The coronavirus crisis has heightened financial anxiety and uncertainty. But if buying a home has been part of your life plan, there’s no need to panic. Many Americans will receive stimulus payments in the coming weeks, which could ease some of the burden, and if you’re able, now is still a good time to start saving for the down payment on your mortgage.
So where should you put that money while you amass the right amount? There are a number of places to stash your cash—each with its own pros and cons.
“Some have low risk, but also low returns, like a savings account or CD,” says Sherry Graziano, head of mortgage omni experience at Truist. “Other options may have higher returns, but they typically have a higher risk associated with them.”
Exactly which type of account will work for your own personal path to homeownership depends on your individual financial situation, how soon you plan to buy a home, and how much risk you’re willing to take. Here’s a look at your options.
Savings, checking, or money market accounts
Best for: People buying a home in three months or less
If you plan to buy a home fairly soon, a savings account is one of the safest places to put your money. They are FDIC-insured, meaning your money is protected in case of banking institution failures, and your money is always accessible.
“The least risky type of account is a savings account,” says Shelby McDaniels, channel director of corporate home lending at JPMorgan Chase. “They are highly insured. It is simple to link a checking or direct deposit to the account, and most do not have any restrictions on timing.”
Most first-time home buyers, she says, use a savings account to begin the process of buying a home.
The downside? Savings account interest rates tend to be low, with less than a 2% annual percentage yield, according to an America’s Best Rates survey. High-yield savings accounts averaged 2% to 2.4%, but some require a minimum deposit or that you maintain a minimum balance.
Money market accounts are another option. They are similar to savings accounts, but offer some checking features and sometimes a little more interest.
If you’re opting for a savings account, make sure you’re aware of any fees or requirements, like maintaining a minimum balance, Graziano says.
Certificate of deposit
Best for: People buying a home in three to 12 months
A certificate of deposit, or CD, is another low-risk option. Offered by banks and credit unions, CDs give savers interest on a lump sum of money if they leave it in the account for a designated time frame, such as three, six, or 12 months, or even longer.
If you’re saving for a down payment, CDs have a couple of downsides.
“CDs typically don’t allow for additional deposits, so that may not be the best option if a client is planning on making continuous deposits,” Graziano says.
CDs also have a low interest rate—just a hair higher than savings accounts—and the money isn’t accessible until the CD has matured.
McDaniels suggests choosing a CD that will work well within your time horizon so you can use it when you need it.
Best for: People buying a home in three years or less
A 401(k) is a retirement account that you contribute to tax-free, but it has annual contribution caps and limits when you can withdraw money before you reach age 59 and a half. For 2020, the contribution limit is $19,500, according to the IRS.
Buying a home is one instance where you can use money from your 401(k) before reaching retirement age, but it can be risky.
Early withdrawals come with a 10% penalty on the amount taken out, and you’ll have to pay income tax on the distribution.
You can also take a loan against the 401(k). However, Graziano says, “the client would want to determine the amount of the repayment, and be sure that they will be comfortable with the new house payment and 401(k) repayment responsibility.”
Another thing to consider: You’ll miss out on any interest you would have earned on the money taken out of the 401(k), McDaniels notes.
“This can be a good short-term option for someone who knows they will be able to pay back their 401(k) loan quickly, with no penalty,” she says.
Best for: First-time home buyers purchasing within three years
A Roth IRA, or individual retirement account, is usually opened at a bank or investment firm. Roth IRAs are a good way to save, because you fund the account with after-tax money, meaning contributions aren’t deducible but funds withdrawn when you retire are also not taxed as income.
First-time home buyers can often take money out of their Roth IRA to buy a home without paying a penalty. You can withdraw the amount you’ve contributed tax- and penalty-free, and then, once the contribution amount is maxed, you can take out as much as $10,000 of the account’s earnings.
Historically, IRAs have earned high interest of 7% to 10%, and money can be accessed within a few days. But keep in mind that Roth IRA contributions are capped at $6,000 for 2020, so you can save only so much per year. And you can’t repay the money you take out like you can with a 401(k). So once you take it out, even to buy a home, it’s gone and you miss out on the years of accumulating interest.
Best for: People buying a home in five years or more
The stock market fluctuates, so investing and hoping your money grows before you buy a house with it can be a risky move. Still, if your time horizon for home buying is more than a few years off, this could be a decent option where your money could expand by as much as 10% during boom market years.
“Higher risk typically means greater return,” Graziano says. “But keep in mind there is no guarantee when investing in the stock market. The account may lose value, too.”
Investing in the stock market can be complex, and you may owe fees and commissions.
McDaniels suggests carefully examining your financial situation and home-buying plans to evaluate the benefits and risks. And when you sell your stock, it can take up to three days to see your money, according to rules set by the Securities and Exchange Commission.
Make sure the cash is accessible
Wherever you choose to put your money, make sure it’s accessible when you find your home.
“The timeline and flexibility with the amount of down payment are the two biggest factors that a buyer should take into consideration,” McDaniels says. “Someone who has a flexible timeline or already has a portion of their down payment might want to consider an investment account. While someone who is just starting to save or plans to buy in a shorter timeframe (of a few months) might be best suited for a savings account.”
Exactly how much you need to save for a down payment varies by your lender and the type of loan you get. Before you buy a home, McDaniels recommends saving 20% of your take-home pay, as well as three to six months of your mortgage payment.
Lenders usually require 60 days of asset account statements verifying the funds needed for the home purchase, and the source of any large deposits.
“Money kept at home in a safe commonly known as ‘mattress money’ is not eligible to be used for the down payment or closing costs,” Graziano says.
With the economy in unprecedented territory and the phrase “housing crash” on the lips of economists, mortgage holders have questions. And current homeowners aren’t alone: First-time home buyers in search of a new mortgage also have questions on how and when to proceed.
For borrowers (and potential borrowers) in search of answers, we present your most frequently asked mortgage questions—along with the all-important answers.
Our top 12 mortgage questions range from the basics to more complex financial moves, to assist consumers who’ve been financially affected by the ongoing pandemic. If you have a question we’ve missed, please drop us a line and tell us your question.
1. Are mortgage rates going down?
It depends on the comparison. Mortgage rates are down from a year ago, but up from a few weeks ago. It’s unclear whether they’ll be headed down again.
In a recent realtor.com® article about mortgage rate fluctuations, Matthew Graham, chief operating officer of Mortgage News Daily, said rates are “the most volatile they’ve ever been, by a wide margin.”
Much like the stock market, mortgage rates have been on a wild ride. In early March, rates were at a record low, then went back up.
“Mortgage interest rates are closely correlated with the 10-year Treasury yield, which has stayed below 1% for much of the last month,” says Bill Banfield, executive vice president of capital markets for Quicken Loans and mortgage platform Rocket Mortgage. “In general, bad economic news is good news for mortgage rates. Mortgage rates will likely stay low as long as the 10-year Treasury yield also remains at its low levels.”
2. Why have mortgage rates gone up?
Despite a constant drumbeat of negative economic news, mortgage rates have gone back up after hitting a record low in early March.
We examined this phenomenon in a recent article about the upward trend in rates. In short, homeowners rushed to take advantage of low rates and refinance their existing mortgages. To handle the rush, many lenders raised rates, in hopes of slowing down the stampede.
