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Start Understanding Your Mortgage in Fewer Than 10 Minutes


Start Understanding Your Mortgage in Fewer Than 10 Minutes

Obviously no one can predict when a life event will occur: divorce, death of a spouse, forced retirement, or job loss. But being prepared financially for whatever happens can be one less trauma to deal with at a difficult time.

Women are traditionally kept out of most conversations and transactions relative to money until they have to be. And often those transactions and conversations require a translator so women can understand what is going on. And if this happens at a time with tons of stress involved, it’s a recipe for disaster. 

Learning about money is not difficult. It’s only difficult if you think you will master it in five easy lessons. The probability of that happening is slim.

Take some time when you are not stressed to find out how you can take some baby steps to increase your understanding of the language and how to put it into practice in your daily life.

A Mortgage As An Example

For instance, most people who own a home have a mortgage. The mortgage documentation can be totally intimidating to anyone, let alone someone who was asked just to sign on the dotted line. Not saying you should take it all out and read through it, (okay, if you’re an insomniac, maybe) but that you might want to arm yourself with some basic information about it, like the term of the loan (10, 15, 25, 30 years), the interest rate of the loan (e.g., fixed at 5%, variable, at the prime rate plus some figure or some other configuration) and the monthly payment for the principal of the loan and the interest on the loan. Is it set up so that the monthly payment is automatically deducted from your checking account? If you do this, the lender may shave a one-quarter point off the interest rate they are charging. It is worth it. 

The monthly payment you send to the bank may be different than the monthly payment you could see on the original mortgage paperwork. That’s because the monthly payment you send could include some other nasty stuff, called escrow, composed of a fixed amount for your property taxes spread out over 12 months, your homeowner’s insurance spread out over 12 months, and monthly mortgage insurance premiums if your down payment was less than 20% of the value of the house when you bought it. If you don’t feel like pulling out all that paperwork, call your bank and ask them to help you figure it out. They would be delighted to do so.

And if you did buy the house with less than the full 20% down payment and have had the mortgage for more than 7 years, you should call your mortgage lender to see if they can remove the mortgage insurance from your monthly payment. It might cost you a few hundred dollars to have them do an appraisal of the home’s value, but if it means less money out of your pocket over the long run, it is clearly worth the few hundred it costs today. So many people forget to do this and end up spending thousands of dollars of unnecessary payments because no one remembered to review it.

Related: Who Will Care for the Baby Boomers?

Mortgage Insurance Versus Mortgage Life Insurance

For the record, let’s not confuse “mortgage insurance” with “mortgage life insurance.” The former is a guarantee to the lender that should you be unable to pay your mortgage (called “default”), file for bankruptcy or die, the lender will be guaranteed their full payment of the balance of the mortgage.

Mortgage life insurance is between you and your named beneficiary (usually a spouse) giving him or her the money to pay off the balance of the mortgage (or not) so they can continue to live in the house. 

The two are very different because of the beneficiary of the policy. The former is used as an additional safeguard by the lender when you do not have the traditional 20% down payment to buy the home. The latter is between you and an outside person which gives them the funds, but not the obligation, to pay off the mortgage if he or she wants to.

Just knowing this would make you feel far more confident in your ability to know more.

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