5 Characteristics to Consider to Choose the Right Neighborhood

aerial view of suburban neighborhood

When it comes to determining the best place for your family to live, there are a number of considerations (and opinions) to balance — but ultimately, it all depends on your personal priorities, values, and budget. Your decision should be one based on both head and heart: while you want to make your whole family as happy as possible, you also want to make sure you’re making a solid investment.

If you hail from the area you’re looking to buy a home in, you’re already at an advantage, since you’re more familiar with neighborhoods and might even have a clear idea of the streets where you want to house hunt. However, if you’re moving to a totally new-to-you city, it might be a bit more daunting. No matter what your circumstances, though, there are several factors to look at before you commit to a place.

1. Safety

Safety is one of the biggest and most important factors to consider in a potential neighborhood, especially if you have children. Fortunately, there are many websites that aggregate crime statistics in a given area so you can easily compare them before even visiting in person, including NeighborhoodScout, SafeWise, and SpotCrime.

When exploring potential streets, make note of the potentially less obvious — but still important — features, including the amount and placement of street lights and sidewalks. Conversely, you should keep an eye out for vacant or abandoned buildings or any other sights that feel unsettling or concerning as you look around. It’s also a good idea to drive around a potential neighborhood at night to get a feel for it at different times of the day.

One more consideration is whether your home is on a main road or on a side street or cul-de-sac, especially if you’re hoping to purchase a home with secluded backyard space for your children to play.

2. Schools

If you plan to or have children, school quality and proximity is another major factor that can make or break your choice of location.

It’s easy to see online, at a glance, how districts are performing and how large they are on Niche and GreatSchools, but it is often worth your while to connect with parents within the district(s) you’re researching to get their firsthand thoughts as well. And if athletics are of interest to your kids, take a look at the size and variety of the sports programs and how the teams typically perform.

3. Convenience

Think about your day-to-day routine and the types of conveniences you value. How close are grocery stores, hospitals, doctor’s offices, pharmacies, parks, and shopping centers? Are you near enough to highways if you need to quickly and easily access other cities, or see friends and family?

Most importantly, if you drive to work or take public transportation, time and map out your potential daily commute. Choosing an area that results in an hours-long drive or multiple train transfers won’t just cut time out of your day that you could spend with your family — and zap your energy — but it could cost you in gas and train tickets as well.

4. Price

Though safety, schools, and proximity to conveniences are the most important aspects when researching areas, you can begin shopping by price once you narrow down a neighborhood based on these criteria. It helps to get an idea of current median home values in the area, as well as property taxes, so you can more accurately and quickly assess what’s within the normal range and what properties might be overpriced as you shop around. Realty websites including Redfin, Zillow, and National Association of Realtors can help estimate home prices, as well as regional realty publications.

5. Any Other Important Features (to You)

Once you’ve addressed all of your must-have characteristics, think about miscellaneous preferences you or any of your family members might have. For example, do you have preferences on town water and septic versus private, an older versus a newer home, or planned future development in the neighborhood that could increase noise and/or traffic?

With some time, effort, and research, you can make an informed decision that everyone is happy with and land in the right neighborhood for your family.

Knowing your current home value can help you determine your budget for the next one. Do you know what your current home is worth? Our Home Equity Dashboard can help!

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.

What Is a Home Warranty and Do You Need One?

bright kitchen with stainless steel appliances

Homeowners have many decisions to make — especially when it comes to protecting and preserving their home — and one of them is whether or not to purchase a home warranty. And if it’s your first home, you may be wondering, “What is a home warranty?” and even if it’s different than homeowners insurance or other coverage. You’re not alone, so we’re here to walk you through it. A home warranty is a contract that covers the maintenance costs of certain household systems and/or appliances for an established time period. Terms can vary by company, but most plans offer coverage on an annual basis.

A home warranty differs quite a bit from homeowners insurance, though the two are often conflated and are similar in the sense that they’re designed to help homeowners save money and help protect their property. Homeowners insurance, which is usually mandatory, generally safeguards against external events that can cause damage to your home — including weather-related issues, fire, or even burglary — while home warranties cover the repair or replacement of household items that may fail due to ongoing regular use. However, there are some details you should be aware of when considering home warranty companies, as one size doesn’t fit all and there is a range of coverage options and providers.

What’s Covered in a Home Warranty

There are different types of home warranty plans, including complete, appliance-only, and systems-only, so it can help to do a little research to find the right one for you. Ultimately, the major difference between the three is the type and amount of coverage you receive.

Complete (or combination) home warranties: These plans provide the most comprehensive coverage, as they cover both appliances and systems. For older homes that haven’t been recently renovated, a combination plan can provide an added layer of protection from the issues that tend to plague aging houses. While the specifics depend on the provider, the following appliances and systems are generally included in a combination plan:

Appliances:

Refrigerator
Oven, range, and cooktop
Dishwasher
Air conditioning unit
Garbage disposal
Garage door opener

Systems:

Heating/Air conditioning (central air)
Electrical
Water heater
Interior plumbing
Ductwork

Depending on the company, you may also be able to secure home warranty coverage for optional add-ons. These can include:

  • Swimming pool/hot tub
  • Septic tank and pump
  • Well pump
  • Extended electronic warranties
  • Guest dwellings
  • Roof leaks
  • Pest control

Appliance-only home warranties: As the name suggests, this type of plan offers coverage for major household appliances, including refrigerators, dishwashers, washers and dryers, ovens, ranges, built-in microwaves, and garage door openers. However, this doesn’t include any of your home’s electrical, heating, or plumbing systems.

Systems-only home warranties: Conversely, these plans address your heating, electrical, interior plumbing, and ductwork systems, but don’t include any assistance for typical appliance wear and tear. If you have an older home that’s been recently updated with modern appliances but retains some older heating or electrical systems, this type of plan might be worth considering.

