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Direct v/s Regular Mutual Funds: Know the Difference

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Mutual Funds are available in two plans – Regular and Direct. While regular mutual fund plans are commonly-known to investors, direct mutual fund plans have started becoming popular recently.

What Is a Direct Mutual Fund Plan?

The Securities and Exchange Board of India (SEBI) introduced direct mutual fund plans in January 2013, making it mandatory for all Asset Management Companies (AMCs) to provide an option to invest in mutual fund schemes directly, without the involvement of an agent, broker or distributor, which is the case with regular mutual fund plans.

What Is the Difference Between Direct And Regular Plans?

Particulars Regular Plan Direct Plan
Expense Ratio High Low
Returns Low High
Investment Advice Available Not Available
Market Research Done by distributor/agent Done by self
Convenience More Less

Regular and Direct plans are just the two options to buy the same mutual fund scheme, run by the same fund managers who invest in the same stocks and bonds. The only difference between the two is that in the case of a regular plan your AMC (Asset Management Company) or mutual fund house does pay a commission to your broker as distribution expenses or transaction fee out of your investment, whereas in case of a direct plan, no such commission is paid.

Instead, in the case of direct plans the commission is added to your investment balance, thereby reducing the expense ratio of your mutual fund scheme and increasing your return over the long term.

To understand it better, let’s take an example. For instance, Mr. X and Mr. Y invested in three mutual fund schemes, namely HDFC Equity Fund, Aditya Birla Sun Life Liquid Fund and HDFC Balanced Advantage Fund via a monthly SIP of Rs. 5,000 for each scheme on 01 April 2014. While Mr. X chose the regular plans of these schemes, Mr. Y chose to invest in the direct plans.

Value of Mr. X’s and Mr. Y’s investments after 5 years.

Particulars/Schemes HDFC Equity Fund Aditya Birla Sun Life Liquid Fund HDFC Balanced Advantage Fund
Mr. X (Regular plan) Rs. 4,00,335 Rs. 3,63,967 Rs. 4,05,544
Mr. Y (Direct plan) Rs. 4,10,115 Rs. 3,64,837 Rs. 4,14,396
Difference Rs. 9,780 Rs. 870 Rs. 8,852

Here’s a comparative analysis of the average expense ratio and average returns of the direct and regular plans of mutual funds across different fund categories.

Average Expense Ratio of Regular and Direct Mutual Fund plans

Fund Category Regular Plan Direct Plan Difference
Equity 2.02% 1.22% 0.80%
Debt 0.90% 0.42% 0.48%
Hybrid 1.96% 0.98% 0.98%

Source: Value Research, Data as on March 31, 2019.

As the table above shows, on an average, you will earn 0.50%-1% more per annum by investing in a mutual fund scheme through its direct plan rather than its regular variant.

Why Is the Direct Plan of a Mutual Fund Better Than Its Regular Plan?

  • Lower expense ratio.
  • Higher return due to reinvestment and compounding of amount which gets paid as commission in regular mutual fund plans.

How To Know If You Are Invested In Regular Plans Or Direct Ones?

The account statement/fund holding statement will clearly state whether your mutual fund plan is regular or direct. Typically, if you have invested in a mutual fund scheme through your bank, then it would be a regular plan. If you have invested via the website of the mutual fund, the plan would be direct.

Also, if you are receiving a ‘free of cost’ service from your investment agent or if he/she tells you he/she is paid by the mutual fund company then in all likelihood you have invested in a regular mutual fund plan and are paying a hidden fee.

Also Read: How To Switch From Regular To Direct Mutual Funds?

The post Direct v/s Regular Mutual Funds: Know the Difference appeared first on Compare & Apply Loans & Credit Cards in India- Paisabazaar.com.



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Eco-Friendly Home Modifications That Impact Your Home Insurance

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As the green revolution continues to gain popularity, homeowners are discovering practical ways to reduce their carbon footprint. One of the most meaningful ways is by making eco-friendly modifications to your home and making sure your homeowners insurance takes them into account.

