Managing a home mortgage in today’s complex world

Owning a home has long been considered the American dream, but that dream hasn’t always been easy to achieve. In fact, in the first part of the 20th century, mortgages as we know them today didn’t exist, and buyers often had to pay cash or take on short-term, high-interest loans to buy a home.

It wasn’t until the 1930s, with the creation of long-term, fixed-rate mortgages, that homeownership became accessible to the average American. Since then, mortgages have become a central part of financial planning for millions of homeowners. However, as the housing market and economy have evolved, managing a mortgage effectively requires careful strategy.

Let’s look at three aspects of modern mortgage management: understanding escrow account increases, navigating the complexities of buying a second home, and exploring the benefits of maintaining a larger mortgage.

Has your escrow account increased?

If you’ve noticed a spike in your monthly mortgage payment recently, it’s likely tied to your escrow account. Escrow accounts are used to hold funds for property taxes and homeowners insurance, which your lender pays on your behalf. When those costs rise – as they have for many homeowners in the past year – your lender adjusts your monthly escrow contribution accordingly.

Why costs are rising

Rising property taxes and insurance premiums are two major factors that can increase your escrow payments. When your local government reassesses your property value upward, this leads directly to higher property taxes. Similarly, insurance costs may climb due to various factors, including inflation, rising construction costs, and home improvements that increase your property's value.

Your mortgage servicer may also need to adjust your escrow payments in certain situations. If your account balance drops below the required minimum, it might temporarily increase your monthly payments to rebuild the balance. Additionally, servicers often maintain a cushion in escrow accounts to handle any unexpected increases in taxes or insurance costs, which can affect your payment amount.

Strategies to lower escrow costs

While you can’t control your local tax rate, you can take proactive steps to potentially reduce escrow-related expenses:

• Challenge your property assessment: If you think your home's assessed value is too high, you can file an appeal with your local assessor's office. This could result in a lower tax bill.
• Shop for insurance: Review your homeowners insurance policy annually and compare rates from multiple providers. You might be able to find similar coverage at a lower cost.
• Consider higher deductibles: Opting for a higher deductible on your insurance policy can lower your premium, though it's essential to ensure you're comfortable covering the deductible in case of a claim.
• Cancel private mortgage insurance: Once your home equity reaches 20% or higher, you may be able to remove PMI from your loan, which could significantly lower your monthly mortgage payments and escrow costs.

Buying before selling: Managing the transition to your next home

Purchasing a new home before selling your current one is a common challenge homeowners face. This approach can offer flexibility and minimize disruption, but it also presents two significant hurdles: timing and financing.

Timing the move

One of the biggest concerns when buying before selling is ensuring you don't end up paying for two homes longer than necessary. There are a few different options that can help avoid or minimize this situation:

• Temporary housing: If timelines don't align, consider renting a short-term residence. This reduces the pressure to rush into a new home purchase and can provide breathing room for making decisions.
• Contingency clauses: Including a sale contingency in your offer allows you to back out of the new purchase if your current home doesn't sell in time. This protects you from being financially overextended.
• Rent-back agreements: Selling your home with a rent-back agreement lets you stay in the house for a set period after closing, giving you time to finalize your new purchase. This arrangement can reduce the stress of coordinating move-in and move-out dates.

Financing the new home

Securing a down payment for a new home while waiting to sell your current one can also be tricky – adding more stress to an already stressful process. Here are some ways you may be able to “de-stress” your financing:

• Home equity loans: Tapping into the equity in your current home can provide the funds needed for a down payment. This option lets you unlock existing equity without waiting for your home to sell.
• Bridge loans: These short-term loans can cover the gap between purchasing your new home and selling your old one. They allow you to move forward with a purchase while managing the timing of your sale.
• Savings accounts: Using cash reserves temporarily can help avoid the need for additional loans. This option requires careful planning to ensure you don't deplete funds needed for other financial goals.

The case for a big, long mortgage

At first glance, carrying a larger mortgage may seem counterintuitive. After all, many of us have been taught to prioritize paying off debt. However, one of the founders of our company, Ric Edelman, has long advocated for the benefits of maintaining a "big, long mortgage."

Here are just a few of the ways that carrying a mortgage can be advantageous:

Potentially cheap money

This is particularly true if you’ve locked in an interest rate that is historically low. In that case, it doesn’t make sense to aggressively pay down or pay off your mortgage because that extra money could potentially be put toward investments that seek to earn higher returns.

Maximized liquidity

A larger mortgage means you're not tying up as much equity in your home. That liquidity can be used for emergencies, investment opportunities or other financial goals.

Tax benefits

If you itemize your deductions, the interest paid on loans used to purchase, construct, or significantly enhance a qualified residence (up to $750,000 for mortgages taken out starting Dec. 16, 2017) can be deducted from your taxes. This can reduce your overall tax burden, making a larger mortgage more cost-effective over time.

Continue equity growth

Paying off your mortgage may feel satisfying, but it's important to remember that a paid-off home doesn't generate cash flow. Keeping a mortgage allows you to preserve liquidity while still benefiting from any property appreciation.

To learn more about the potential advantages of having a big, long mortgage, check out our article, Should I Pay Of My Mortgage?

Mortgages are often the largest financial obligation most of us will ever have, making them one of the most critical areas of your financial plan. Managing your mortgage isn't just about making your monthly payments on time, it’s about understanding the strategies that can help improve your financial health.

If you're unsure about your current mortgage strategy or want to explore your options, reach out to your planner, who can help you make informed decisions. With our guidance, you can align your mortgage with your broader financial goals, helping ensure you're not just managing debt but building a secure financial future.