There’s been a lot of press lately on how to find a job and how to keep your job, but not much about how not to work.  Whether you are between jobs or are making a conscious decision to stay home, these financial tips may be helpful.

When my children were young, it was important to me to be their primary caregiver until they were three.  My husband and I were both young in our careers and supporting the family on one income was challenging.  We all know the basics in trying to pinch pennies – eat out less, combine errands to save on gas, moderate the heating and air conditioning, don’t grocery shop when you’re hungry, etc.  For most folks, their biggest expense is their housing cost.  I’d like to share tricks and new mortgage products that can ease the way for a monthly cashflow that’s livable.

Below, I’ll review the basics and advantages of the following options for lowering your housing expense:

• Interest Only Loan
• Extending the term
• Debt Consolidation
• Adjustable Rate Mortgage
• FHA Refinance

One of the newer products on the market is an interest only loan.  Most mortgage loans require the repayment of principal as well as interest each month.  Interest only loans require only the repayment of interest monthly.  With an interest only loan of $200,000 your monthly payment would be $833 vs. $1,167 of principal and interest on a 30-year mortgage, a savings of $334 per month.  

The typical interest only mortgage allows for interest only payments for either three, five or seven years at a set interest rate. Unlike a home equity line, the interest rate is fixed and will not change for that three, five or seven year period.  Principal repayments can be made at your discretion but are not required. Most interest only loans require at least 20% equity in your home (equity means value in your home after home debts are paid off).

If you have 25 years or less left on your mortgage you may want to consider refinancing, especially if you can lower your interest rate.  If your current mortgage is $200,000 at 6% and you can lower your rate to 5.75% while extending the term to 30 years, your monthly payment would decrease by $121.  Remember, you can always choose to make the old higher monthly payment if your cashflow allows, but, making the old higher payment is not required and at your discretion.  

A basic rule in finance is to use short-term debt for short-term assets, however, there are times when consolidating debt into your mortgage makes sense.  If you have credit card debt that you are not able to whittle down and you do not expect to do so in the near future, consider consolidating the debt into your mortgage payment. 

If you have a mortgage of $200,000 at 6% and credit card debt of $8,000 with a monthly payment of $170, you could combine these payments into your mortgage for a monthly savings of $156.  There are also potential tax advantages this may provide.  One big caution, don’t do this unless you’re sure you have the discipline to not run up your credit card once it’s paid off.

Adjustable Rate Mortgage (ARM)

There’s a lot of talk that no one should finance their home with an Adjustable Rate Mortgage (ARM) in this period of historic low interest rates.  However, there are some situations in which it makes good sense. 

Old ARM products reset every month or every year. Current products on the market allow you to lock in a rate for 1, 3, 5, 7, or 10 years, after which time the interest rate adjusts a certain percentage each year.  If you think you’re going to be in your home for five years or less, or that you income will be rising significantly at the end of the fixed rate period, this may be a great product.  It allows you to have a significantly lower monthly payment than with a 30 year fixed rate loan.  The downside is that if you are still in your home at the end of the fixed rate period on your adjustable mortgage, you will probably want to refinance the loan and interest rates may be higher.

One last point that most people don’t know about is a streamline FHA refinance.  FHA loans are government loans.  If you currently have an FHA loan, it can be refinanced without the usual documentation.  As long as you don’t increase the loan amount from your initial value, a FHA refinance does not require a new appraisal, verification of income, or verification of assets.  You don’t have to requalify for the loan. 

Conclusion

These options provide flexibility with your monthly mortgage payment and can reduce your housing cost significantly for an extended period of time.  However, there is no one cookie-cutter solution to what is best for you and your family finances.  Important things to consider are how long you expect to be in your home, what monthly payment fits your budget, and how you might expect to see your income change over the coming years.  In determining your best solution, don’t hesitate to contact a mortgage or financial specialist for guidance; our job is to help you tailor the best financial plan for your situation. 

As a partner of Moxie Moms, one of the services I extend is a free consultation to tailor a plan specific to your situation.  Don’t hesitate to call me at Boulder West Financial with any mortgage or financial questions you may have at 303 443-9424 x122.  Please note, rates and monthly payment amounts are subject to change with market conditions.