Benefits of eco-friendly home modifications:

  • Lower utility costs
  • Reduced carbon footprint
  • Save money on energy costs
  • Potential tax credits

Whether you’re on the market for a new energy-efficient home or interested in upgrading your current space, you must make sure your policy is ready to accommodate those changes. While many insurers are extending their coverage to include green renovations, not all offer this additional coverage.

We’re here to guide you through how typical eco-friendly home modifications impact your home and your homeowners insurance. We’ll break down four home improvements you can make to your home, the benefits, installation considerations and insurance implications.

Solar energy

One of the most common eco-friendly home modifications, solar energy is the cleanest and most abundant resource available to us. A big investment, solar energy gives homeowners a way to save money and generate their own electricity.

Benefits of solar energy

Lower energy costs

In the U.S., the demand for solar energy is at an all-time high. As the prices of installation have dropped, solar energy has become an economical choice for many homeowners. The lifespan of solar panels is typically around 25-35 years, so they are a long-term investment that will continue to pay off.

Increased home value

In addition to saving money, installing solar equipment to your home can increase its value, sometimes by tens of thousands of dollars. While a solar upgrade can be an expensive investment, the increased home value can help you earn back what you spend.

Reduced environmental impact

Besides the potential tax breaks, solar energy has a positive impact on the earth. Solar energy doesn’t produce air pollution or carbon dioxide, which helps reduce emissions and the negative impact on the environment. Solar panels help homeowners take control of their energy consumption and also contribute to the reduction of U.S. dependence on other energy sources.

Solar energy installation considerations

Roof stability

Not every roof can support a solar energy system. Hardware options will differ by weight and sizes, so make sure you understand what a roof needs to be able to support them. Even for roofs that are designed to support solar panels, installation can have unintended consequences. If your roof is damaged during the installation process, your insurance policy may not cover it. Make sure you contact your provider to discuss your coverage and avoid being forced to pay out of pocket to cover damages.

Cost

While the hardware cost continues to drop, the soft costs associated with solar installation aren’t dropping nearly as fast. At the end of 2018, the average price of a residential rooftop system was around $18,000, before tax credits or incentives. Approximately 64% of the total cost of residential systems. These costs include, but are not limited to:

  • Permits
  • Labor
  • Sales tax
  • Indirect corporate costs
  • Supply chain costs
  • Transaction costs

Even though solar energy is much more affordable than it once was, it is still out of reach for some. Thankfully, there are financing options for homeowners.

Solar power financing options
Third-party ownership 40% of homeowners with solar energy systems use third-party ownership. Under this type of agreement, homeowners spread out their payments over time and share the responsibility of maintenance with the third party.
Solar lease A solar lease requires the homeowner to pay fixed payments to the solar leasing company. The homeowner will pay any electricity usage that extends beyond what the system generates.
Loan financing Solar loans are designed to help homeowners stretch the system’s cost of the system over the length of the term while directly owning the panels and all the benefits that result from them.

Tax incentives

As a way to reward homeowners for choosing solar energy, the U.S. government offers tax breaks and incentives.

  • Tax credits — There are both federal and state tax credits given to homeowners, allowing them to deduct a percentage of their solar costs from their taxes.
  • Solar renewable energy certificates (SRECs) — If you live in a state which requires that a certain amount of their allotted yearly energy has to come from solar power, you will collect SRECs. You can sell SRECs to supplement your income.
  • Performance-based incentives (PBIs) — PBIs are paid to homeowners (per kilowatt-hour) for the energy that’s produced by their systems. The rate is set at the time of installation.

Solar energy insurance implications

Most homeowners insurance policies cover rooftop panels, though you may consider increasing your coverage to include the cost of the entire system. Remember, all insurance policies are different. Examine your policy and contact your provider to see what your needs are since other options like ground-based and carport systems are not always covered.

