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Fine tune your mortgage

Alice White • Apr 27, 2007 at 7:39 AM

Managing investments and retirement savings with an annual review is a standard activity for most people. But it's not just the asset side of your personal balance sheet that needs attention. It is equally important to manage your debt, specifically your mortgage.

The average homeowner owes over $100,000 on their mortgage. That's a small fortune! It's certainly worthy of a little time and attention. For most homeowners, however, their mortgage goes along year after year completely unmanaged.

What are some things we should look for when we review the state of our mortgage? The first thought - refinancing a mortgage for a lower interest rate - isn't really up for consideration for many right now because rates are well off their lows of several years ago. But other adjustments, from increasing cash flow to tapping your equity for the right reasons, can be a smart move today. Here are possible adjustments you should consider.

• Refinance and dump HELOC.

Home-equity lines of credit were yesterday's addiction, fueling the home improvement binge of the past few years. It's easy to understand why. Three years ago, the minimum monthly payment on a $100,000 line of credit was just $333. But now that the prime interest rate has doubled to better than 8 percent, the minimum is $666. That's a significant hit to the monthly expenses. You may be able to improve your position by refinancing the HELOC and your mortgage into a single fixed-rate loan. This could lower your payment and free up cash flow. If your blended rate is higher than what you could get on a new fixed-rate mortgage, consider it. Let's say you have a 6.5 percent mortgage with a $200,000 balance and an 8.5 percent HELOC with a $100,000 balance. Your blended rate is 7.2 percent - a rate you can still beat today. The refinance will have closing costs, but the long-term mortgage plan may easily justify the cost of the loan consolidation.

• Rethink the prepayments.

There's nothing like paying off your mortgage for a feeling of freedom. But that doesn't mean it's a wise financial move. Low mortgage rates over the last few years - you could be paying less than 6 percent on a 30-year loan - make it fairly easy to earn a greater return on conservative investments. A better move now for older boomers with under-funded retirement plans and a lot of home equity may be to give a big boost to their retirement savings by putting their idle equity to work. You could take money out of your home now with a cash-out refinance and invest it in safe, conservative investments that enjoy the benefits of compound interest and tax-advantaged growth. The monthly payments can often be offset from monthly retirement contributions with the same tax advantages and far greater growth. Not a bad solution, particularly if you've enjoyed big gains in your home's value and can put that money to work effectively.

• Scrap the PMI.

If you put down less than 20 percent on your home, you may be paying private mortgage insurance (PMI). PMI can cost anywhere from $16 to $50 a month or more for every $100,000 of debt. The lender should automatically cancel your PMI once you've paid off 22 percent of the loan. But as long as you've paid the loan on time for two years, you can ask that PMI be discontinued when your equity reaches 20 percent. If your house has increased in value significantly since you purchased it, you may hit the 20 percent mark sooner than you expected. That increase in equity belongs to you, not the lender. But it is up to you to get it removed at that point. You'll have to spend about $350 for an appraisal to prove that your equity gains add up to 20 percent. But just a few months of PMI savings could easily cover that cost.

Keeping your mortgage fine tuned can pay off big. The right strategy at the right time can lower your monthly payments and free up cash for better things.

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