In the secondary mortgage market, a wave of refinancing created a glut—which sent rates higher. Lenders often bundle and sell some of their home loans as mortgage-backed securities on the secondary market. This frees up cash for lenders to make new loans. More bundled loans on the market meant lower prices for those securities.
But even though rates have crept up, there’s room for them to fall again with so much uncertainty in the marketplace.
“We’re in uncharted territory, so you can’t look to history as a guide to what could happen. It’s hard to predict how mortgage rates will react,” says realtor.com’s chief economist, Danielle Hale. “I don’t think they’ll go up until it’s pretty clear we’re out of the woods. They might move sideways, or they might go down more slowly.”
3. What are mortgage rates today?
Mortgage rates change daily (even hourly), and a number of elements factor in to the rate a borrower locks in. Although many people follow the Federal Reserve’s actions when it slashes or raises the federal funds rate, that doesn’t directly affect mortgage rates.
“You’re not getting [a mortgage] directly from the Fed,” says Mary Bell Carlson, a certified financial planner known as the Chief Financial Mom. “You’re getting it through a service provider, which is a bank or mortgage lender.”
Mortgage rates are influenced by both the federal funds rate and the Treasury bond market. In addition, each lender adds a percentage to the rate to account for various company fees, Carlson says. So even when the federal funds rate is at 0%, you’re not going to finda mortgage that allows you to borrow with zero interest.
The realtor.com mortgage rate finder will give you information on mortgage rates in your area. All you’ll need to do is enter your ZIP code and answer questions such as the following:
If you are looking to buy a new home or refinance
The type of home you want to buy
Where you are in the home-buying process
If you plan to use the home as a primary residence, vacation property, or investment
Your veteran status
Whether you’re a first-time or repeat home buyer
Your projected price range and how much you’re willing to put as a down payment
Financial information such as your household gross income, credit score, employment status, and past bankruptcy filings
Once your information is entered, you’ll see the latest mortgage rates in your area.
And because each lender is different, it pays to research and shop around.
Carlson advises not to limit yourself when it comes to working with lenders and to look beyond your own bank.
“You absolutely want to do your homework and check around,” says Carlson.
4. Should I refinance my mortgage now?
Mortgage rates are low, and if you secured a mortgage in early 2019, 2018, or 2017, you’re likely a solid candidate for a refinance. Be aware, though, a refinance replaces the original loan with a new one and you may have to change lenders.
“It’s a great time to take advantage of how far rates have fallen in the last month, and it’s a pretty dramatic decrease, especially for somebody who took out a mortgage 12 to 48 months ago,” says Banfield.
The realtor.com refinance calculator can help you determine if refinancing is a smart strategy. You’ll need to provide a few critical bits of information to get a well-informed answer:
Original loan amount
Original loan terms and rate
Original loan origination date
The current balance on your mortgage
Whether or not you want to take out some cash
New loan terms and rates
The amount of the new loan you want
The refinance calculator will provide you with an idea of how much you could save, and tell you how long it will take for you to break even. To calculate your break-even point, divide your total refinance costs by the monthly savings you’ll reap. For example: If your refinance cost $2,500, and you’ve knocked $100 off your monthly mortgage payment, your break-even point is 25 months.
“My check [for a refinance] is always: How long are you going to stay in the house? If you’re going to stay there longer than your break-even point, that makes sense for you to refinance; otherwise stay where you’re at,” says Robert Parades, a Tampa, FL–based branch manager for Hometown Lenders.
Assuming that a federal rate of 0% means you can get a 0% mortgage rate (Not true!)
Jumping on the refinancing trend too late
Forgetting about the fees associated with refinancing
Refinancing too much equity out of your home in a time of uncertainty
Expecting to lock in your lender’s quoted rates and fees ASAP
Shopping for the right loan for too long
If the calculator shows you could save some money by refinancing and you’re going to stay in your home long enough to break even and then some, make the move sooner rather than later. Rates are creeping back up, and if you’re affected by unemployment or a furlough, you likely won’t qualify for a refinance.
5. My mortgage payment is too high—what can I do?
If your mortgage payment is too high, you might want to consider refinancing if the timing is right.
“We have had a refinance boom. My team rarely does refinances, and I do maybe one refinance a year. In the last 30 days, I’ve done 14,” says Parades. “The interest rates probably about a year ago for somebody with decent credit were about 4.5% or 4.7%. With the government buying all of the mortgage-backed securities, it has deflated those rates to as low as 3.25%.”
6. Can I stop paying my mortgage for a few months?
Because of the pandemic, borrowers all over the country are dealing with unemployment or furloughs. Lenders understand the current economic situation and are offering options to clients who can’t currently pay their mortgage.
“What I’m telling people right now is, if you cannot pay your mortgage this month it’s important to reach out to your mortgage lender and negotiate and talk through it,” Carlson advises. “A lot of lenders are offering relief opportunities.”
Policies vary, but some lenders are allowing borrowers to pause payments for a few months. Several are waiving late fees, penalties, and the reporting to credit bureaus that often come with missing payments.
However, it’s a bad idea to stop paying without contacting your lender. Without a plan in place, you’ll accrue late fees and eventually face foreclosure proceedings.
Keep in mind: When a deferment or forbearance period is over, the missed payments are due, so there is no free money.
However, many lenders are allowing customers to work out terms other than paying a lump sum at the end of the forbearance period. When you contact your lender, be honest about your financial situation.
7. What are the repercussions if I stop paying my mortgage?
Again: Don’t do it. Speak to your lender. Putting your head in the sand and simply not paying your mortgage is a bad move and can have serious consequences.
“The worst thing people can do right now is just bury themselves and not do anything. The payments continue to come, and the [lender] has no idea how to help you,” Carlson says. “It’s better to reach out and be proactive rather than reactive.”
If you stop paying and ask for forgiveness months down the road, lenders might not be as willing to help you. Your decision will also affect your credit score, hampering your chances of obtaining any kind of loan in the future.
Carlson says it’s important to prioritize what you can and can’t pay. She adds it’s better to pay secured debt like mortgage and car payments before credit cards.
“If you don’t pay your credit card bills, they can’t come to your home and repossess your TV. They have no ability to repossess anything or touch your personal property [over missed] credit card payments,” Carlson says. “Whereas, if you don’t pay your mortgage lender, they can absolutely come and take your house.”
8. What is a cash-out refinance?
A cash-out refinance is a way to refinance a mortgage and turn some of the equity in your home into cash. This strategy is often used for home improvements or to consolidate debt. It differs from the main goal of a traditional refinance, which is to lower your monthly payment.
With a cash-out refinance, you’ll get money back from the bank. The loan usually has a fixed rate, unlike a home equity line of credit, which often has a variable rate. Also, a cash-out refinance replaces the first mortgage and doesn’t add a second mortgage like a home equity line of credit.
“If you have been paying down your mortgage in timely manner and you’ve built up enough equity, it’s a good time to tap into it,” says Sathi Roy, head of refinance at Better.com. “If someone is a little strapped for cash right now, it’s a perfect option.”
Roy says her company has seen a 150% increase in cash-out refinances since March.