The Cost of a Home Warranty

The price of a home warranty varies quite significantly depending on several factors, including type, term length, your house’s size and age, and your state or geographic area. States with the highest average home warranty premiums include New York, Alaska, Connecticut , and New Hampshire, while states with the lowest average premiums include Washington, California, and Florida.

Map of the average cost of home warranties by state

There are also various smaller costs that comprise the total cost of a home warranty plan. The typical cost breakdown includes the following:

Premium: The monthly amount you pay for your plan (the bulk of the cost).
Range: $264–$1,425, with the national average around $600

Service fee: A charge you pay each time you require a repair or replacement — or even just call a technician to your home to assess the issue.
Range: $60–$100

Coverage cap: The maximum amount of coverage your warranty company will pay for repairs and replacements.
Range: Varies widely by company, but typically $500–$1,500 per appliance or system, plus a total cap for all events within the warranty period

Cancellation fee: The charge you pay when you cancel your warranty contract before the end of the specified term. In general, you have an initial grace period of around 30 days with most home warranty companies, during which you can cancel with no penalties.
Range: Varies by company, but typically $50-$75

Many home warranty providers will also offer different tiers of their complete plans that range in coverage and provide homeowners with a few different options, so they can find one that matches their budget.

Chart showing average cost of home warranty premiums by plan type

Should I Pay for a Home Warranty?

There are several different factors you’ll want to consider when deciding whether or not it’s worth it to purchase a home warranty. For example, the age of your home and its appliances and heating/cooling systems are perhaps the most important thing to think about; the older the home, the more likely it is to need fixes.

In addition, it may be a good idea to create rough estimates of the cost of repairs/replacements for your appliances, as they can add up on top of the cost of your warranty. Or it may just make more sense to buy a warranty when you do the math and determine that the likely fixes will cost you more money out of pocket than the price of the premium and service call.

Below are the average cost ranges and repair costs for the most common appliances:

Cooktop/Range

Cost range: $100-$430
Average repair cost: $250

Dishwasher

Cost range: $100–$300
Average repair cost: $220

Garbage Disposal

Cost range: $70–$400
Average repair cost: $250

Microwave

Cost range: $50–$400
Average repair cost: $200

Oven

Cost range: $100–$400
Average repair cost: $300

Refrigerator

Cost range: $200–$500
Average repair cost: $400

Washer/Dryer

Cost range: $100–$650
Average repair cost: $300

Frequently Asked Questions About Home Warranties

What are the cons of a home warranty?

While complete warranty plans are typically quite comprehensive, you’ll want to make sure you understand the potential costs of any repairs or replacements that might not be included in your particular plan, as they can be expensive. Note that there can be stipulations regarding specific appliances that merit coverage as well — for example, only built-in microwaves are included in most warranties, and not free-standing ones. And if an appliance or system breaks because of neglect, your warranty may not cover the repair, so it pays off to stay on top of maintenance tasks.

What is a home warranty vs. homeowners insurance?

A home warranty can help handle the regular wear and tear of appliances and/or heating or cooling systems, while homeowners insurance addresses more external issues like weather or natural disasters. If you’re able to afford it, having both can ensure that you have maximum protection for the majority of the “what ifs” you want to prepare for as a homeowner.

Are home warranties expensive?

The cost of a home warranty depends on the company you choose and the level of coverage you select. There are two components: the monthly premium, which is the cost to buy the warranty, and the service call fee, which the homeowner is required to pay each time they need a repair or replacement. You should also keep in mind that each company has different coverage caps — so if the cost of necessary repairs exceeds the designated amount, you’ll need to pay for the rest out of pocket.

Is a home warranty worth it for an older home?

While the decision to buy a warranty is completely up to you, purchasing coverage for an older home can be a great idea, especially since aging appliances and systems can mean that they’re more prone to issues that require repairs.

How do I know if I have a home warranty?

If you haven’t purchased one yourself, there are a couple of different ways to find out if there is an existing home warranty for your property. The first is to find out from a previous owner whether they had one and request a copy from them. Or, if you’ve already closed on the home, you can contact the title company or the realtor who closed the home sale to check on the status of the warranty.

Though there are multiple factors to consider when deciding whether or not to obtain a home warranty, they can provide added peace of mind for homeowners who want to make sure they’re covered if and when they experience some of the unexpected issues that come along with day to day wear and tear.

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.

The First-time Homebuyer’s Guide to Mortgages

front porch of home

As a first-time homebuyer who’s wondering how to apply for a mortgage, you probably have at least a few questions — but let’s begin with the basics. A mortgage is defined as a loan that’s specifically used to buy or maintain a home, land, or another type of real estate. The vast majority of the time, barring extenuating circumstances, you need a mortgage to purchase and own a home.

There are two types of mortgages: fixed rate, which provides a set payment amount for the life of the loan, and adjustable rate, which begins at a set interest rate for a period of time, then regularly fluctuates based on market conditions.

While it may seem quick and easy to secure a mortgage to buy a home, there’s actually quite a bit more involved than meets the eye. Read on for an overview of the process — from how to get approved for a home loan to what happens at the closing table — so you can be as prepared as possible.

Step 1: Preapproval

Who’s involved: Buyer, lender

How long it takes: One day – one week

The first step in any prospective home buyer’s journey is getting preapproved by a lender. Before picking one, make sure you shop around to compare rates and loan types, as well as different flavors of lender. You aren’t restricted to big banks, as there are local institutions and credit unions, online-only options, and more, so it can pay off to spend time doing your homework.