Shamor Paul, co-founder of Sunly said, “A solar power system, if designed and installed by a professional, and carrying all necessary approvals and inspections, should not be an issue to get insured. As it is an added asset to the home, the premium may increase to cover the replacement cost.”

If you plan to sell the extra energy you generate, consider additional liability through Green Energy Insurance. This coverage would protect you in case of a net-metering accident that damages property or harms the employees of the municipality.

Geothermal heating and cooling

One of the lesser-known energy options, geothermal systems use the earth’s heat to warm and cool your home. There are three main types of geothermal technologies: ground source heat pumps, direct use geothermal and deep and enhanced geothermal systems.

Geothermal heating and cooling benefits

Lower energy costs

Geothermal systems yield substantial energy savings for homeowners. Up to 65% more effective than regular HVAC systems, installing a geothermal system in your home can reduce your energy costs by approximately 70% per year.

Another advantage of this method is its single system design. You can avoid worrying about multiple components that can break at any point and reduce maintenance costs. These systems also have an extremely long lifespan, so there won’t be a need to replace parts regularly.

Increase home value

Geothermal energy is a long-term investment that results in considerable savings. Even though installing a geothermal system is expensive, you are adding a significant amount of value to your home. Unlike solar energy, which requires visible hardware, most of the geothermal components are buried underground. This not only protects the investment but also means that the curb appeal is high.

Reduced environmental impact

An effective way to reduce your carbon footprint, geothermal systems use 25% to 50% less electricity than conventional options and don’t contribute to the burning of fossil fuels or greenhouse gas emissions. As an added bonus for your family’s safety, this type of energy eliminates the chance of a carbon monoxide leak in your home. Choosing to pursue geothermal energy is one of the most environmentally-clean home improvements you can make.

Geothermals installation considerations

Property suitability

While geothermal technology can thrive in any environment, it doesn’t mean that any home is suited for it. When evaluating your home for a geothermal system, your provider will consider three things:

  • Soil properties
  • Groundwater available
  • Available land

Cost

The installation cost of a geothermal heat pump generally ranges somewhere between $10,000 to $25,000. The upfront cost is noticeably higher than traditional options, but the savings over the lifespan of your system can be worth it. Low operating and maintenance costs also supplement the initial costs, leaving you to break even on the entire system in under ten years.

Like solar energy, there are federal and state tax incentives and select financing options available to help mitigate the cost. Figure out what incentives you’re eligible for here.

Geothermal systems insurance implications

With such an expensive system, making sure your insurance covers your investment is crucial. Start by contacting your provider to see what is included. If you have an extensive system, you may need additional coverage. Most components of a geothermal system are buried underground, which means they are safe from external dangers like vandalism, hail or wind damage. But if you live in an area that is prone to earthquakes, be wary. Since homeowner insurance policies do not cover earthquakes, you should take out an additional policy to cover your investment.

Rain harvesting

Rain harvesting is one of the easiest eco-friendly home modifications. Collecting water for future use, it also reduces storm water pollution. You can use the rainwater you harvest for outdoor irrigation or utilize it in your home for laundry, cleaning or purified human use.

Benefits of rain harvesting

Lower water costs

Collecting rainwater allows you to be less reliant on water companies. And if you have enough to meet your daily needs, it will drastically reduce your water bill. Another great benefit about harvesting rainwater is its storage life. Since rainwater is not always consistent — and in some areas scarce. having a reservoir of rain can help you get through dry seasons.

Rain harvesting systems generally have low maintenance costs, especially if you are collecting water for outdoor use with no purification requirements. After installation costs, you shouldn’t expect to dedicate funds for regular maintenance.

Increased home value

Having a well-maintained rain harvesting system can have a positive effect on your property’s value. If you plan to sell your home, most potential buyers might find the eco-friendly system attractive and vital as the demand for clean water continues to grow.

