Month: April 2022

With so many day-to-day expenses to worry about, it can be difficult to know exactly how much money should be allocated for each purpose. But as a homeowner, it’s important that you determine how much of your gross monthly income you should allocate to your mortgage in order to stay on budget — and on track to achieve your financial goals. This can be a challenge, especially if you need to consider fairly splitting the amount with your spouse or if you have multiple income streams.

First, it’s important to note that there are four components to your monthly mortgage payment: principal, interest, taxes, and insurance. This is known as PTI for short. There are two parts to your monthly gross income in terms of where the money goes: the front-end ratio, which goes toward your mortgage, and the back-end ratio, which goes toward paying any outstanding debts, like extra housing costs, school or personal loans, and credit cards. 

As a general rule of thumb, on an annual basis, you should aim for a mortgage that is roughly two to two-and-a-half times your yearly income to ensure affordability. But there are at least a few different schools of thought when it comes to the percentage of your income that should go toward your mortgage each month.

The 28% Rule

A fairly established and well-known piece of wisdom, “the 28% rule,” also known as the 28/36 rule, advocates that homeowners should spend 28% of their gross monthly income on their mortgage payment (the front-end ratio). If you’re following this rule, it’s pretty simple to calculate the specific amount you can afford by multiplying your monthly gross income by .28. 

Experts warn that spending more than 28% on your monthly mortgage payment can start to spell trouble. Daniel McCue, Senior Research Associate at the Harvard Joint Center for Housing Studies, told CNBC that homeowners should be wary if this percentage creeps up to 30%. 

“In order to pay for housing, people spend a third less on food and two-thirds less on health care,” he explained. In addition to negatively impacting your quality of life, spending too much on your mortgage can also drain your emergency savings, and it’s relatively easy for interest to get out of hand.

And if you’re a first-time homeowner, keep in mind that just because a lender approves you for a particular mortgage amount that’s beyond the 28% figure, this doesn’t mean you should overspend — you should still keep your income and additional expenses like HOA fees, utility payments, and maintenance costs in mind to avoid getting into trouble and staying on budget.

The 35% / 45% Model

Another rule some homeowners subscribe to is the 35% / 45% model, which states that your total monthly debt, including your mortgage installment, shouldn’t exceed 35% of your pre-tax income, or 45% of your post-tax income.

In order to calculate how much mortgage you can afford with this model, figure out your gross pre-tax income tax and multiply it by 35%. Then, multiply your monthly gross post-tax income by 45%. Your target price range is in between these two figures.

This model can provide you with a bit more flexibility in terms of the amount of money you’re able to spend toward your mortgage each month. Homeowners in regions with higher-than-average state or local taxes, or even just higher home prices, may find this model to be especially beneficial.

The 25% Post-Tax Model

Finally, the 25% post-tax model says that your total monthly debt should be 25% or less of your monthly post-tax income. So, for example, if your monthly income after taxes is $6,000, you’d multiple this by .25 to get the maximum amount you should be putting toward your mortgage: $1,500.

Majority of Homeowners on Track, But Some At Risk

According to Hometap’s 2021 homeowner report, homeowners generally seem to be aware of this advice: the highest cohort of homeowners (48%) spent 15% or less of their gross monthly income on their mortgage, and the next-highest percentage (27.9%) spent 16–25%. However, the COVID-19 pandemic has significantly affected homeowners negatively, with one in four surveyed saying that they plan to tighten their budget until they financially recover — so it’s more important than ever that they keep an eye on their spending.

However, there were some exceptions. For example, one in three millennials reported that more than 25% of their gross monthly income went toward their mortgage, which puts them at increased risk of becoming house-rich and cash-poor. 

What Should I Do If I Am Spending Too Much on My Mortgage?

If you are concerned that you’re spending too much of your monthly income, there are a handful of different options to consider:

• Take a fresh look at your budget and determine whether you’re stretching it too far in order to pay off your mortgage early
• Rent out a room in your home to bring in some extra cash each month
• Get a second job or pursue a side hustle
• Look at a cash-out refinance — but only if it makes sense financially for you
• Downsize to a home that’s more affordable 

If you’re a homeowner who is looking for a way to cover more expenses so you can stay on top of your mortgage payments, you also might want to consider a Hometap Investment — you can tap into your equity to receive cash while staying in your home. Take our five-minute quiz to see if a Hometap Investment might be a fit to help you reach your financial goals.

Is Hometap right for me?

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Refinancing is one of the most common ways to access your home’s equity, and it can be beneficial in a variety of ways — but there are some things to be aware of before you begin the process.

What Is a Refinance?