The lender will ask you questions about your credit score and income, before providing you with a specific maximum loan amount that you’re approved for. If you’re purchasing the home with another buyer, such as a spouse, you’ll both need to provide this information.

In order to place an offer on a home, you need to be preapproved for a mortgage first. Once you receive it, your home loan preapproval will last for 90 days — so it can be a good idea to get this taken care of before you begin seriously looking at properties. That way, you’re not rushing to obtain it once you find a house worth an offer.

Step 2: Property under contract

Who’s involved: Buyer, seller, real estate agent, lender

How long it takes: One – three days

Once you’re preapproved for a mortgage and put an offer on a home, you’ll need to have the offer accepted by the home’s seller. This process is typically initiated through an official offer letter that’s presented by your real estate agent to the seller’s agent, and outlines details like the offer price and closing costs. If your offer is accepted, you’ll likely need to move fairly quickly to get the property under contract. 

This requires your lender to evaluate and approve the property. When you get the green light, the home is deemed under contract and taken off of the market. However, it’s important to note that this doesn’t by any means signify an official sale yet; simply that the sale is pending.

Step 3: Application

Who’s involved: Buyer, lender

How long it takes: One – three hours

While your potential new home is under contract, this is really only the beginning; next, you’ll need to fill out a mortgage loan application. Completing a standard application will take between one and three hours. You’ll need to answer questions about:

  • The property you want to buy
  • Personal details, including your marital status, current living situation, and employment 
  • Your monthly income and expenses
  • Any assets and liabilities, including life insurance or retirement funds

Before you begin filling out the application, you should gather any relevant documents, including:

  • The signed purchase and sale agreement for the new home
  • W-2 statements for the past two years
  • Tax returns for the past two years
  • Pay stubs for the past two years
  • Bank and savings account statements for the past two months
  • Profit and loss statement, if self employed

Once the lender receives, reviews, and approves your completed application, they’ll provide you with a loan estimate that includes all potential closing fees and charges. Again, you aren’t obligated to move forward with a particular lender — in fact, if you have the time, it can be beneficial to compare estimates from a few different financial institutions to determine the best offer.

Step 4: Home inspection

Who’s involved: Buyer, inspector, (possibly) seller

How long it takes: Two – three hours for inspection

A home inspection allows a prospective homebuyer to hire a third-party individual to look at the interior and exterior of a home, which includes plumbing, electrical wiring, roofing, HVAC, and more. An inspection can be incredibly valuable, especially if the property is an older one, as it can uncover serious and/or costly issues that you as the homebuyer may be able to require the seller to address before going forward with the purchase. 

While forgoing an inspection happens more frequently today in the interest of expediting the purchasing process, many lenders still will not finance the home without an inspection. If the inspection reveals a major problem, you typically have a week to walk away from the purchasing process.

Step 5: Underwriting

Who’s involved: Buyer, lender 

How long it takes: Three days – three weeks

Underwriting is a critical piece of the mortgage process, but it’s also unfortunately the step where things can get a bit complicated. During this phase, your loan officer will hand your application and any required documentation over to an underwriter, who will review each piece thoroughly in order to confidently issue you the mortgage loan.

Sometimes, issues can pop up during the underwriting process that require you to provide more documentation than you originally anticipate — the inspection report, for example — and request that certain repairs be made prior to closing. How long does underwriting take? It varies widely depending on both the property and the lender; while it can be completed in as little as a few days, it can take up to a few weeks or longer in some cases.

Step 6: Loan commitment

Who’s involved: Buyer, lender

How long it takes: 20 – 45 days

If you’ve successfully made it through the underwriting process, the hardest part is done, but you still have a couple steps to go before you make it official. Once they’ve approved your application and completed the underwriting process, the lender will issue you a loan commitment letter that details the type of mortgage, how much money you’re borrowing, the terms and length of the loan, and the interest rate.

Step 7: Closing

Who’s involved: Buyer, seller’s representative, real estate agents (buyer’s and seller’s), attorneys (buyer’s and seller’s), closing agent (usually a title company employee), lender’s representative, notary public

How long it takes: One – two hours

The final — and most exciting — step in the homebuying process is the closing. While it depends on your particular situation, closing usually occurs about four to six weeks after the home goes under contract. It will typically take place at the office of the title company, your lender, or your attorney. 

At the closing, you’ll be required to sign several different documents and pay your closing costs, which typically range between three and five percent of the loan total. Once this is done, you’ll receive the keys to your new home! 

Buying your first home will require a lot of patience. It isn’t a quick process, but the steps to obtaining your home are in place to help ensure you’re purchasing a safe home that meets certain safety standards and that you can make the mortgage payments on the home. It pays to be organized and patient throughout the homebuying process. 

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. 

Everything You Need to Know About Title Insurance

couple purchasing home

There are certainly enough things to worry about as a first-home or aspiring homeowner, and while you may have heard the term before, you may be wondering, do I need title insurance? The answer isn’t that simple, since you don’t technically need it as a homeowner — but it is a very good idea in order to avoid the unforeseen costs and headaches that can stem from bad titles. 

Title Basics

A title provides you with the legal right to own — and sell a piece of property, including a house, boat, or commercial real estate building. Up front, it’s important to denote the difference between two frequently-used terms: title and deed. The title refers to the concept in general, whereas the deed is the physical, tangible document that you’ll receive once the title is transferred to you after a purchase.

A “bad title” is a document that doesn’t grant ownership to the person or entity who holds the title due to legal or financial issues (and sometimes an administrative or clerical error). The issues must be resolved to deem the title “clear” before it’s able to be transferred to a new owner, and title companies will perform a search to verify this before the transaction can be completed.

For a comprehensive list of homeownership terms, check out our Homeownership Glossary.