Reduce environmental impact

Harvesting rainwater impacts the environment in multiple ways. Collecting rainwater allows you to lessen your reliance on companies and reduce the demand for groundwater, which keeps increasing every year.

Collecting rainwater also reduces the chances of soil contamination. Runoff water can pick up contaminants from pesticides and other pollutants and spread them to the surrounding water sources. Eliminating the chance for excess water to run off by collecting and reusing it is a way to mitigate the negative impacts of pollution. In addition to increasing your home value and reducing an environmental impact, rainwater harvesting systems give your home an emergency water supply.

Rain harvesting installation considerations

Property suitability

Rainwater harvesting systems can be easily integrated into most homes, though some things can rule out suitability entirely. Your roof and gutters are at the center of property compatibility. Depending on the material they are made of, they could potentially introduce contaminants into your water supply. Older pipes or galvanized roofs may cause lead, copper or zinc contamination. So before installing any system, make sure you identify what materials your roof and gutters are made of.

Not every climate is a match either. Infrequent rainfall negates the purpose of rain harvesting systems altogether. If you live in a particularly arid climate, for example, you would not see a quick return on investment.

Cost

You decide how intricate you want your water harvesting system to be. It can be as simple as one tank or more complex with pumps and purification technology. The price of these systems can range from hundreds to thousands of dollars, depending on which system you choose. The initial cost of setting up a water harvesting system is high, and the return isn’t as quick as what you see with geothermal systems.

Time

A rainwater harvesting system requires a big time commitment from homeowners. You’ll have to regularly check your tanks and make sure they are clean. So while it won’t cost as much some of the more involved home modifications, it requires more of your time.

State and local restrictions

There are no federal laws concerning rainwater harvesting, though some states do have restrictions on how much rainwater you can collect. States also specify where and when you can collect rainwater and limit how it can be used. For example, there are generally stricter guidelines if the water is intended for drinking.

In climates where rainfall is not frequent, states may restrict collection to ensure that the water that does fall flows to its rightful water drainage system and is not limited to a number of people. Read more about the laws and legislation of states here.

Rain harvesting insurance implications

Contact your broker before installing a system to make sure your home insurance policy will cover it. Much like solar panels, rainwater harvesting requires above ground, outside fixtures. This means that the equipment is susceptible to damage. When going over your current policy, make sure you consider potential damage to the system, as well as to your home. Leaks or floods as a result of your rainwater harvesting system may not be covered under every policy, so adding coverage is always a good idea.

ENERGY STAR products

ENERGY STAR appliances and products use less energy than the traditional options on the market. To be considered an ENERGY STAR product, it must meet the energy requirements set by the U.S. Environmental Protection Agency (EPA). As a homeowner, choosing appliances and products with an ENERGY STAR will help you save money, energy and contribute less to harmful emissions.

ENERGY STAR Benefits

Lower energy costs

The average homeowner can save hundreds of dollars on their energy bills by choosing products with the ENERGY STAR. Designed to be energy efficient, the appliances you replace will impact how much money you save on your energy bills. For instance, a traditional clothes dryer can use the same amount of energy as an ENERGY STAR model dishwasher, refrigerator, and washing machine combined.

Beyond just certified appliances, ENERGY STAR also offers installation of doors and windows designed to control air leakage and sunlight transmittance.

Increase home value

There is no denying that replacing appliances with ENERGY STAR models is a significant investment. But once the installation process is over, you’ll be rewarded with incremental home value ranging from hundreds to thousands of dollars. While the increase may not be as substantial as installing solar panels, energy efficiency is a selling point for many buyers on the market.

Reduced environmental impact

ENERGY STAR’s mission is to reduce the impact we have on the environment. Since 1992, the label has helped reduce greenhouse gases by more than 3.5 billion metric tons, which is proportional to the yearly emissions 750 million cars would produce. While saving money on electricity bills directly benefits homeowners, the environmental impact ENERGY STAR products reduce cannot be ignored.