A refinance is the process of taking out a new mortgage loan. However, it’s important to note that there are two primary types of refinances. A rate-and-term refinance is one in which the borrower is seeking a lower interest rate or better terms on their mortgage. With a cash-out refinance, a homeowner takes out another mortgage that has a larger balance than their original one in order to receive the difference in cash — typically, a cash-out refinance is used in cases where the homeowner is looking to achieve another financial goal such as pay for renovations or education or pay off debt.

Why Might You Want to Refinance?

There are a few reasons you may want to refinance — the main one being that you’ve built up equity in your home and want to tap into it to access cash without having to sell your house.

It can also be advantageous to refinance as it may allow you to secure a lower interest rate or shorten the term length of your mortgage, and many homeowners choose to refinance during times of particularly low rates. If your original mortgage was an adjustable rate mortgage (ARM), a refinance can present a good opportunity to switch to a fixed-rate mortgage. 

If you’ve built up at least 20% equity in your home, you may also be able to use a refinance to eliminate private mortgage insurance (PMI), which is racked onto mortgages when homebuyers don’t have a sufficient down payment amount.

Pros and Cons of Refinancing

On the plus side, as mentioned above, refinancing can also help you secure a lower interest rate on your mortgage as you’re essentially replacing your first mortgage with a new one. With a cash-out refinance specifically, as the name suggests, you’ll be able to use the difference between mortgages in cash and put it towards necessary expenses.

However, there are some downsides to be aware of as well. If you’re shortening the term of your mortgage, this means that your monthly payments will go up as a result, so it’s important to make sure that you’re prepared to handle the increase.

And since you’re taking out an entirely new mortgage, you’ll have to deal with the same fees you paid the first time around, including application and origination fees, closing costs, and potentially appraisal fees. 

Steps to Refinancing

If you decide a refinance is right for you, you’ll need to apply to kick off the process, either with your current mortgage lender or a new one. 

• Shop around to compare rates

Before you settle on one lender, make sure you’re getting the best rate you can find by applying with at least a few different lenders. Contrary to popular belief, it probably won’t negatively affect your credit score to apply for multiple refinances — as the majority of credit scoring models acknowledge this practice and factor it into their evaluation. Usually, this means that multiple inquiries made within 14 to 45 days will only be counted as one. 

• Gather all of the required documentation 

Not only will you need to provide current mortgage and financial statements to the lender you choose to apply with, but looking at the details of your current mortgage will better help you compare different estimates from competing lenders.

• Select a lender

Once you’ve received multiple quotes, you can evaluate the rates and determine what makes sense for you. You’ll typically need to make a decision fairly quickly — within 10 days or so — before your rate estimate expires.

• Close on your loan

After some additional steps like paying an appraisal fee and having your loan approved by the lender’s underwriting team, the final step is to schedule a time to sign your documents to confirm the refinance.

How Much Equity Do I Need to Refinance?

While the amount of equity you need to refinance is dependent on your lender, most typically require that you have at least 20% of your home’s value to qualify; while you may still be approved with less than that, other evaluation criteria — like your credit score — may need to be higher to compensate. Generally, the higher the amount of equity you have in your home, the easier it is to qualify for a refinance. 

Alternatives to Refinancing

Fortunately, if a refinance doesn’t make sense for you, there are several other options to consider, especially if you’re seeking to tap your home’s equity to access cash.

A home equity loan is one of the most common, and on the plus side, it provides you with a lump sum of money and a fixed interest rate, so monthly payments are predictable. However, you’ll be responsible for monthly payments on top of your mortgage installments, so you’ll need to prepare for this extra cost.

A home equity line of credit gives you flexibility in terms of the amount of funding you can access and the frequency with which you can access it, but the variable interest rate makes for unpredictable monthly payments that fluctuate.

Finally, a home equity investment can help you tap into your equity in as little as three weeks. You can use the cash for whatever you’d like, and there aren’t any interest or monthly payments to worry about. Instead, you settle the investment at the end of the effective period with a percentage of the home’s market value. 

Is a home equity investment the right move? Take our Fit Quiz and see!

Is Hometap right for me?

Ultimately, whether a refinance makes sense depends on your own personal financial situation and goals — so it’s important to weigh your options to ensure you’re making the best decision for you.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Much like its name suggests, homeowners insurance is a form of insurance that protects one’s property from various adverse events. While specifics vary by policy, most coverage addresses interior and exterior damage, personal asset loss or damage, and injury that occurs on a property.

Homeowners Insurance vs. Home Warranty

The biggest difference between homeowners insurance and a home warranty is that the former covers damage caused by forces of nature (like fire or wind), while a home warranty guarantees the replacement of parts or entire appliances or home systems that malfunction or stop working.

