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60-Second Guide to Managing your Mortgage

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For most homeowners, your mortgage payment is by far your biggest monthly expense. So we think it’s completely justifiable to spend 60 seconds reviewing it. In fact, don’t be surprised if this brief exercise does wonders for your budget. Let’s take a look under the hood and see whether we can find you some savings.

0:60 Find out whether you’re overpaying your mortgage lender
If the amount you borrowed was more than 80% of the appraised value of your home, you’re probably paying PMI, or private mortgage insurance. PMI payments are not trivial. Depending on the size of your down payment and how much your house costs, PMI can effectively increase your interest rate by as much as 1% — potentially adding hundreds of dollars to your monthly payment.

0:50 Kiss PMI goodbye
You can get rid of PMI by providing your lender with proof that your mortgage balance is less than 80% of your home’s value. (No, an airtight alibi doesn’t count.) Do what it takes to get there: Send in extra payments, clearly identified to “apply to principal,” to get the loan balance down. Or, if housing values are rising in your neighborhood, get a new appraisal. Talk to your lender and see what you need to do to eliminate your need for PMI.

0:45 Explore the potential savings of refinancing
The rule of refinancing is relatively straightforward: If you can chop a percentage point off the interest rate on your mortgage, you should consider it. However, that’s just a rule of thumb — and, as you know, we Fools never blindly follow the conventional wisdom without doing some due diligence. Most important here is to take closing costs and points into account. What’s the easiest way to do that? Give our “Am I better off refinancing?” calculator a whirl. Even reducing your mortgage payment by just $100 a month can save you thousands over the years.

0:30 Calculate the real cost of prepaying your mortgage
Once you get your loan-to-value low enough to banish PMI, is it worthwhile to keep making additional payments to principal? Owning a home outright can be a huge financial advantage, but there’s no rush. In most cases, you will come out ahead by sticking to a 30-year payment schedule and investing your extra money in a market-matching index fund. Calculate how much you would save by paying off your loan early, and then compare your savings with how much your extra payments could earn if invested in an index fund earning 8%-10%.

0:15 Tap into your equity
With caveats aplenty, the equity in your home (what it’s worth minus what you owe) can be a good source of low-interest funds for major purchases. Consider refinancing (a good first choice), a home equity loan (a feasible second choice), or a home equity line of credit (the most flexible, but often the one with the highest interest rates) to generate cash if you need to finance home improvements or have other major expenses to cover. In addition, if you’re carrying a lot of high-interest debt, you can use your equity to reduce the interest you pay. In most cases, the interest will be tax-deductible, too. Just don’t go overboard. Despite all of the problems with mortgages during the housing downturn, mortgage debt is still considered “good” debt. But it’s still debt, so don’t abuse your equity. Remember, the collateral for these loans is your home.