ENERGY STAR Installation considerations

Cost

The benefits of switching to ENERGY STAR certified products cannot be overstated. But updating your home with these types of appliances will require a considerable amount of money, especially if you plan to make replacements all at once.

Depending on the appliances you want to replace, your energy savings may not be as significant at the beginning. For example, a dishwasher will most likely yield fewer savings than a refrigerator because it uses less energy by default. If updating all of your appliances is unrealistic for your budget, create a long-term plan to gradually switch to all ENERGY STAR products.

To help offset some of these costs, the government offers federal income tax credits for making energy-efficient improvements to your home. However, to claim the tax credits, the improvements must be made to your home before 2021.

ENERGY STAR Insurance implications

Adding ENERGY STAR appliances and updates to your home generally doesn’t impact your insurance. Most homeowners insurance policies have coverage for energy-efficient appliances. Contact your insurance provider to better understand what type of coverage you need and what incentives they provide.

Final thoughts

Eco-friendly home modifications are considerable investments but benefit homeowners with savings, increased home value and tax credits. More than that, these home modifications are changes homeowners can make to help the environment. Personal responsibility for your carbon footprint is part of living in the global community. No matter how many changes you are able to make, every bit makes an impact.

The post Eco-Friendly Home Modifications That Impact Your Home Insurance appeared first on The Simple Dollar.



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How to Talk with Your Parents About Their Finances

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Talking to your parents about their finances probably seems like one of the most awkward you conversations you could ever have. I’ll bet it ranks right up there with the sex talk your parents gave you when you were a kid — or that you’ve had with your own children.

I grew up in the South, where we don’t talk about money or sex. So when I asked my mom where babies came from, she told me a man and woman “make love”. That’s it. That was the extent of the conversation.

I have three kids, so clearly I figured out where babies come from. When my oldest was 10, she asked me where babies came from. I didn’t say something vague like, “A man and woman make love.” I simply told her the basics. She then looked at me – and remember, I have three kids – and said, “Ooh, you did that three times.”

I decided to be upfront with my kids because I wanted them to know they could feel comfortable talking to me about a topic that many people consider taboo. Like the money talk with parents, it’s only as awkward as you make it.

However, unlike the birds and the bees talk, you cannot figure out your parents’ finances unless you actually get the details.

I learned this the hard way.

Why You Need to Talk to Your Parents About Money

Years ago, I suggested to my mom that she look into getting long-term care insurance. She was sixty years old and living on her own because she and my dad had divorced. As a personal-finance journalist, I knew it would be good for her to have an insurance policy to pay for long-term care if she ever needed it.

She took my advice and met with an insurance agent. But, unfortunately, she had a pre-existing health condition – a benign tumor behind her left ear — that made her too much of a risk to insure. If I’d been smart, I would’ve used that opportunity to start talking to her about her finances to figure out how she would pay for long-term care if she ever needed it.

But I wasn’t smart.

I didn’t realize how important it was to have a conversation with my mom about her finances at the time.

A few years after my mom found out that she couldn’t get long-term care coverage, she started having trouble remembering things. I knew I needed to act quickly to get her to meet with an attorney to update her legal documents. She agreed, and the attorney drafted a will, living will, and power of attorney for her.

It was especially important to get those latter two documents drafted. Her living will named my sister and me as her health care surrogates and gave us authority to make health care decisions for her. And we both were named her power of attorney, which gave us the right to make financial decisions for her.

Here’s the thing. You must be mentally competent to sign those documents. If I had waited any longer to get my mom to meet with an attorney, the attorney might not have allowed her to sign her power of attorney and living will documents. I wouldn’t have been able to step in and start making financial decisions for her without going through a lengthy and expensive court process to become her conservator and guardian.

If something were to happen to your parents – say a stroke – and you needed to access their bank account to pay their hospital bills or talk to any of their financial institutions, you couldn’t unless your parents had already named you their power of attorney and you had the document. And you can’t make health care decisions for them unless they’ve named you their health care proxy.