Types of Title Insurance

The most common type of title insurance is lender’s insurance — which, as the name suggests, protects the lender from any issues with the homeowner’s title. For example, if a legal claim is made against the home due to back taxes, liens, or will conflicts, the lender won’t be liable.

There is also owner’s title insurance, which similarly guards a potential homeowner from legal issues or damages before they purchase the home. These include conflicting ownership claims, lawsuits and liens, fraud and forgery, and erroneous public records. Unless you own the property or are about to buy it, you are not on the hook for title problems as a renter — if there are any issues, the responsibility lies with the homeowner (your landlord). Owner’s title insurance is effective as long as the homeowner is legally in possession of the property. When they sell the property, the title can be transferred to the new owner.

Finally, a warranty of title is a guarantee to the homebuyer that the seller can transfer ownership of the property that no other parties have rights to.

Title insurance is usually handled by a third-party — often a closing agent — once the property purchase agreement has been completed.

Is Title Insurance Required?

Owner’s title insurance is recommended, but not required. Before foregoing the purchase of owner’s title insurance, though, it’s important to really think through the potential ramifications, as sometimes, claims might not be made until years into your ownership of the home. Due to the risk the lender is assuming in issuing a mortgage loan, however, lender’s title insurance is mandatory.

While it depends on your particular lender, owner’s and lender’s title insurance is often packaged and priced together. This is usually a one-time fee that runs between .5% and 1% of the total sale price of the property. So, for example, title insurance on a home that sold for $400,000 would range from $2,000 to $4,0000. In the grand scheme of homeownership costs, the price of title insurance is relatively low, and can help you avoid expensive title issues down the road.

Can you negotiate title insurance? The short answer is sometimes. Your lender may have a title company that they regularly use, but it never hurts to suggest a company of your choice who offers a better rate.

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.

What Percentage of Your Income Should Go to Your Mortgage?

front porch with wood front door

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.

2021 Homeowner Report

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.

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.

How to Refinance: A Guide to Refinancing Your Mortgage

back deck overlooking lake

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!

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.

What Is Homeowners Insurance and What Does It Do?

backyard with pool

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.

homeowners insurance policy types

  • 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. 

Homeownership Glossary: Terms Homeowners Should Know

aerial neighborhood view

Whether you’re a long-time or first-time homeowner, it can be easy to get overwhelmed by industry terminology. Fear not; we’ve compiled this comprehensive glossary of the most common words and phrases as they relate to homeownership, lending, real estate, financial technology, and much more.

A / B / C / D / E / F / G / H / I / J / K / L / M / N / O / P / R / S / T / U / W / X 

 

A

Accessory Dwelling Unit (ADU)

A smaller, attached or detached residential unit located on the same lot as a standalone single-family home.

Actual Cash Value

The amount of money needed to replace damaged property, minus depreciation.

Adjustable-Rate Mortgage (ARM)

A mortgage loan that typically provides a lower starting interest rate than a fixed-rate mortgage. This rate can fluctuate during what’s known as an adjustment period, depending on market changes that are documented in the LIBOR and Treasury indexes. This is also known as a variable-rate loan.

Adjustment Period

A period of time between interest rate changes for an adjustable-rate mortgage. The first one is typically at the start of the loan and lasts up to 10 years, with adjustment periods coming annually thereafter. 

Amortization

The process of paying off a loan during its term at the interest rate indicated in the loan document.

Amortization Schedule

A timeline, provided by one’s mortgage lender, that illustrates the increase in principal and decrease in interest.

Annual Percentage Rate (APR)

The annual cost of a loan, which includes the interest rate, points, broker fees, and additional fees.

Application Fee

The cost to apply for a mortgage loan, which is charged by the lender and includes processing fees.

Appraisal

An analysis of a property conducted by a professional appraiser, which includes nearby similar property sales and estimates the property’s value

Appraiser

The professional who conducts the appraisal of a home.

Appreciation

A rise in a property’s market value, usually due to home improvements or market conditions.

Arbitration

The process through which disputes between parties (two individuals or an individual and an institution/business) are resolved with the help of an objective and unbiased third party. This typically involves a hearing where both parties can voice their side of the story.

Asbestos

A material once used to fireproof and insulate homes that has been found to be toxic and is linked to several diseases. It can still be found in some older homes.

Assets

All valuable items that an individual owns. These include stocks, bonds, mutual funds, certificates of deposit (CDs), 401(k) and IRA accounts, and checking and savings accounts. Prospective homebuyers are typically required to have their assets verified to confirm their capacity to handle a mortgage loan.

Assumption

When a homebuyer agrees to become responsible for paying the mortgage loan instead of the home seller.

B

Balloon Payment (or Balloon Mortgage) 

A type of mortgage loan that includes monthly payments based on a 30-year amortization schedule and a lump sum payment of the unpaid balance that’s due at the end of a designated time period, typically five to seven years.

Bankruptcy

A financial state that is declared when an individual is legally declared unable to repay debts, and can affect both one’s credit and approval for future financing needs.

C

Capacity

A homeowner’s ability to make timely loan payments. This can be influenced by several factors, including current and future income, savings, and assets.

Closing (Closing Date)

The date that marks the completion of a home sale between the buyer and the seller, when the buyer signs the required documents and pays their closing costs.

Closing Agent

A professional who handles all processes related to the closing of a home sale, including recording documents and disbursing funds.

Closing Costs

The costs required to complete the purchase of a home that are paid at the closing. Closing costs are in addition to the home price and include taxes, title insurance, points, prepaid or escrowed items, and financing costs.

Closing Disclosure

A document that includes all of the details of a mortgage loan, including terms, fees, and costs, and must be delivered to the borrower by the lender at least three days before closing takes place.

