Financial Options to Be Aware of as a Homeowner

As a homeowner, your financial health has far-reaching implications. Financial health relates to your ability to manage your expenses, including recurring and unexpected expenses. It also relates to your ability to navigate through serious financial challenges, minimize debt and grow your net worth. What should you know about prioritizing your finances as a homeowner to improve your financial health?

The Importance of Prioritizing Finances

Your home may be one of your largest financial assets. Safeguarding it means protecting it from damage and being prepared if damage does occur. It also means that you can navigate through rough patches without placing your home at risk of foreclosure. When you focus on these factors, you can keep related debts low and optimize the value growth of your asset.

How to Prioritize Finances as a Homeowner

To prioritize your finances as a homeowner, identify the weaknesses in your financial health and find opportunities to improve. What does this entail?

1. Prepare and Fine-Tune Your Budget

Your monthly budget itemizes all of your regular monthly expenses, such as your mortgagepayment, groceries, car payment, utilities and more. Think about any periodic payments, such as your HOA fees. There also may be other known and irregular expenses, such as home maintenance costs. Fine-tuning your budget means identifying frivolous or unnecessary expenses and eliminating them.

2. Analyze Your Debt Load

Your debt load includes your mortgage, credit cards, student loans, personal loans and other debts. List the minimum monthly payments for all debts. Divide that sum by your income. This calculation tells you your debt-to-income ratio. Mortgage lenders generally consider a debt-to-income ratio to be healthy if it is less than 41% to 45%.

3. Review Your Credit Report

The three credit bureaus, which are TransUnion, Experian and Equifax, analyze your debt load, types of debts, available credit, derogatory credit history and other factors to gauge financial health. You are entitled to a free copy of your credit report from each of the three bureaus. By tracking your credit history over time, you can monitor your financial health.

4. Look at Your Emergency Fund

An emergency fund plays a key role in financial health as it provides much-needed funds in the event of a serious challenge. The emergency fund could be used to pay insurance deductibles and cover basic living expenses. To gauge this aspect of your financial health, analyze how many months of living expenses your fund currently covers. Calculate if you have enough money to pay your full deductibles for your health, auto and property insurance policies.

Financial Options for Homeowners

Even when a homeowner prioritizes financial health, situations may arise that create significant stress. When faced with such situations, homeowners have a few options available.

Homeowner Assistance Fund Program

The purpose of the Homeowner Assistance Fund is to temporarily help homeowners make mortgage payments when they are faced with a financial hardship. The funds can also be used for utility bills and property insurance. Homeowners who are interested in this program can get more information through their state’s housing authority or agency.

Loan Modification 

Some mortgage lenders may agree to modify the terms of a loan without the need to refinance. Depending on the circumstances and what the lender agrees to, a modification could result in a longer loan term, a lower interest rate or the transition from an adjustable-rate loan to a fixed-rate loan. These modifications could lower the mortgage payment, making it easier for the homeowner to continue making payments if their circumstances change.

Refinance Loan

For homeowners who identify the need for a lower payment, such as through a readjustment of the loan term or a lower interest rate, a refinance loan is an option. This could be a straight refinance, which means that the equity is not tapped, and no cash-out proceeds are distributed at closing. In some cases, a homeowner could lower the monthly mortgage payment and tap into equity at the same time. A refinance or cash-out refinance loan replaces the first mortgage on the property.

Home Equity Loan or Line of Credit

A home equity loan or line of credit may be other options to consider. Generally, these loans take the second position, and the first mortgage remains in place. The result is two payments. While this can increase your monthly expenses, the home equity loan or line of credit funds may be used to cover unexpected expenses, eliminate other expenses or address other critical needs.

There are qualification requirements for these options. Learn more today to determine which specific options are available to you.

Written by Taylor McKnight, Author for Acala Investments