If you wait until a health emergency to talk to your parents about their finances, it could be too late. They might not have the legal documents in place to allow you to step in and help. You won’t have a plan for dealing with the emergency. And emotions will be running high. You and your parents won’t be thinking rationally, and the last thing any of you will want to discuss are finances.

It might not be a health issue that forces you to get involved with your parents’ finances. They might not have saved enough for retirement and will need support from you. They might die without a will, and you’ll have to deal with what’s left behind while family members fight over who gets what.

As scary as having a conversation with your parents about their finances might seem, the consequences of not talking to them can be much worse.

How to Talk to Your Parents About Their Finances

So now that I’ve sufficiently scared you, you’re probably thinking: “Okay, I get that I need to have this conversation. But I don’t know how.”

First, realize that the scenario you’re playing out in your head about your parents flying off the handle because you tell them you want to talk about their finances probably won’t happen. In fact, they might even be grateful that you’re looking out for their well-being – that is, if you approach the conversation out of respect and concern for their best interests.

What you don’t want to do is be condescending. The fastest way to shut down a conversation with your parents is to talk down to them.

You’ll also scare them away if you appear to have selfish motives. These conversations are not about you and what you might hope to inherit someday. These conversations are about letting your parents know that you want to know what their wishes are so you can follow them.

And don’t issue ultimatums. Telling your parents you won’t help them as they age if they don’t talk to you about their finances won’t work. They’ll just resist your efforts even more.

Instead, choose a time when your parents are relaxed and there aren’t other people around who don’t need to be part of the conversation. (Hint: A holiday meal isn’t the ideal time for this talk.) Then try one of these tactics to get the conversation started:

  • Share your own financial planning experience. For example, if you recently drafted a will, tell your parents that you want them to know where it is in case of an emergency. Then you could ask what sort of estate planning documents they have and where they are. The goal isn’t to find out whether they’ve included you in their will or how much money you’re getting, but to know if they even have their financial wishes in writing.
  • Use current events. You could let your parents know that you’re concerned about their well-being during the current coronavirus pandemic and want to know whether they’ve taken any steps to plan for a health-care emergency. For example, you could ask whether they have an advance directive or living will that names a health care proxy for them – someone to make medical decisions for them if they can’t.
  • Offer to lighten their load. You can get a glimpse into your parents’ finances by offering to take over a money task for them – such as setting up automatic bill payments – so they have more time to do things they enjoy.
  • There are plenty of other ways to start the conversation, from sharing a story about someone you know who had to get involved with a parent’s financial life to sending them an actual invitation to talk. If one approach doesn’t work, try another.

    What to Do If Your Parents Are Reluctant to Talk About Money

    It might take time for your parents to get comfortable with the idea of sharing information about their finances with you. If you’ve made several attempts to start the conversation and haven’t had luck, you might benefit from getting a third party involved.

    Reach out to a family friend, a member of the clergy or your parents’ attorney or accountant for help. That person might be more successful in persuading your parents to start talking to you because parents can be reluctant to take the advice of their own children.

    Another option to get your parents to share information with you is to ask them to write it down rather than tell you. Ask them to make a list of their financial accounts, store that list someplace safe, and tell you how and when you would be able to access it.

    This can be a tricky situation, but it’s important not to give up. If those approaches don’t work, here are a few other strategies for speaking with reluctant parents.

    What Information to Gather

    If your parents are willing to talk, start with the basics.

    You don’t need to know how much they have in the bank, but you need to know where they bank. Also find out how they pay their bills – by automatic bill pay or by check. If it’s the latter, suggest that they set up automatic payments to ensure their bills get paid if, say, they are injured and have to be in the hospital for a while.