The refinance calculator can help you figure out how monthly payments could change if you choose to employ the cash-out strategy.
9. What is mortgage forbearance?
“Forbearance [is a program] that would allow a temporary period for a borrower to not have to make a contractual monthly payment amount,” says Sara Singhas, director of loan administration for the Mortgage Bankers Association. “You can either pay a lesser amount of your mortgage—or not pay anything at all—for a period of time.”
At the end of the forbearance period, the amount of the missed payments is due, often in a lump sum. However, lenders do sometimes allow payment plans. Forbearance is for a short and specified term, and does not change the terms of your loan.
Mortgage forbearance requests shot up 1,270% between the weeks of March 2 and March 16. The association also showed the number of loans in forbearance went from 0.25% of all mortgages to 2.66% from March 2 to April 1.
During a forbearance period, lenders will not charge late fees or penalties, report missed payments to the credit bureaus, or begin foreclosure proceedings.
Lenders use the term “forbearance” interchangeably with “mortgage deferment.”
No matter what you call it, don’t let it dissuade you from reaching out to your lender and asking for help. Lenders will not automatically offer forbearance if you miss a payment. A plan must be in place if you think you can’t make your monthly payment. A solid payment history helps in forbearance cases, but in these unprecedented times, many lenders are changing their rules and regulations.
“The important thing to get across to folks is, if you need help, talk to a servicer because there are absolutely ways that borrowers can get assistance with paying their mortgage payments,” says Singhas.
10. What is a loan modification, and how do I get one?
A loan modification changes the original terms of a mortgage loan. It’s different from a refinance in that it does not pay off the original loan and replace it with a new one. Instead, it changes the conditions of the current loan.
“It is usually used when a homeowner has unexpected financial hardship that makes it difficult to make their mortgage payment,” Quicken’s Banfield says. “Under normal circumstances, a modification of a mortgage results in an adverse impact to a client’s credit history and credit score.”
Loan modifications can include an interest rate change, an extension in the payment schedule, a different type of loan altogether, or a combination of these levers.
“A homeowner can only get a loan modification through their current mortgage servicer, because they must consent to the terms,” Banfield explains. “Every servicer has its own standards for loan modification, and homeowners should contact their servicer to see if they qualify for a loan modification.”
11. Should I get a home equity line of credit?
A home equity line of credit, or HELOC, can help you turn equity you’ve built up in your home into cash. This financial tool is usually deployed for home improvement projects or updates. In current financial times, people are using HELOCs to pay bills.
“For some people, it’s their go-to option for savings—a lot don’t have other places to turn,” Carlson says. “Our homes are the biggest asset we own … so it is the asset that we turn to when times are tough.”
You can get a HELOC only if you have equity built up. So if you put 0% down on your home, have an interest-only loan, or have owned your home for less than a couple of years, there likely won’t be any equity to tap.
The interest rate on a HELOC is often variable, meaning it will adjust up during the period of the loan. Even though rates are low right now, there are risks associated with a HELOC.
A HELOC is secured debt, and although a HELOC is a lower-cost option to borrow money than credit cards, there are risks.
“If you don’t pay [HELOC] debt, it is tied to your home,” Carlson warns. “You’re adding a risk, because if you can’t pay that home equity line of credit back over time, your home is now at stake.”
12. Where can I find a mortgage calculator?
A mortgage calculator will help you figure out what you can afford and how much you’ll need to borrow. Yes, realtor.com has a handy mortgage calculator to guide your way.
The calculator will help estimate your entire monthly house payment—the principle, interest, taxes, homeowners insurance, and private mortgage insurance.
In order to use the tool, you’ll need to know:
The price of the home you’re considering
Estimated down payment amount
Mortgage interest rate
As you adjust the different numbers, you will see how your monthly payment can slide up or down. The largest variables at play are the home price and how much money you plan to put toward a down payment.
Realtor.com also provides an affordability calculator to help you figure out how much you can afford to spend each month on your mortgage. To use it, you’ll need to input your information:
Annual gross income
Down payment amount
Credit score range
This calculator provides guidance you’ll need to make an informed decision on how much home you can afford. Carlson also recommends running the numbers based on your net income to see the difference—net income is what you actually bring home each paycheck.
“Roughly speaking, if you can get a mortgage payment that is anywhere between a quarter to a third of your net take-home pay, that’s the sweet spot,” she says. “Because what that means is, if you have a quarter or a third of your income [for a mortgage], that means you’ve got two-thirds or three-quarters left to spend on everything else, including car loans, student loans, utilities, and food.”
A letter arrives in the mail and tells you your mortgage has been sold. It also informs you to send your monthly payments to a new address. Don’t panic! This happens all the time, and you shouldn’t see many (if any) changes.
“I would say probably 30% to 50% of the time [borrowers are] going to eventually end up mailing their payments somewhere else different from when they first originated it,” says Rocke Andrews, president of the National Association of Mortgage Brokers.
So why does your mortgage get sold—and why can it happen multiple times? Banks and mortgage servicers constantly check the numbers to find a way to make a buck on your big loan. It all takes place behind the scenes, and you find out the result only when you get that aforementioned letter in the mail.
What does a mortgage being sold mean for homeowners?
The short version: When a loan is sold, the terms of that loan don’t change. But where a mortgage-holder submits payment and receives customer service may change as the loan gets sold. And that could affect a few things.
“The level of service that you receive may vary depending upon who the servicer is,” Andrews says. “Certain servicers might offshore a lot of that [work]. So when you would call into servicing you could get a call center in India or over in Asia somewhere and people were less than knowledgeable about the product.”
But service issues that lead to frustration are the exception, not the rule, says Andrews. “Most [consumers] don’t deal with the servicers that much, they just send in a payment and things are happy.”
The new servicer might offer different payment options and may have different fees associated with payment types, so be sure to check any auto payment or bill pay functions you’ve set up.
The basics of mortgage servicing
To understand why mortgages are sold, it’s important to understand some basics.
First, when you take out a mortgage to buy a home, a lender approves your loan and you make payments to a loan servicer. Sometimes, the servicer and the lender are one and the same. More often, they’re not.
The servicer “collects the payment and disburses it out,” Andrews says. “They distribute the payment to the investors, [send] property taxes to the local taxing entity, and [pay] homeowners insurance. They are taking care of all the payments coming in and getting them distributed to the people they belong to.”
Andrews says a small portion of the interest you pay on a loan—often a quarter of a percent—goes to the servicer.
“Typically servicing is a labor-intensive business—there are only five or six servicers [nationwide] that probably handle 75% to 80% of all the mortgages in the United States,” Andrews explains. Major players include Chase, Wells Fargo, Citibank, Freedom, and Mr. Cooper. Some of these companies service the loans they originate.
Servicers can sell your mortgage
Lenders can enter agreements with servicers to purchase batches of loan servicing. Or lenders may shop around for a servicer if they’re carrying too many loans on their books.
Servicers are interested in buying loans in order to sell other products to their new-found customers. Andrews uses an example of a big bank that can then attempt to sell retirement funds, credit cards, or other profitable financial product to customers they had no prior relationship with.
Many lenders originate loans, and then proceed to sell off the servicing or the loan itself. If the servicer changes, the customer must receive a notification. There will be a grace period in case a borrower accidentally sends payment to the wrong place.
