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One of the most common questions I get is:

How can I refinance my loan without increasing my principal balance?

There are three things that go into establishing a loan amount:

  1. The principal balance on the existing loan – Which will also include any payoff fees they charge as well as interest due on the loan.
  2. The amount of closing costs for the option you choose.
  3. The pre-paid set up, which includes establishing an escrow account for tax and insurance payments as well as interest from the day you close through the end of the month. Mortgage interest is always paid in arrears.

Step 1 – Choose a No-Cost Loan

The first step is to choose an interest rate that has $0 fees which will equate to zero closing costs. This is what we term a “no-cost loan”. This will eliminate option #2 above.

Step 2  – Escrows

The second step is to avoid having to bring cash to close. I suggest adding the new escrow account set up to the new mortgage. Then, when you receive your current escrow refund, you can apply this as a principal reduction on your first payment of your new loan. If you do not currently have an escrow shortage, the amount needed to establish an escrow account should be in line with the amount you have in your current escrow account. This takes away the escrow part stated in c above.

Step 3 – Interest

And lastly, the interest due on the current loan (a), as well as the interest due on the new loan (b), will account for just over one month of interest. Since this is interest that you would pay regardless, it isn’t a fee for doing a new loan. It is just changing where the current payment due on your existing loan is being sent. As a result, you will end up missing one mortgage payment. The solution to not have this one month of interest impact your ending mortgage balance is to make the additional payment that you will be missing as a principal reduction to the first mortgage payment due on your new loan.

In short, by choosing a no-cost loan and applying the escrow refund as well as the missed payment to the first payment on the new loan, you will owe no more on your new loan that you owe on your current loan. In the end, it will not have impacted your expected cash flow, so you will be in the exact position as you are in currently.

When structured properly, a home mortgage can be a tool to help you build net worth. However, when not properly managed, a mortgage can cause excess burden and be a financial and emotional drain. In the current environment of distressed home values and inevitable interest rate increases, now is the time to ensure that you have a mortgage strategy that is in line with your long-term goals. When advising my clients on their next mortgage, we consider much more than just their loan.

Secondary Home
I ensure they avoid making the following 5 most costly mortgage mistakes:

  1. Listing your home without first being approved for your next home purchase.
    I often hear of horror stories where a homeowner sells their current home and later realizes that they are not in position to financially qualify for their next home. As a result, they are forced to either rent or purchase a house that is less than they had hoped for.
  2. Borrowing more than you can afford or accepting a short amortization with a payment that is not sustainable within your budget.
    Many homeowners have unmanageable mortgage payments. The inevitable result of an over-extended budget is an eventual inability to keep up with the required obligation. Emotions play a large role in how much home to buy, and when to have the mortgage paid off. Making wise and well thought-out mortgage decisions is crucial for long-term mental and financial health.
  3. Not addressing credit challenges in time to help improve your score.
    The interest rate you will qualify for is dependent upon your credit score, more so in today’s market than ever before. Having a credit review in time to correct errors can save you thousands of dollars in interest over the life of a mortgage.
  4. Putting down your entire savings and not maintaining an adequate cash reserve.
    Maintaining a cash reserve is the most important step in achieving financial peace. Without a cash reserve, families live paycheck to paycheck and in a constant state of stress. By not putting down every dollar you have, you can prevent the anxiety of day to day cash flow challenges.
  5. Not considering consumer debts or other investment opportunities when determining how much to put down on your home.
    Managing daily cash flow and minimizing interest expenses is an important consideration for longterm net worth growth. Sometimes, getting on the right path requires a one-time decision to clean up consumer debts to free up cash flow to help increase long term investment opportunities.

By avoiding these common mistakes you can help ensure you are making wise decisions regarding your mortgage that will be most beneficial to you in the long term. Please contact me to discuss how these and other potential pitfalls can be avoided. By having these discussions early in your home buying process, you will be better prepared when the time comes to close on your next home.

 

 

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Our team secretly came together for this photo while we were out of town and put it up on billboards for our return.
Mike and I started this amazing journey when Austin Taylor Roberts was still in a baby carrier sleeping under my desk.CCM_Turns_19_Years_txt
It has been the most rewarding, challenging, painful, scary, and exciting thing we’ve ever done…and we wouldn’t change it for anything.
Every day we get to work with our friends who believe what we believe and share our mission to be the most Trusted, Respected & Loved mortgage company in Utah….and soon beyond 🙂
I could not be more proud of this team, of the company we have all built and to all of you who honor us with the opportunity to serve.
Here’s to another amazing 19 years!

– Tobi Roberts