    Find out whether they have a power of attorney who can make financial decisions for them if they can’t — and a health care proxy to make medical decisions for them if they can’t. Also, ask if they have a will that spells out who gets what when they die. An attorney can draft all of these documents. Without them, state law will determine who gets your parents assets, and a judge will likely decide who can make financial or health care decisions for them if they become incompetent.

    Over several conversations (that’s right, you don’t need to do this all at once), dig deeper to find out what sources of income your parents have and where they stand financially.

  • Do they have debt?
  • What sort of insurance policies do they have?
  • Do they have enough saved for a comfortable retirement?
  • Do they have a plan for paying for long-term care if they need it?

Gather as many details as you can about the financial accounts they have, the bills they regularly pay, the investments they have, the professionals they work with and their financial wishes. Again, you could ask them to write down this information – including usernames and passwords – so you’ll have it in case of an emergency.

I can’t promise that if you use any or all of these strategies that the conversation will go so well that you and your parents will pop open the champagne and celebrate when you’re done talking. It might take several attempts and several conversations.

But if you don’t try at all, you won’t get the information you need, and you won’t be prepared to help your parents as they age. Really, that’s what this is all about – being there for your parents when they need you most.

J.D.’s note: Cam and I are in similar situations, and we’ve chatted about our shared frustrations before. Both of our mothers are aging and have memory issues. As a result, we’ve both taken charge of their finances.

One thing that I’ve learned is that some of this stuff is really very easy. Many institutions will work with you as long as you have the proper documentation. In some cases — as with my mother’s bank — the organization will work with you, but there are hoops to jump through.

Believe it or not, the greatest difficulty I’ve had in managing my mom’s money is with the Vanguard Group, and it’s not because they’re being jerks. They’re very serious about security — as they should be — but as a result, it’s a total pain in the ass to take care of my mom’s retirement accounts — including required minimum distributions.



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How and Why to Refinance Your Home Mortgage

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Key Takeaways

  • Refinancing can save money if you can take advantage of lower interest rates, which makes your mortgage debt less expensive to carry.
  • There’s more than one way to refinance, so choose the solution that complements your finances.
  • Refinancing can eliminate extra costs over the lifetime of your home loan like private mortgage insurance.

Although the pandemic has caused economic turmoil, it’s also resulted in at least one bright spot: interest rates are dropping to historic lows. Lower interest rates can mean lower monthly mortgage payments or better loan terms, which is especially helpful for individuals who’ve lost their jobs, had hours cut, or otherwise felt the impact of a worldwide health crisis. 

But there’s more to refinancing than waltzing into your local bank and demanding a new loan. Understanding the different forms of refinancing can guide you to a decision that makes sense for you.

Bonus:If the COVID-19 pandemic has you worried about money, check out my free Coronavirus Proofing your Finances guide and protect your money during this pandemic!

What Does Refinancing Your Home Mortgage Mean?

Refinancing your mortgage means you replace your existing home loan with a new one. Homeowners can use home loan refinancing to leverage lower interest rates, restructure their mortgages, or tap into their home equity.

When Should I Consider Refinancing My Mortgage?

  • To leverage a lower interest rate: You can lower your monthly mortgage payments if you can secure a lower interest rate, which makes your debt less expensive to carry over time. 
  • If you can recoup the costs: Refinancin’ ain’t free, so you’ll have to whip out a calculator to confirm that you reach a break-even point relatively early on in your new loan. At first, your loan will be more expensive because of the closing costs for the new mortgage, but you’ll save money later in the form of less interest.
  • If you want to reduce your loan term: Homeowners often opt for a 30-year mortgage to spread out payments. This is a double-edged sword because it also means that you’re paying more in interest plus other potential expenses like insurance. By reducing your loan to a 15-year term, you can pay more cash toward the principal. 
  • If you want to transition from an ARM to fixed: If you’re in an adjustable-rate mortgage (ARM), your interest rate stays the same for an initial period, but then changes every year for the life of the loan, according to an interest rate index. Worried about your interest rate going up? If you’ll be in your home for the long haul, it might make sense to restructure into a fixed-rate mortgage. 
  • To use a cash-out refinance: For homeowners with a substantial amount of equity (over 20%) in their homes, there’s an opportunity to refinance and “cash-out” the difference between your old home loan and your new one. This cash is free to use for home improvement projects etc. You can think of cash-out refinancing as a way to both refinance your mortgage and borrow money, simultaneously.
  • To get rid of mortgage insurance: Many lenders require at least a 20% down payment if you want to avoid mortgage insurance. If you’re still paying mortgage insurance, refinancing is a way to eliminate it.