Lenders often sell the loans to financiers as a mortgage-backed security for investors or to government-sponsored entities like Fannie Mae, Freddie Mac, and Ginnie Mae.
So why does my mortgage get sold?
Loan servicers are businesses in search of a profit. Andrews says the value of the servicing depends on two main factors:
Whether a borrower pays on time or not
How long the borrower will be paying
If a servicer receives a quarter percent for servicing a 30-year mortgage, a consumer who pays steadily for the life of the loan is more valuable than a borrower who opts for a refinance within a few years.
Keep in mind: During a refinance, the new loan pays off the old loan, and new terms are set. So if a servicer was expecting to earn a quarter of a percent over 30 years and the borrower refinances after only five years, the servicer gets the share for five years as opposed to 30.
For example, if you have a $100,000 loan at 4% for 30 years, you’d pay about $70,000 in interest over the life of the loan. However, the lender would need to wait a full 30 years to make that full $70,000. In hopes of a quicker profit, lenders will often sell the loan.
If servicing a loan costs more than the money it brings in, lenders may attempt to sell the servicing of it to lower their costs. The lender may also sell the loan itself to free up money in order to make more loans.
Loan servicers have another consideration in play. They need to pay investors who buy mortgage-backed securities—even if a consumer with a mortgage can’t make payments or is in forbearance.
“The downside to forbearance is the servicing company has to make your payment for you,” Andrews says. “That’s why we’re running into problems.”
With millions of homeowners asking for forbearance, Andrews predicts more mortgages will be sold.
Can I state that I don’t want my mortgage sold?
Somewhere in the terms and conditions of your mortgage paperwork, it likely says your mortgage can be sold. Andrews says there is really no way to keep it from happening.
The trade-off for the odd behind-the-scenes shuffling of your mortgage is a lower interest rate for you—the all-important borrower.
“It’s just part of making the entire mortgage industry safer, more liquid,” Andrews says. “Back in the old days you would go to the bank and make your payment at the bank.” The rates depended on how much money the bank had and the area economy.
But instead of the bygone days of interacting with the local banker, nationwide competition for your borrowing needs has been unlocked.
“By nationalizing the mortgage market, you provide lower rates and better options to the consumer,” says Andrews.
Those who are fortunate enough to still be collecting a paycheck while quarantined or sheltering in place might expect to build up some serious savings. While you work from home, you’re avoiding your usual commuting expenses, and you’re probably saving money by not going to bars, restaurants, and movies, or skipping that vacation to Fiji.
But as spending decreases in some areas during self-isolation, it can creep up in others. To brace yourself and your budget, keep an eye on these expenses while you’re self-isolating at home.
If you’ve gone from office life to Zoom life, you’re spending more time at home than usual, which could ramp up your household expenses.
“Your utility spending might be considerably higher if you’re spending more time at home cooking, charging devices, using lights and appliances,” says Ted Rossman, industry analyst at CreditCards.com.
To keep your utility bills down, turn off lights when you leave the room, open windows during the day to let in cool air, unplug devices that you’re not using, and consider turning down your water heater by a few degrees.
Even if you’re not hoarding (and you shouldn’t be), you might find yourself spending more on groceries while you shelter in place.
For some people, an uptick in grocery spending will be offset by the money saved from not dining at restaurants. But if your local store is picked over—or if you pay fees for grocery delivery—you could spend more on groceries than usual.
If your grocery spending feels out of hand, be flexible and creative with your menu. Cook the food you already have at home before you head back to the store. Sites such as Eater have compiled resources for home cooks, including Pantry Cooking 101 and How to Stock a Pantry.
If you’re using a delivery service, place infrequent, larger orders instead of several small orders. Or consider curbside service; many stores are allowing free pickups where they bring your groceries right to your car, so you can save on delivery fees and tips.
3. Meal delivery and takeout
You may not be able to enjoy a nice meal at a restaurant, but you can order takeout and delivery—and those indulgences can add up quickly. After all, it’s not just the meal you’re paying for.
“There’s probably still a service fee, and on top of that you have to leave a gratuity,” Repak says. (It’s also a good idea to generously tip the workers who are delivering your food in these times.)
If you’re on a budget, reserve takeout and delivery for special occasions or those days when you just can’t muster the motivation to cook.
4. Alcohol and other sources of comfort
If you find yourself decompressing with a glass or two (or three) of wine every night, your drinking habit could do a number on your budget. And you wouldn’t be alone—alcohol consumption has shot up nationwide, and in states where recreational marijuana is legal, dispensaries are reporting booming business.
“Social isolation is really strongly linked to physical and mental health problems, and the way we cope with a lot of them is by drinking more,” Repak says. “People are going to smoke more and drink more … and we need to find other healthier coping mechanisms to offset that additional spending.”
You may not want to totally forfeit your evening glass of pinot, but you can make your supply last longer by sipping a mug of (far more affordable) chamomile tea on occasion, or opting for a calming yoga video or breathing exercise.
You’ve rewatched all your favorite shows on Netflix and Hulu—so, now’s the time to add a Disney+ subscription, right?
Not so fast, Repak says.
“Save a little bit of money by just picking one of the streaming services,” he suggests, or at least don’t pile on new subscriptions to the ones you already have.
To free up your budget, take inventory of your other monthly subscriptions, services, and other recurring expenses, and see if there’s anything that can be eliminated.
“Ten dollars a month may not sound like a lot, but if you have five of those, that’s $600 annually,” Rossman adds.
6. Online shopping
If you turn to retail therapy to soothe your soul, your budget could take a hit. True, many retailers are offering deep discounts in order to move merchandise, but even discount purchases add up.
“Impulse buying is a potential trap,” Rossman says. “Some people fall victim to it more than others.”
Instead of clicking “add to cart” as a coping mechanism, Repak suggests cleaning out your closet instead.
“This is a great time that we can offset our budget by decluttering our house or apartment,” he says.
Use sites like Poshmark to sell your clothes, or Mercari for your household items. Many donation centers such as Goodwill are still accepting donations, too—just call ahead to make sure your local store or donation drop-off location will take your items.
7. New hobbies you’re trying in quarantine
Our spending habits are highly personal, and you might find yourself throwing money at a new habit or hobby to fight cabin fever.
“It’s a worthwhile exercise to track your spending, especially now that so much is different,” Rossman says. “Look through your credit card and bank statements from the past month. Do you see anything surprising? Are there areas where you spent extra but didn’t feel it was worth it? These could be good ways to cut back.”
And remember: Even if quarantine has eliminated some of your old day-to-day expenses, it’s easy to overestimate how much you’re saving.
“Most people don’t have a great handle on their budget and spending habits anyway, and so much has changed of late,” Rossman says. “It’s easy to overlook things.”
Homeowners are asking for breaks on their mortgage payments in droves, as millions of Americans face the prospect of unemployment or reduced income because of the coronanvirus pandemic. But requesting forbearance on your mortgage isn’t foolproof.
Requests for forbearance have poured in. Forbearance requests grew by 1,896% between March 16 and March 30, according to a recent report from the Mortgage Bankers Association, a trade group that represents the mortgage industry. And before that, forbearance requests had increased some 1,270% between March 2 and March 16.