Collateral

Any property that’s used as a form of security for debts or other obligations — for a mortgage, the house would be considered the collateral.

Commitment Letter

A letter from a lender to a homeowner that confirms the amount of a mortgage loan, the loan’s term, interest rate, loan origination fee, annual percentage rate (APR), and any monthly charges.

Concession

An agreement or compromise made by the seller during the sale of a home and typically requested by the buyer in the written offer. Common concessions include partial payment of closing costs or appraisal fees.

Condominium

A type of home that’s located in a building or community with multiple units, also known as a “condo” for short. While the condo owner has rights to their individual unit, they do not own public or common spaces or features of the condo building. Typically, the condo owner pays monthly fees to the condominium association to cover maintenance, taxes, and insurance.

Contingency

A backup plan for a hypothetical event prior to a home sale. For example, a buyer’s offer may be contingent upon the home passing inspection.

Counter-offer

A response — in the form of a second offer — from the seller of a home to the buyer. If the seller thinks the buyer hasn’t offered enough for the home, they may present a counter-offer at a higher price.

Credit

An individual’s capacity to borrow money and pay it back over time. One’s credit limit (or maximum) can be increased by their lender based on their positive financial standing and reliable record of repayment.

Credit Bureau

A company that collects data on credit-using consumers and sells this information to lenders through credit reports.

Credit History

The complete record of an individual’s credit use. This list includes individual debts and their payment statuses. 

Credit Inquiry

A request from an individual or institution for a copy of one’s credit report. Over time, several inquiries can negatively affect an individual’s credit score.

Credit Report

A widely-used document within the credit industry that monitors and shares an individual’s credit and payment history.

Credit Score

A number, expressed in the hundreds, that is generated by a computer and provides a summary of your creditworthiness based on past payment history.

Creditworthiness

A lender’s assessment of your ability to qualify for credit products and your capacity to repay debt.

D

Debt

The money that an individual (or organization) owes to another individual or organization.

Debt-to-Income Ratio (DTI)

The percentage of an individual’s gross monthly income that is used to cover monthly housing expenses, car payments, and other debts.

Deed

A document that legally transfers title or ownership of a property to an individual. 

Deed of Trust

A document that allows a third-party trustee to hold a property as a security for a lender or other lien holder. Once the loan is paid back or the lien is settled, the deed of trust is released, and if the homeowner defaults on the loan or lien, the trustee sells the property and settles the loan or lien. This is also known as a trust deed.

Deed-in-Lieu of Foreclosure

The cancellation of a mortgage loan when a homeowner voluntarily transfers the title of their property to the mortgage company. This typically happens when the homeowner is unable to sell the home for fair market value after 90 days.

Default

An individual’s failure to fulfill one of their legal obligations. In the context of a mortgage loan, this is most often used when a homeowner is delinquent on their payments over a period of time.

Depreciation

The decrease of a home’s value, usually caused by conditions in the market or failure to maintain the home.

Discount Points

Discount points, also known as mortgage points, are an optional method of prepaying your mortgage interest. Each discount point is equal to 1% of the loan amount, so the more points you purchase, the lower your monthly mortgage payment will be. It should be noted, however, that discount points are an additional expense on top of your closing costs and down payment.

Down Payment

An initial payment made up front on a home, which usually ranges between 3 and 20% of the full price of the home.

E

Earnest Money Deposit

The (usually non-refundable) money a prospective homebuyer puts down to demonstrate commitment to purchasing the property. 

Effective Period 

The length of a Hometap Investment, which is 10 years. A homeowner can settle their Investment at any time before or at the end of the effective period through a refinance, buyout with savings, or sale of their home.

Encumbrance

A limit on how a homeowner can use real estate. Encumbrances are raised by individuals or organizations other than the owner and include zoning laws or liens on the property for debt repayment.

Equity

Within the context of home equity, the value of a home beyond the total amount of liens against the property. For example, if the homeowner owes $200,000 on the house but it is valued at $260,000, they have $60,000 in equity.

Escrow

The state in which money or documents are held by an objective third party prior to closing. 

F

Fixed-Rate Mortgage

A mortgage loan which has a set interest rate that doesn’t fluctuate during the life of the loan.

Forbearance

A lender’s temporary reduction or suspension of a homeowner’s mortgage loan payments during a period of financial instability. Once the homeowner exits forbearance, they are expected to make up for their missed payments through a reinstatement or repayment plan.

Foreclosure

An event which rescinds all homeownership rights when a homeowner goes into default after failing to make timely mortgage loan payments or defaults on a secured lien.

Free and Clear Title

A property title that does not have any liens or other hindrances like easements or boundary disputes. Also known as simply a “clear title,” the owner of the title is easily identifiable.

G

Gift Letter

A letter from a homeowner’s family member that confirms their donation of a specific amount of money that does not need to be repaid — the gift is typically used toward a down payment.

Gross Income Multiplier

An approximate estimate of an investment property’s value that is calculated by dividing a property’s sale price by its annual gross rental income.

Gross Monthly Income

The income earned by an individual each month prior to taxes and other deductions.

H

Home Equity Investment

An alternative form of home financing that provides homeowners with equity in the form of cash in exchange for a share of their home’s future value.

Home Equity Line of Credit (HELOC)

A home financing option that allows a homeowner to open a line of credit that’s secured by the equity they’ve built in their home.

Home Equity Loan

A loan that allows homeowners to borrow against the equity they’ve built in their home.

Home Inspection

An inspection performed by a professional to assess the state of a property after a purchase offer is made and accepted. The inspection typically includes a thorough examination of the foundation, roof, plumbing, heating and cooling systems, and more.

Homeowners Insurance

An insurance policy that covers disasters, like floods or fires, that cause damage to homes or pieces of personal property, as well as injuries to visitors at the home.