What Are the Costs of Refinancing?

Refinancing is Latin for “new loan.” 

Okay, it’s not, but refinancing still means that a new loan is created to replace your old one. Remember all those fees and expenses you had to pay for your first home loan? Unfortunately, those same costs apply. 

Fees vary lender to lender, but you may have to pay fees for the initial application, loan origination, legal reviews, title insurance, and title searches. All in all, these fees and costs usually sit between 3% and 5% of the total loan. 

Bonus: Having more than one stream of income can help you through tough economic times. Learn how to start earning money on the side with my FREE Ultimate Guide to Making Money

Okay, How Do I Refinance?

Step 1: Know why you’re refinancing

Do you want to restructure your ARM into a fixed-rate loan? Do you want to shorten your loan duration? It’s essential to nail down exactly why you want to refinance your mortgage, so you can approach the refinancing process with a specific goal in mind.

Step 2: Take your financial temperature

Just like your original home loan, your new mortgage requires approval. Do you have a good to excellent credit score and a low debt-to-income ratio? The better your finances, the better your potential loan terms. 

If your credit score could use a little work or you have lots of outstanding loans you can pay off, it’s in your best interest to work on improving it before applying for a new loan.

Step 3: Calculate how much home equity you’ve built up

Home equity is the difference between your property’s value and how much you owe the mortgage lender. So, let’s say your home is worth $500,000, and you owe $300,000 on the loan. Your home equity would be $200,000. Figuring out your home equity will tell you if you can avoid getting private mortgage insurance and other fees.

Note: If you have more than 20% equity in your home, you’ll be charged with fewer fees and be eligible for better loan terms. But you can still refinance if you have at least 5% equity.

Step 4: Get quotes from lenders

When you’re shopping for clothes, you probably don’t take home the first thing you pick up on the sales rack. You likely try on a few clothing combos, decide those horizontal stripes are unflattering and put a few pieces back before ending up at the register. The same process should apply to your refinancing… Minus the horizontal stripes. 

Approach multiple lenders to get a variety of quotes. Make sure you look beyond interest rates when evaluating your quotes—the fees and other costs are also important to consider.

Step 5: Gather your paperwork

Have you ever had to give a speech without your notecards there to guide you? Although winging it can sometimes result in success for the lucky few, you’ll have a lot more success if you prepare. You shouldn’t “wing” your refinancing, either. 

Gather appropriate tax documents, pay stubs, IDs, and all the other paperwork your lender needs for the loan approval process. In some cases, you’ll also need to prepare for an appraisal—but not all lenders require this step. 

Step 6: Prepare for closing

Like your first home loan, you’ll be on the hook for closing costs. Lenders will give you the closing disclosure and loan estimate that details how much cash you’ll need to close on your new loan. 

Step 7: Pay your loan and settle in

Ask your lender about autopay discounts and make sure you keep track of your loan payments. Make copies of your paperwork and review your statements regularly.

Your Home, For a Little Cheaper

Refinancing isn’t for everyone, but it’s worth your time to look into your options when interest rates drop or if your current mortgage terms aren’t ideal. The pandemic has delivered a slew of unfortunate news, but for some homeowners, it can make a mortgage debt less expensive to carry.

How and Why to Refinance Your Home Mortgage is a post from: I Will Teach You To Be Rich.



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