As consumers have rushed to call their servicer in search of assistance, call centers have been overwhelmed, leading to longer wait times to speak with a representative.
“If you are eligible for this and you need the help, take full advantage of the program,” said Rick Sharga, a mortgage industry veteran and founder of CJ Patrick Company, a real-estate consulting firm. “But similarly, if you don’t need the help, and if you can pay your mortgage, don’t try and game the system and make it harder for people who really do need the benefits to access.”
For those who have yet to get a forbearance agreement in place, here’s what you need to know:
‘Forbearance is not forgiveness’
To be clear, mortgage borrowers will still need to pay off their loan eventually if they receive forbearance.
“Forbearance is not forgiveness,” said Karan Kaul, a research associate at the Urban Institute, a left-of-center nonprofit policy group. “You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.”
‘Forbearance is not forgiveness. You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.’
Karan Kaul, a research associate at the Urban Institute
Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. Homeowners with federally-backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.
The provisions in the stimulus package stipulate that during the forbearance period, mortgage servicers cannot make negative reports about the borrower in question to credit bureaus, including the three main ones, Experian, Equifax and TransUnion. Borrowers also will not owe any late fees or penalties if they are granted forbearance.
You need to know who your servicer is
Struggling homeowners won’t automatically receive forbearance. You need to request it from your servicer.
Mortgage servicers are the companies who receive your monthly payments. A homeowner’s mortgage servicer isn’t necessarily the same as their lender — many lenders sell the servicing rights for mortgages to other companies.
The first step to figure out who your servicer is would be to check your mortgage statement. If for some reason the information isn’t there, you can look it up by searching the Mortgage Electronic Registration Systems website. Alternatively, you can check with Fannie Mae and Freddie Mac, if your loan is backed by one of them.
How do you know if you qualify?
To qualify for forbearance, a borrower must have a mortgage backed by one of the following federal agencies:
• Fannie Mae
• Freddie Mac
• The Federal Housing Administration (FHA)
• The U.S. Department of Veterans Affairs (VA)
• The U.S. Department of Agriculture (USDA)
Borrowers should avoid calling their servicers to find out if they’re eligible, Sharga said.
“Find out what you can before you try and reach your mortgage servicer, because they are overwhelmed with call volume right now,” Sharga said.
Fannie Mae and Freddie Mac both have websites where you can check whether your loan is backed by one of them. You can access those websites here and here. Almost half of all mortgages in the U.S. are backed by Fannie and Freddie.
To find out if your loan is backed by the FHA, check the original closing documents or your most recent mortgage statement. If you pay for FHA Insurance, then that agency is backing your loan. Alternatively, your closing documents should include a HUD (Department of Housing and Urban Development) statement and a 13-digit HUD number.
Because the VA and USDA loan programs target specific borrowers, those borrowers should already know if they have loans backed by those agencies. In the event you are still unsure, you can call your servicer.
Those who aren’t eligible aren’t necessarily out of luck, though. Servicers for non-federally-backed mortgages may still be willing to provide forbearance to borrowers facing financial trouble right now.
Be prepared to answer some questions
You don’t need to provide documentation to prove your financial hardship at this time, but your servicer may have some questions to determine how much assistance they will offer you.
• Is the problem you are facing temporary or permanent?
• What is the current state of your income, expenses and other assets, including money in the bank?
• Are you a service member with permanent change of station orders?
“Consumers should indicate they have had a hardship due to COVID-19 and ask about their forbearance options with the company servicing the mortgage loan,” said Chris Diamond, director of financial products at online mortgage lender Better.com. “They should ask how long of a forbearance they can qualify for as well as what their options are at the end of that forbearance period.”
Get your forbearance agreement in writing
The CFPB stresses that any borrower who has received a reprieve on mortgage payments should get their agreement in writing.
“Once you’re able to secure forbearance or another mortgage relief option, ask your servicer to provide written documentation that confirms the details of your agreement and that you’re clear on what the terms are,” the agency said on its website.
Having the agreement in writing will protect you if there are errors in your mortgage statement or your credit report.
Watch out for balloon payments
After a borrower has secured a forbearance agreement from their servicer, they should discuss repayment options.
“You don’t want a surprise like finding out that six months of deferred loan payments are all due immediately upon the end of the forbearance,” Sharga said. “Most people simply won’t have six months’ worth of mortgage payments available.”
Some borrowers have expressed concerns after being offered a balloon payment option like the one Sharga described. With a balloon payment, a borrower would pay back the entire amount owed for the forbearance period at once.
While a lender may offer a balloon payment as an option, there is no mandate that a borrower must repay in this manner, Kaul said.
Homeowners can and should aim to negotiate the best possible repayment options for them. “All those terms are negotiable,” Sharga said. “Be diligent, be steadfast and try and stand your ground.”
Beyond a balloon payment, servicers may offer to extend the term of the mortgage and tack on the missed payments at the end, so a 30-year mortgage would be extended by 4 months if that’s how much forbearance a borrower received.
There is no mandate that a borrower must repay what they owe in missed payments in one balloon payment after forbearance.
Alternatively, a borrower may also be offered the option to amortize the balance they owe over the life of the loan. This means they would repay a portion of the balance owed in addition to their usual monthly payments.
A borrower can request information on who owns their mortgage note, since the owner might be able to provide more relief options. Servicers must respond to these requests within 10 business days, said Andrea Bopp Stark, an attorney with the National Consumer Law Center.
“If the servicer does not respond, the borrower should send another letter and seek legal assistance,” Bopp Stark said. “The servicer could be held liable for actual damages and up to $2,000 statutory damages for a failure to respond.”
If you’re still in financial trouble after forbearance, consider a loan modification
It’s too soon to tell whether 12 months of forbearance will be enough assistance for those who are among the millions of Americans who have lost their jobs in recent weeks.
“The most beneficial option if the borrower might be out of work or impacted for an extended period is to request to modify the loan at the end of forbearance,” Diamond said.
Unlike forbearance, a loan modification involves a permanent change to the details of the mortgage. This can include adjusting the interest rate, extending the duration of the loan or deferring the amount owed until the end of the loan as a separate lien.
A servicer will determine whether or not a borrower qualifies for the modification.
In French, it means superior force. However, in legalese, the term force majeure refers to a clause that can allow a person or business to extricate themselves from a contract.
“In general, it’s a force outside the control of a party,” says Denver, CO, contracts attorney Susan Goodman. “What the force majeure clause says is: If there’s an act of force majeure, then performance is excused if the performance is affected by that act.”
In even plainer English, it means: If something completely unpredictable occurs, a contract may be voided.
The current pandemic certainly seems to fit the bill, and will have contract holders invoking force majeure for relief from creditors.
However, mortgage holders looking for a way out of their debt obligations are likely to be out of luck when it comes to following the path of force majeure. Here’s how force majeure works in a contract.
What is an act of force majeure?
Contracts with a force majeure clause often list (very) specific potential calamities. If any of those calamities come to pass, a contracted party is allowed to back out of the deal with no penalty.
Force majeure events often written into contracts include:
“Acts of God,” which often include severe weather, floods, earthquakes, hurricanes, fires, etc.