Housing Expense Ratio

The portion of a homeowner’s gross monthly income that is allotted to their mortgage loan — typically expressed as a percentage.

I

Imputed Interest

The interest that a lender is assumed to have been paid — and which they report as income on their taxes — regardless of whether or not the amount was actually received.

Index

A published collection of interest rates that are used to calculate the interest rate for an adjustable-rate mortgage loan. 

Individual Retirement Account (IRA)

A savings plan which is tax-deferred and designed to help you fund retirement.

Inflation

A widespread price increase driven by market conditions.

Interest

The amount of money you’re charged by a lender to borrow money, typically communicated to you as a percentage of the full sum that was borrowed.

J

Judgment Lien 

A lien that is attached to a homeowner’s property without their agreement and is created when another party wins a lawsuit against the homeowner.

Junior Mortgage

A second mortgage loan that is subordinate to your first mortgage loan.

K

Keogh Funds

A retirement savings plan for small business owners and self-employed individuals that is tax-deferred and the contributions to which are tax-deductible.

L

Liabilities

Any financial obligations or debts you have.

Lien

A charge of claim that is placed on a property by a lender to satisfy a legal obligation. For example, a lien may be put on a home if a homeowner is delinquent on tax payments.

Life Estate

The ownership of property for the duration of an individual’s life.

Lien Waiver

An agreement between a payer and counterparty in which the counterparty relinquishes their right to place a lien on the payer’s property or possessions.

Loan Estimate

A document provided to a homeowner by a lender that lists the total projected costs and fees associated with a mortgage loan. The lender must provide this estimate to the homeowner within three business days of receiving the loan application.

Loan Modification

An official adjustment made to the original terms of a homeowner’s mortgage loan by the lender to make payments more affordable.

Loan Origination Fees

The fees a homeowner pays to a lender in order to process a mortgage loan application, typically expressed as points (one point equals 1% of the loan amount).

Loan-to-Value (LTV) Ratio 

A ratio used by financial institutions and lenders to express the amount of a loan in relation to the value of an asset. The LTV ratio helps lenders determine how much risk they’re taking on with a particular applicant.

Lock-In Rate

An agreement that guarantees a designated mortgage loan interest rate for a specific period of time.

Loss Payee

The party with legally secured insurable interest in a property — this is typically a lender in the case of a mortgage loan.

Low-Down-Payment Feature

An option with some fixed-rate mortgage loans that allow homeowners to put as little as 3% down to purchase a home.

M

Margin

The percentage that is added to the index for an adjustable-rate mortgage loan in order to determine the interest rate for each adjustment period.

Market Value

A home’s current value as it relates to how much a homebuyer would pay. This number is often determined by an appraisal.

Mortgage Loan

A loan which uses an individual’s home as collateral. This term can also refer to the amount of money a homebuyer borrows, with interest, to purchase the property, or the actual document the buyer signs to allow the lender to place a lien on the home.

Mortgage Broker

A finance professional who typically operates independently to facilitate the completion of mortgage loans. 

Mortgage Insurance (MI)

Refer to Private Mortgage Insurance.

Mortgage Lender

The financial institution that funds a mortgage loan and facilitates the process from application through closing. 

Mortgage Rate

The interest rate attached to the mortgage loan a buyer takes out to purchase the home.

Mortgage Term

The number of years a homeowner makes mortgage loan payments on a home before they fully own it. Terms usually range from 15 to 30 years.

Mutual Funds

A fund that contains money pooled by investors, which is used to purchase various securities.

N

Net Monthly Income

A homeowner’s take-home pay each month after taxes.

Normal Wear and Tear

The damage to property from ordinary exposure to elements and use over time.

Note

A legally-binding agreement between a lender and homebuyer in which the buyer promises to repay the loan with specific terms. Also known as a promissory note.

Notice of Default

A notification sent to a homeowner if they’ve failed to fulfill their legal obligations. In the context of a mortgage loan, a notice of default from a lender alerts the homeowner that their delinquent mortgage loan payments have exceeded the amount or time limit set forth in their loan contract.

Notice of Nonresponsibility

A legal document that protects property owners from liability for nonpayment of property improvement services that they themselves did not directly commission, like construction.

O

Offer

An official bid from a potential homebuyer to a home seller to purchase a home.

Offsite Costs

Construction costs that are incurred in a location away from the construction site, like utilities and sewer lines.

Open-End Mortgage

A type of home loan in which the amount of the loan is accessed on an as-needed basis instead of advanced at one time.

Open House

An event held by a home seller’s real estate agent that opens the house up to the public.

Origination Fee

A fee a borrower pays to a lender to process a loan application.

P

Package Mortgage

A mortgage loan that’s used to finance both the purchase of real estate property and personal property, like appliances and furniture. 

Participation Mortgage

A specific type of mortgage loan that lets two or more parties share the proceeds from a piece of property.

Personal Property

An individual’s property that can be moved from one location to another.

Piggyback Loan

A term used by mortgage lenders when a borrower takes out a first and second mortgage loan simultaneously. This is often done to bypass high interest rates or private mortgage insurance (PMI).

Points

A portion of the total mortgage loan amount — each point is equal to 1%. For example, if the mortgage is for $100,000, one point is $100.

Pre-Approval/Pre-Approval Letter

A letter to a prospective homebuyer from a lender that notifies them that they are preliminarily approved for a mortgage loan for a set amount. Pre-approvals differ from pre-qualifications in that they typically are more involved and involve asset and income verification. 

Pre-Qualification Letter

A letter to a prospective homebuyer from a lender that notifies them that they qualify for a mortgage loan, but does not specify an amount.

