This is the 5th entry in our Home Buying series. There are links to the other entries at the end of this article.
Once you’ve bought a home and moved in, you’ve got a few new financial things to keep in mind. Don’t worry, they’re nowhere near as involved as the home buying process but there are some things you need to know.
First, it’s possible, even likely, that your mortgage will be sold soon after you close. You may have worked with “ABC Mortgage Company” to get your loan but they may sell the loan, the servicing rights, or both to another company, let’s call them “XYZ Mortgages.” Don’t be surprised if you get a letter in the mail at your new address notifying you of the change. The important thing for you to pay attention to is your mortgage servicer. That may, or may not, change when the mortgage is sold. The servicer is the company responsible for sending you statements, accepting your monthly payments, maintaining your escrow accounts, and other administrative tasks. If your mortgage servicer changes you’ll probably need to create an account with the new servicer, change any auto-payments you have set up to pay your mortgage, and make sure that the escrow accounts were transferred properly. You still need to make your monthly payments on time, even if the servicer is changed.
You should also be on the lookout for mail and postcards sent to your new home that LOOK official and as if they came from your mortgage company. Your home buying is public record and marketers know who the lender was, the address of the property, the amount it sold for, and more. It’s common to receive offers for mortgage payment life insurance, mortgage payments services, etc that use the name and/or logo of your mortgage company. The junk mail can be very convincing. Read everything twice before you sign up for anything and don’t be afraid to call your mortgage company to ask them if they sent you that offer.
After you’ve owned the home for a while and made some payments you’ll probably start wondering when you can stop paying PMI. Private mortgage insurance (not to be confused with homeowner’s insurance) is usually required if your initial down payment was less than 20% of the cost of the home. PMI protects the lender in the event of default or foreclosure and is included in your monthly payment on top of the principal and interest you owe on the loan. The mortgage servicer has to cancel PMI automatically when your loan value (how much you owe) reaches 78% of the value of the home. You can request this in writing at 80% to get it canceled a little sooner. To figure out how close you are just take the balance of the mortgage (what you still owe) and divide by the value of the home (in most cases, you should use your purchase price). If you still owe $225,000 on a $250,000 home you’re at 90% (this is known as your “Loan to Value” ratio). You can request a written PMI cancellation schedule from your mortgage servicer so you know well ahead of time when you’re scheduled to have it removed, and when you’ll be eligible to request the early removal.
You’ve probably heard the term “equity” when people talk about home ownership. It’s just another way of expressing the Loan to Value ratio. The simplest way of defining equity is the portion of the home you actually own, or the value of the home minus anything you still owe on the mortgage. Going back to our example of the $250,000 home that you still owe $225,000 on: the equity is $250,000 – $225,000 = $25,000. At closing, the value of the home equals the amount you’re borrowing (your mortgage balance) plus your down payment. Therefore your equity equals your down payment.
Why does equity matter? Well, for one when it reaches 20% you can request the removal of PMI (as mentioned above). For another, you can borrow against your equity via a home equity loan if the need arises. If you have significant equity in your home, you can borrow against it in what is essentially a second mortgage. If your home is worth $250,000 and you still owe $150,000 on the mortgage you have $100,000 in equity. Since that belongs to you, you can borrow from 75% to 90% of that $100,000 via a home equity loan. There are 2 general types: a home equity loan which is a lump sum with a fixed interest rate or a home equity line of credit (HELOC) which is a line of credit you can borrow from as you need, up to a maximum amount. In both cases, your interest rates will probably be better than you could get from a personal loan since your home is collateral for the lender. That is a downside however, since that means if you default on these loans you could lose your home (even if you’re up to date on your original mortgage.)
Finally, you should be aware of the option of refinancing. If interest rates drop significantly, or your credit improves dramatically, you might qualify at a later date for a lower interest mortgage rate than you did when you initially bought the home. Refinancing is essentially taking out a new mortgage for the remaining balance of your first mortgage in order to pay it off all at once. Now you have a new mortgage, at a lower rate. There are significant fees involved with refinancing, so you should carefully do the math on how much a lower rate will save you before deciding to refinance.
Home Buying #1
You need to know the basics.
Home Buying #2
How to prepare your finances before it’s time to buy.
Home Buying #3
Understanding the different stages of the mortgage process.