Acts of war
Acts of terrorism
Acts of government authorities
Strikes or labor disputes
An inability to secure materials
Other causes beyond the reasonable control of a party
Do all contracts have force majeure clauses?
Force majeure clauses are almost always written into business-to-business contracts.
However, personal mortgages usually do not contain force majeure clauses. Neither do apartment leases or contracts for home improvements.
Commercial leases and development projects often do, and those clauses may be invoked due to COVID-19.
“You’re seeing a lot of activity on the on the [commercial] leasing front now with the argument of force majeure,” says Jack Fersko, co-chair of the real estate department at the law firm Greenbaum, Rowe, Smith, & Davis LLP in New Jersey and co-chair of the American Bar Association’s real estate section committee.
Businesses “can’t use the space—whether it is because of the virus, which has closed operations down, or [because of local] government orders.”
Construction firms might also invoke the clause if they’re unable to meet deadlines or milestones on a development project. Adding to the confusion is that each state has different requirements for force majeure clauses, which means there’s no one-size-fits-all option.
Invoking a force majeure clause
By definition, an act of force majeure must prevent one or both parties from performing a service listed in the contract.
But economic hardship is not a reason to invoke force majeure.
“Anybody can always claim economic hardship. If your company goes into bankruptcy, that doesn’t void a contract, and you can’t get out of it by force majeure,” says Goodman.
As always, the key for consumers is: Be aware of all terms in any contract.
Courts around the country are already investigating COVID-19 and how it might relate to force majeure.
“I think it’s important to point out that this is such a unique situation. We’re already hearing that courts are treating things differently than one might expect—like not calling this an act of God,” Goodman says.
Fersko adds that there isn’t much legal precedent for the current crisis.
“I guess we’ll look to fall back to the early 1900s with the flu. We’ll look to other events in history that may be akin to this, and see what sort of case law evolved from that,” he says.
“In many respects, this being a worldwide pandemic, it’s certainly going to create some novel legal issues.”
Future contracts are likely to include allowance for pandemics
“Force majeure clauses are all written differently,” Goodman explains. She adds that she has seen some clauses with the word “epidemic,” but none with the word “pandemic.”
That will change, of course, after the coronavirus outbreak.
“Most force majeures after 9/11 added terrorism to the clauses. It was never in it before, because nobody really thought of it—because it wasn’t really part of our society,” Goodman says.
“I think pandemics and epidemics are going to be added to every force majeure clause. Attorneys are already advising their clients to do that.”
The key to a force majeure event is its unpredictability. However, if an unfortunate event or disaster was something that you could and should have prepared for, it’s nearly impossible to invoke the clause.
Here’s the macabre truth: With hundreds of thousands of confirmed cases of COVID-19 across the country—and the death toll steadily rising—estate planners are reporting an increase in calls and transactions by people wanting to put their affairs in order in case of their death.
But estate planning isn’t just for those with a life-threatening diagnosis. In fact, if you’ve never considered who will inherit your assets, or whom you’d appoint to be your power of attorney, now’s probably a good time. We spoke with several experts to find out everything you need to know about quickly securing your assets during the pandemic—or beyond. Keep reading for all the details.
Estate planning with a lawyer vs. online
If you’re panicked about getting your estate planning done quickly, maybe you’ve wondered: Can’t I just do it online?
While many lawyers advocate for working with a professional, there are situations in which it might make sense to take the do-it-yourself online approach.
“If you’ve already taken stock of your assets and decided on how it should be managed, creating an estate plan is rather straightforward,” explains Felix Sebastian of Legal Templates. “An attorney can draft one up for you in a matter of hours, or you can do so yourself by using forms provided by your state government.”
For those with relatively simple estate planning goals (i.e., a limited number of assets and beneficiaries, and no special circumstances), online services can be a great option, with the added perk of having an incredibly fast turnaround time.
“We have streamlined the process to make it easy and efficient,” says Patrick Hicks, head of legal at Trust & Will. “Most people finish in 15 to 30 minutes, but the process is driven by the individual, so anyone can take more or less time as they desire.
“Our process is much like TurboTax,” he adds. “One easy question at a time, and each question will then lead you through the process to collect and synthesize all of your information and decisions. Most people can complete it all with no preparation and no other documents needed.”
The downsides of DIY estate planning
If this sounds good to you, you wouldn’t be alone. Hicks says their service has seen a 50% increase in activity even compared with other busy times of the year, and Mary Kate D’Souza, founder of online estate planning service Gentreo, reported a 143% increase in membership over the past week alone.
And while there are certainly potential perks of using an online service (e.g., getting documents faster or saving money on lawyer fees), just be sure you understand what you’re actually getting: a set of unnotarized forms that will likely not include any sort of legal advice.
“Creating an estate planning document such as a will only gets you halfway there,” Sebastian says. “Pretty much every single state and territory of the U.S. requires that these documents be signed by witnesses and/or notarized.”
Lawyers urge clients not to delay their wills and trusts
If you’re considering working with a lawyer for your estate planning, the experts are advising you get to it—and fast.
“Since the COVID-19 outbreak, we have experienced a 30% increase in calls from people wanting us to draft powers of attorney, health care powers of attorney, and wills,” says family law and estate planning attorney Chelsea Chapman of McIlveen Family Law Firm.
Plus, beyond those new clients, estate planners are trying to juggle their existing roster of clients, too—who are, understandably, concerned.
“With the COVID-19 outbreak, we’re receiving an exponentially greater number of existing-client calls than usual,” says Judith Harris, an attorney and co-chair of the Estate Trust and Tax Group at Norris McLaughlin.
Although many law offices typically take several weeks to complete estate planning packages, exceptions can be made for emergency situations.
“In the event of an emergency, we can get documents done in 48 hours,” says Eido Walny, founder of the Walny Legal Group. “That’s one heck of a rush job, however, and would require skipping over a lot of other people in the process. As a result, clients who ask for that kind of turnaround should expect to offer all the cooperation that is asked of them and also to pay a hefty premium for the service. But it can be done.”
The final word
Ultimately, however you choose to get your estate planning done, there’s one key takeaway.
“Don’t wait,” Walny says. “Get the planning process started now. Estate planning is not death planning—these documents will help you during life, during illness, and also in death. Hopefully this crisis will pass, and when it does, these documents will continue to be valuable, unlike the 1,200 rolls of toilet paper hidden in the basement.”
With finances in peril due to COVID-19, many homeowners are in search of mortgage relief. Two strategies that many borrowers are anxious to invoke right now are mortgage deferment and mortgage forbearance.
Both tactics allow a borrower to skip monthly payments for a set period. Depending on the lender, there can be subtle differences between the two terms.
“We are seeing the terms being used interchangeably,” says Sara Singhas, the director of loan administration for the Mortgage Bankers Association.
She adds that both tactics allow a temporary period during which a borrower need not make contractual monthly payments. The differences between the two strategies come at the end of that period.
“What happens at the end of the forbearance period is the amount of payments that you missed during that forbearance will be due in a lump sum,” says Singhas.
Sometimes, lenders will work with borrowers to structure a payment plan, instead of demanding a lump sum.
Deferment—especially special programs that lenders have introduced during the pandemic—often allow customers to repay the money over time or to add it to the end of the loan period.