Predatory Lending

A type of lending practice in which lenders give mortgage loans to individuals who are unable to repay their balance, or add exorbitantly high fees and costs to loans.

Prepayment Penalty

A fee that’s charged to a homeowner by some lenders for paying off all or some of their mortgage loan early.  

Prime Rate 

The lowest rate at which money can be borrowed commercially.

Principal

The sum of money a homeowner borrowed that has not been repaid to the lender. The principal does not include interest. 

Private Mortgage Insurance (PMI)

The type of insurance that’s usually required when a homebuyer makes less than a 20% down payment on a home. 

Property Taxes

The taxes a homeowner pays to their local government, which are used to fund public needs in the community like education, road repairs, snow removal, and more. Property tax amounts are dependent on home value and location.

R

Radon

A toxic gas that can lead to cancer and other illnesses, often located in the soil below the house and detected in basements.

Rate Cap

The maximum amount of interest rate increase or decrease on an adjustable-rate mortgage loan during an adjustment period. 

Ratified Sales Contract

An official — but not final — contract that demonstrates agreement between both the seller and buyer of a home.

Real Estate Agent

A person who offers home buying and selling services and receives a percentage of the home sale price from the seller.

Realtor

A real estate agent who is a member of the National Association of Realtors.

Recording

The process of filing a deed, mortgage, or other document with a county. The document is dated and time stamped. When closing on a home, the deed and any mortgage loan documents will be recorded. The homeowner pays a fee for recording.

Reduction Certificate

A document provided and signed by a lender that shows the loan balance, its maturity rate, and interest rate.

Refinance

A form of home financing in which the homeowner replaces their original mortgage loan with one that has a larger balance in order to get the difference in cash or with one that has the same balance in order to get a lower interest rate and/or monthly payment.

Reinstatement

A method of repayment on delinquent mortgage loan payments in which the lender agrees to let the homeowner pay the total amount they owe in one lump sum by a designated date. 

Repayment Plan

An agreement between a homeowner and lender that gives the homeowner a set period of time to make up for delinquent mortgage loan payments. This plan usually combines the overdue payment amount and regular monthly payment.

Replacement Cost

The amount of money required to cover damaged property, not including a deduction for depreciation.

Rescission/Rescission Period

The cancellation of a loan by a consumer. The consumer’s rescission period lasts three days after closing, during which time they have the right to rescind the contract.

Reverse Mortgage

A type of mortgage loan for homeowners ages 62 and older in which the lender pays the homeowner based on a percentage of the home’s value.

S

Second Mortgage

A lien on a property that already has a lien attached to it.

Short Payoff

A condition a mortgage lender may agree to if an individual sells their house but the proceeds are less than the total loan balance. The lender then writes off the amount of the loan balance that exceeds the sale profits.

Short Sale

A sale that occurs when a homeowner defaults on a mortgage loan or otherwise finds themself in financial trouble and sells the property for less than the amount they owe. All proceeds from the short sale go to the seller’s lender.

Simple Interest

The interest calculated on the principal of a loan (typically an auto or short-term personal loan). To determine simple interest, multiply the daily interest rate by the principal by the number of days in between payments.

Spot Loan

A personal or business installment loan that’s issued rapidly (“on the spot”) to help individuals or businesses cover unexpected expenses that arise.

Subordination Agreement

A document that determines the priority of lien repayment (which may include mortgages, home equity loans, HELOCs, or home equity investments) through a rank that assigns a lien position to each.

Survivorship

Also referred to as the “right of survivorship,” a legal privilege provided to an individual that grants them ownership of a property when the previous owner dies.

T

Tax Lien

A government-issued legal claim against a property owner who fails to pay taxes. If the tax lien is not handled, a tax levy that seizes property could follow. 

Title

A document that verifies the right to own a particular piece of property or land.

Title Insurance

Insurance that can be obtained by lenders and homeowners that protects both parties against potential legal issues with the title.

Truth-In-Lending Act (TILA)

A federal law that requires consumer lenders to disclose certain specifics of the loan, like total cost of credit and APR.

U

Underwater Mortgage Loan

A home purchase loan for which the principal exceeds the value of the home in the free market, leading to negative equity.

Underwriting

A process by which a lender determines an applicant’s eligibility to receive a mortgage loan, that includes assessment of the borrower’s creditworthiness and capacity to keep up with payments.

Uniform Residential Loan Application

The industry standard application your lender will request when you apply for a mortgage loan. It includes fields for income, assets, liabilities, and more.

W

Warranties

Documentation that guarantees a product’s quality and provides a promise to fix or replace it in the event of breakage or malfunction.

Wrap-around Mortgage

A specific type of home loan that lets a home seller keep their loan while the buyer pays them a monthly amount directly, usually at a higher interest rate than that of the original loan.

 

Safely Accessing Your Home Equity: What You Should Know

white house

If you’re a homeowner, you’ve likely built up equity in your home — but what, exactly, is that? In the simplest terms, home equity is the value of your interest in your home. It’s a number that can change over time due to several factors. These include your mortgage payments — the more you put toward your home, the more equity you build — as well as local and national trends in the real estate market. 

While many homeowners don’t realize it, there are many methods for tapping into your equity and using it now without having to wait until you decide to sell your home. This can be a great solution if you’re seeking extra funds to pay off debt, complete renovations, or any number of financial goals. An easy way to get a general idea of how much equity you may be able to access is with our home equity calculator. Simply plug in a few details about your home and receive an instant estimate.

home equity calculator banner

How Much Equity Can I Access From My Home?

The amount of equity you can borrow from your home depends first and foremost on your home’s current value, as well as the specific product you use to access your equity, which we’ll cover below. However, it’s important to note that no matter which option you choose, you won’t be able to leverage your home’s full value; most choices allow you to take out a maximum of 85%. In other words, you typically need to retain a minimum of 15% equity in your home. 