Homeowners insurance is more comprehensive and encompasses a wider range of incidents, and a home warranty is not an adequate replacement for homeowners insurance. 

As Art Chartrand, executive director and counsel for the National Home Service Contract Association, explains, “Home warranties are contracts of inclusion, while homeowners insurance [policies] are contracts of exclusion.”

How to Choose the Right Homeowners Insurance

Traditional homeowners insurance plans fall into one of eight buckets that range from HO-1 to HO-8 policies, each offering a different level and/or type of coverage.

• HO-1: While this policy still exists, it’s very rare, as it provides the bare minimum of coverage for single-family homes.
• HO-2: A slightly more common policy than HO-1 that offers additional coverage, though still not very widely used.
• HO-3: Now the most common insurance policy, offering coverage for single-family homes. 
• HO-4: The HO-4 policy type specifically covers renters rather than homeowners, and is generally referred to as “renters insurance.”
• HO-5: This policy provides the most comprehensive coverage and is the second most popular option for single-family homeowners behind the HO-3 policy. 
• HO-6: A policy type specifically for condo owners. 
• HO-7: HO-7 policies provide coverage for manufactured or mobile homes. 
• HO-8: Also sometimes referred to as the “modified coverage form,” the HO-8 policy type is typically used for older or historic owner-occupied homes. 

The difference between HO-3 and HO-5 homeowners insurance policies comes down to how they handle personal property. The former only covers said property if the damage done is caused by something included within the policy. And if, for example, furniture is the damaged property in question, an HO-3 policy will likely only cover its cash value (accounting for depreciation), and not the cost of replacing it. 

An HO-5 homeowners policy covers all damage to personal property except for damages excluded from the policy, and it covers the cost of replacing the damaged property. 

Once you determine the appropriate policy type, you’ll also want to make sure its reimbursement type makes sense for you. There are typically two arrangements: a cash value policy that repays you in cash for the actual value of items lost, stolen, or damaged (with depreciation accounted for), or a replacement cost policy, which repays you an amount consistent with what it would cost to repair damaged items or buy new ones to replace those lost — usually this is higher than the cash value rate. 

How Much Homeowners Insurance Do I Need?

The amount of coverage all depends on your particular personal situation and home, but you should purchase enough coverage to cover all of your belongings in the event that they’re destroyed. As mentioned above, most policies provide a minimum of $100,000 in coverage and protect your property in the cases of lightning, fire, hail, or explosions. However, if you live in an area that may experience other natural disasters like earthquakes or floods, you’ll need to purchase additional coverage as well. 

If you’re deciding between HO-3 and HO-5, it should come down to the value of your personal property. If you have a lot of expensive belongings like electronics or high-end furniture that you want covered in case of an event like theft or smoke damage, it may be worth considering an HO-5 policy.  

Branch suggests speaking with an insurance professional to determine the right amount of insurance coverage for your needs and budget.

How to Save on Homeowners Insurance Costs

There are several different ways to save on homeowners insurance, so it’s worth spending some time exploring options and checking out discounts to see if you can slice a few bucks off of your annual premium.

• Shop around: While you want to make sure you’re not cutting corners and getting sufficient coverage, it can pay off — literally — to do your homework in terms of providers. Experts recommend getting quotes from at least three different companies. 
• Raise your deductible: Increasing the amount that you pay when you file an insurance claim can actually save you money on an annual basis, so it can be a calculated risk worth taking. Of course, this means you need to meet that deductible before insurance kicks in when an issue does arise.
• Bundle your home and car insurance: If you’re already paying for an auto insurance policy, you can often get a discount by packaging it with homeowners insurance through the same provider. 
• Add security features to your home: It might not be the first thing you think of, but simple additions like a smoke detector, deadbolt locks, or an intruder alarm can help to reduce your premium.
• Consider eliminating “high-risk” items: Some home leisure purchases, like trampolines, playgrounds, or pools, can raise your insurance premium due to the risk of injury they present. If you or your kids can’t live without them, it may be worth paying a bit more — but it’s certainly something to consider if you are looking for ways to cut costs. 
• Do a review of your coverage every year: As your needs change over the years, you may find that you’re paying too much for your policy when you compare your premium to that of competitors, or that you can downgrade to a lower amount of coverage to better fit your specific situation.

Ultimately — like many home-related things — finding the ideal homeowners insurance policy comes down to your own priorities and values, but with a bit of research, you can confidently select the right one for you.

YOU SHOULD KNOW…

The above information is for general awareness and education purposes only, and does not pertain specifically to the homeowners insurance needs of those seeking a Hometap Investment. We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.