Clearing up confusion about mortgage forbearance
“In the mortgage world, it’s very fluid … [but] what we hear more is the term forbearance,” says Mary Bell Carlson, a certified financial planner professionally known as Chief Financial Mom. “Overall, forbearance is saying, ‘Hey, something has happened, I cannot pay.’”
A book Carlson has dubbed her Bible of the financial world, “Surviving Debt,” by the National Consumer Law Center, makes no distinction between forbearance and deferment.
“They do not even use the word deferment in terms of a mortgage, everything is called a forbearance in this book,” she says.
If a lender does differentiate between the terms deferment and forbearance, the difference will be at the end of the loan period, according to Singhas.
Some borrowers will be able to add extra payments to the end of the loan or make other arrangements to spread out repayment, while others will not. Sometimes, payment terms involve a new loan or a rewriting the existing loan.
Mortgage loan originator Krista Allred says one differentiation can center on foreclosure proceedings and timing.
“Technically, a mortgage forbearance agreement is when you’ve possibly been late, and the lender agrees not to foreclose during that forbearance period,” says Allred. In this scenario, a borrower already has a history of nonpayment before entering into a forbearance agreement.
But with the pandemic only revealing its enormous scope within the past 30 days, many borrowers haven’t been late—yet.
However, because of sudden job loss or because of the quarantine, borrowers have besieged the phone lines of their lenders, to get out in front of the financial iceberg.
Contact your lender for mortgage relief
No matter what you call it, if borrowers ask for help during this crisis, many lenders are allowing them to miss payments and not charge them late fees or penalties.
“The definition really doesn’t matter. The moral of the story right now is to call your lender. Don’t just assume you can skip a payment. Call them, let them know, and make arrangements,” Allred advises.
Carlson struck the same chord and told us that borrowers shouldn’t get caught in the weeds about the semantics of forbearance versus deferment.
She says, “They just need to pick up the phone and say, ‘Hey look, I’m in a bad situation, I’ve lost my job, and I think it’s going to be rough for the next three months.’ From there the lender can come back and say, ‘Here [are the] options.’”
Due to the current financial situation, the mortgage world is shifting. Options that weren’t on the table for borrowers a few months ago might be available now.
Singhas says the length of time that the forbearance could be extended and the options at the end of the term might be different. She adds that borrowers in good standing prior to the current crisis may able to do a modification wherein any monthly payments missed now are simply tacked on to the end of the loan.
Pressing pause on your mortgage
Whatever terminology your lender uses, it’s important for you to understand what is really happening with your loan. Nothing is free. You can’t expect to stop paying your mortgage forever.
“It’s not free mortgage payment, it’s not free money. [Forbearance] is temporarily hitting the pause button on your mortgage, and not having to make the payment,” Carlson warns.
“It does not necessarily pause the interest that is accruing, and it does mean that you’re going to have to make that principal and interest payment at a later date.”
Key questions to ask before seeking mortgage forbearance
When calling your lender, Carlson recommends asking:
What relief options are available?
Will interest continue being calculated during the length of time I am not paying?
Will there be any fees?
How will it be reported to the credit bureaus?
Do I still need to pay for my escrow to cover taxes, insurance, and mortgage insurance?
Singhas says some lenders have decided to allow certain loan modifications. In some cases, they will allow the monthly payment to be changed later in the life of the loan, to include the amount missed during the forbearance.
She adds that the main confusion for consumers right now is the fact that most lenders will not necessarily require a lump sum payment after the forbearance period ends.
“I think some people are panicked that if they get a forbearance, they have to pay it all back immediately,” she notes.
“That’s one option, or they can enter into a payment plan if they can’t make the lump sum, and if they can’t make a repayment plan work, there are other options available to them.”
If you work out a forbearance or deferment plan with your lender and don’t just skip payments, it can protect your credit.
“It doesn’t show a positive or a negative, but it doesn’t show like a missed payment,” Carlson explains.
“So if you were to ignore it and just not pay anything and pretend it will go away, that’s absolutely going to affect your credit report in the long run. But the forbearance or deferment is a neutral. It’s not positive or negative on the credit report, but it’s a lot better than having missed payments on your mortgage.”
One caveat to keep in mind is that if you can pay your mortgage, pay it, and don’t ask for relief.
“It’s always better to make your monthly payment if you can,” Singhas says.
Standard versus itemized deduction: Which one should you claim? If this question is weighing heavily on your mind as you file your taxes, now that all the new tax reforms have taken effect, let this guide help you decide.
Itemizing your deductions—particularly if you’ve bought a home recently—could save you major bucks when you file. But, more than ever, you need to understand what you can and can’t do. We’ll break it down to help you make the decision on whether to select a standard or an itemized deduction.
What is the standard deduction?
The standard deduction is essentially a flat-dollar, no-questions-asked reduction to your adjusted gross income. When you file your tax return, you can deduct a certain amount right off the bat from your taxable income.
For 2019, the standard deduction is $12,000 for single filers and $24,000 for married couples filing jointly. (The standard deduction nearly doubled as a result of the Tax Cuts and Jobs Act, which went into effect in 2018.)
Here are some of the benefits to taking a standard deduction:
It allows you a deduction even if you have no expenses that qualify as itemized deductions.
It eliminates the need to keep records and receipts of your expenses in case you’re audited by the IRS.
It lets you avoid having to track medical expenses, charitable donations, and other itemizable deductions throughout the year.
It saves you the trouble of needing to understand the fine nuances of tax law.
What are itemized deductions?
Although claiming the standard deduction is easy and convenient, choosing to itemize can potentially save you thousands of dollars, says Mark Steber, chief tax officer at the Jackson Hewitt tax service.
“Don’t be lulled into thinking the standard deduction is always a better answer,” Steber says. That advice especially applies to homeowners.
“Buying a home has the single largest impact on your tax return,” he adds, noting that a home purchase is “an anchor item that can move someone into the itemized taxpayer category.”
Itemizing your deductions may enable you to deduct these expenses:
State and local income taxes or sales taxes (but not both)
Gifts to charities
Casualty or theft losses
Unreimbursed medical and dental expenses
Unreimbursed employee business expenses
Why itemizing often makes sense for homeowners
Under the new law, current homeowners can continue to deduct interest on a total of $1 million of mortgage debt for a first and second home. But new buyers can deduct interest on only $750,000 for a first and second home.
It’s still possible that if you own a home, your mortgage interest alone might exceed the standard deduction, says Steve Albert, director of tax services at the CPA wealth management firm Glass Jacobson. In this case, it’s a no-brainer to itemize your deductions.
This is particularly true if you bought a house recently, since most mortgages are front-loaded to pay mortgage interest rather than whittle down the principal (which is the amount you borrowed).
For instance: If you have a 30-year loan for $400,000 at a fixed 5% interest rate, in the first year of your mortgage, you’ll pay off only $5,901 in principal and a whopping $19,866 in interest.
That alone exceeds an individual’s standard deduction of $12,000 deduction for 2019. So if you’re filing taxes this year, itemizing would make total sense.
Plus: If you bought your house in 2019 and paid points—which are essentially a way to prepay interest upfront to lower your monthly mortgage bills—these points count as mortgage interest, too, amounting to more tax savings.