Financial Products for Accessing Equity

There are several ways you can reap the benefits of your home equity; here are a handful of the most common ones.

Home Equity Loan

Maximum amount of equity: Typically 80-85% of home value

Many homeowners first look at a home equity loan when seeking funding, as it’s one of the most common options for tapping into equity. The advantages include receiving a lump sum of cash and having consistent monthly payments and a fixed interest rate. On the other hand, you’ll have to pay off the loan in addition to your regular mortgage payments, and the process of application and approval is frequently quite challenging.

Home Equity Line of Credit (HELOC)

Maximum amount of equity: Typically 85% of home value

A HELOC, or home equity line of credit, offers you flexibility when it comes to both how much equity you can access and how often you can access it, since it acts like a credit card from which you can draw funds incrementally. However, because HELOC interest rates are variable, you won’t have a fixed (predictable) payment each month, and you run the risk of the lender freezing your HELOC in the event that your credit score drops. Similar to a home equity loan, the application and approval process for a line of credit can be daunting.

Cash-out Refinance

Maximum amount of equity: Typically 80% of home value

A cash-out refinance is essentially a new mortgage with a balance that exceeds that of your previous one. Many times, a refinance can allow you to lock in a lower interest rate — and, in turn, pay a lower amount each month toward your mortgage. There are some disadvantages, though: in addition to application and approval hurdles, you’ll have to deal with the same fees that came with your first mortgage, including those for closing and origination, and your payoff timeline will likely be extended since it is a new mortgage. 

Home Equity Investment

Maximum amount of equity: Typically 30% of home value, up to $600,000

A home equity investment gives you access to your home equity without the hassle of debt. You get cash in exchange for a share of your home’s future value, and can use it for whatever is most important to you. If you’re hoping to use your equity to handle debt, this can be a smart option as there are no  monthly payments or interest to worry about. The application process is typically more streamlined and efficient than a loan or line of credit.

If you’re wondering “How much equity can I borrow from my home?”, it’s easy to find out if Hometap is a fit for you with our five-minute quiz.

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.

What Is the Difference Between Disposable and Discretionary Income?

woman with tea and dog

Disposable income is defined as the amount of money an individual or household has to spend or save after income taxes have been deducted. It’s often used interchangeably with the term “discretionary income,” but the two are quite different. Disposable income is net income, whereas discretionary income is the money that remains after all necessities (food, housing, etc.) have been addressed.

So, if you’re talking about the money you spend on vacations, electronics, or concert tickets, you’re referring to discretionary income, but the two generally go hand in hand: typically, the more disposable income you have, the more discretionary income you have as a result. From June to July of 2021, disposable personal income in the U.S. increased from $17,850 billion to $18,048 billion.

Payments and Priorities

While it’s certainly nice to have, there are many day-to-day expenses that can take precedence over discretionary income, like mortgage payments, car loans, and credit card debt, and these necessities can eat away at a huge chunk of one’s disposable income.

Hometap’s 2021 Homeowner Survey found that 53.9% of homeowners surveyed have mortgage debt, 45.4% have credit card debt, 33.9% have auto loan debt, and 13.7% have student loan debt.

Homeowner Debts in 2021

More than 32% of these homeowners have named increasing their disposable income as a financial priority in 2021, behind growing their retirement savings (39.6%) and paying off credit card debt (39%).

Homeowner financial goals chart

More Spending, Less Saving

Recent trends in spending look a bit different than those in previous years due to shutdowns and shifting priorities spurred by the COVID-19 pandemic. For example, a MassMutual survey of 1,000 U.S. adults in July of 2021 found that their spending increased an average of $765 per month compared to the summer of 2020, largely on discretionary expenses like dining out and taking trips. Along with this increase in spending came a predictable decrease in savings, with 48% of respondents saying that they saved less than $500 in the past three months.

2021 Homeowner Report

And according to a recent Wallethub study, consumers spent less of their discretionary income in 2020 in favor of paying down credit card debt. However, in the second quarter of 2021, with spending increasing once again, consumers added $47.5 billion in credit card debt — a quarterly record that highlights the ongoing challenge to stay on top of life expenses.

How to Increase Disposable and Discretionary Income

If you’re hoping to increase your disposable income, there are a handful of options. The most obvious ones include working more hours if you have a wage-based position, seeking a job with higher pay, or even adding new streams of revenue through another part-time job or side hustle. If you can get a raise in your current job, this will help you make more money and avoid the stress and strain that comes with working multiple jobs and/or long hours, but be aware that if you enter a higher income bracket, you’ll also be subject to higher income taxes.

Investing is another avenue that can help you earn passive disposable income; this includes stocks, bonds, and real estate. However, if you’re looking to quickly increase your disposable income, this is probably not your best bet. Investing is a long game that may or may not see big returns, so you’ll need to be patient if you go this route.

Cutting costs where possible is also a great strategy to increase discretionary income: if you already have a budget where you keep track of expenses, it should be fairly simple to see where you can reduce spending. Of course, eliminating any outstanding sources of debt, like credit card debt or student loans is often a smart first step in making strides toward more financial freedom and discretionary income as well. If you want to get a better idea of how long it might take you to become debt free at your current rate, our Debt Calculator is a great place to start — just plug in your current balance, interest rate, and monthly payment amount, and we’ll do the rest.

Hometap's cost of debt calculator

If paying off debts sounds like it’s the best fit for your financial plan, your home equity could help you get there.

Take our five-minute quiz to see if a Hometap Investment might be able to help you handle life expenses so you can work on increasing your disposable and discretionary income and enjoy life a bit more.

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.