On the other hand, if you’ve owned your home for a while, then your mortgage interest may not amount to much. By the 25th year of that same $400,000 loan, you’ll pay only $6,223 in interest.
However, keep in mind that your property taxes of up to $10,000 are an itemized deduction, too—and combined with mortgage interest and other deductions, could push you over the top into itemizing territory.
Itemized vs. standard deduction: Which is right for you?
Not sure how much you paid in mortgage interest and property taxes last year? To get a ballpark, you can punch your info into an online mortgage calculator.
Also, early in the new year, your mortgage lender should have mailed you a mortgage interest statement (Form 1098) showing the total you paid during the previous year.
“And if you had your property taxes impounded in your loan, your taxes will appear on your 1098 as well,” says Lisa Greene-Lewis, a CPA and tax expert at TurboTax.
Another DIY approach for seeing whether your combined itemized tax deductions are higher than your standard tax deduction is to fill out the IRS Schedule A form, which outlines all federal itemized deductions line by line.
You can also consult an accountant (you can search for a tax professional in your area using the IRS directory of tax return preparers). But as a general rule, if you bought a home recently, you could be a prime candidate for itemizing, so don’t let these potential savings pass you by without checking!
Between low mortgage interest rates and the coronavirus pandemic sending our economy in a tailspin, many people have recently rushed to refinance their mortgages. But as we all know, haste makes waste—and many of those eager homeowners made mistakes that could cost them tons of money in the long run.
So if you’re tempted to jump on the refinance bandwagon, do so with caution. To help clue you in to where the pitfalls lie, here are six mortgage refinancing mistakes to avoid.
Mistake No. 1: Assuming that a federal rate of 0% means you can get a 0% mortgage rate
In an effort to stimulate the economy amid the coronavirus pandemic, the Federal Reserve dropped the federal funds rate to a range between 0% and 0.25%. Many people assumed that this meant that mortgage rates would fall into that range, too. That is not the case, as it happens.
“I think one of the most misunderstood things that people are seeing right now is the news about interest rates going to 0%,” says Ryan Wright at Do Hard Money.
The reason? Wright explains that the Federal Reserve interest rate, the prime rate, and the actual rate someone’s lender will offer are all different.
The federal funds rate, which is what the Fed sets, is the rate that banks pay to borrow from each other. This actually doesn’t directly affect mortgage rates, but it does have a trickle-down effect.
The mortgage rate reports that come out weekly typically compile the average rate for a 30-year loan. But there are a lot of variables, including where you live and what your borrower profile looks like. Prime borrowers, with the best credit score and debt-to-income ratio, get the cheapest rates. Meanwhile, if you aren’t the ideal borrower, your rate is likely to be higher.
Moreover, interest rates have been going up and down in the last few weeks, and are likely to continue in this way before they level out. As a prospective refinancer, it’s important to stay informed, and not to try to refinance with unreasonable expectations.
Mistake No. 2: Jumping on the refinancing trend too late
With so many people refinancing, you might be tempted to do the same. Unfortunately, it may already be too late.
That’s right: Good news travels fast, and with so many people rushing to refinance, lenders have been inundated by the demand, and rates have gone up.
“We are seeing a major influx of refi applications to capture lower interest rates,” Nicole Rueth, a mortgage lender with Fairway Independent Mortgage Corporation explains. But it’s not just homeowners hoping to score a deal during a dip in the economy. Plenty more are visiting lenders to prepare for an uncertain future.
Rueth reports that she’s seen many homeowners who are leveraging equity with cash-out refis, aiming to secure a nest egg to prepare for the ongoing COVID-19 emergency.
And it’s not just Rueth who’s experienced the surge in refinancing. As of March 11, the volume of refinancing applications was up 79% from the previous week and 479% year over year, according to data from the Mortgage Bankers Association.
Since the industry wasn’t prepared to process all these applications, many lenders hiked up rates in an effort to slow business.
“Mortgage rates move according to supply and demand and liquidity in the market,” Mike Zschunke, a real estate specialist in Arizona, says. “The more people that want to refinance or that apply for new mortgages, the higher the rates will go.”
Mistake No. 3: Forgetting about refinancing fees
As stated above, it may be hard to get a good refinance rate, now that so many homeowners have gone running to their lenders. Still, that doesn’t mean it’s impossible to find a better rate than the one you currently have.
But the promise of a lower rate doesn’t necessarily mean you should refinance.
A refinance will come with plenty of fees and closing costs, and sometimes those fees can make your refinance cost even more than you’d save on the lower rate.
“People should know that just because their new interest rate may be lower than their current interest rate, it may not make sense,” says Roger Ma, a certified financial planner. “They need to consider how much longer they’ll be staying or keeping their current place, the upfront closing costs involved, and the ongoing interest savings.”
If you crunch the numbers and realize that, in the long run, a refinance will be worth the costs up front, great!
Just make sure you know what fees you’re facing so you can make an educated decision.
Mistake No. 4: Refinancing too much equity out of your home in a time of uncertainty
There are many reasons to refinance, but if you’re planning to tap into your home equity—to, say, consolidate your debt or pay for home improvements or other expenses—watch out.
“We should be concerned about people refinancing too much equity out of their homes and not being able to afford the mortgage payment,” says Odest Riley Jr. of WLM Financial. “This is especially the case if the COVID-19 virus causes any type of economic downturn, which could tighten up a homeowner’s ability to keep up with their financial obligations.”
So if you’re refinancing—even with a lower interest rate—make sure that your new monthly payments make sense for your budget. Before you make any big decisions, remember that rates are low for a reason, and in this time of national and international financial uncertainty, it may be best to play it safe, financially speaking.
Mistake No. 5: Expecting to lock in your lender’s quoted rates and fees ASAP
Since the rates could go up (or down) while you’re in the process of refinancing, it’s always good practice to lock in your lender’s rate to ensure you’ll be paying what you expect. This lock may cost a fee.
But with all the volatility in the market these days, locking in rates can be especially tricky. It can be difficult to get a lender to look at your application, let alone lock in a rate, before the rates move again.
If you’re lucky enough to lock in a rate that works for you, even if it’s not the best rate you’ve seen, you might want to take the opportunity while you can. Here’s more on when to lock in a mortgage rate.
Mistake No. 6: Shopping for the right loan for too long
With today’s online financial tools, like this mortgage rate comparison tool, there’s no excuse to not get the lowest rate possible. Still, experts warn against falling into a black hole of shopping for the best rate indefinitely, always thinking you can find a better deal.
“I have many clients who are too focused on rates or making a perfect decision on small details of their loan—so much so that they are likely to miss out on an incredible opportunity in an effort to make a perfect decision,” says Todd Huettner with Huettner Capital.
“A few are in a position where they could save thousands of dollars a year—tax-free, no less—by refinancing, but they are waiting to start the process. Many of them will get left behind.”
Plenty of people track rates as they sink, waiting to pounce when rates drop to their absolute lowest, but Huettner says this isn’t the best tactic.
“If you think you can time the bottom, you can’t. You can only get lucky,” says Huettner. “Find a rate that makes sense for you, and jump on it if you get it.” Here’s more info on how to shop for a mortgage.