What You Should Check On Your Mortgage Statement
NEW YORK ( MainStreet) Buying a home with a mortgage comes with plenty of strings attached, aside from just interest and principal.
While you'll have a general sense as to what your monthly mortgage payment will be, this complacency likely prevents you from reading over the specifics of your mortgage statement. By simply writing a check each month and skipping over the details on your statement, you're missing out on a variety of potential savings.
First, examine the line item "unapplied funds" on your statement and make sure the balance is zero. The reason money would be in the unapplied funds account is if you made a partial mortgage payment that didn't cover the entire amount. For example, you might be making payments every two weeks or an extra $50 here and there with the goal of paying your mortgage off faster. If you don't tell the bank to direct this money towards principal it'll sit in the account, instead of working to your advantage.
"The bank can still put towards principal, even if its not the full payment, but you have to tell them first," says Dani Babb, founder and CEO of The Babb Group .
Alternatively, the bank would rather put that money towards interest, which is essentially giving them free money, since interest is calculated based on the new principal amount. If you're not making a dent in your principal, you won't see your interest expense drop.
Next, double-check the escrow balance to see if you have an impound account. With loans, the bank adds up your insurance and taxes for the year, divides by twelve and adds this amount to your monthly mortgage payment. However, if your switch insurance companies or your property taxes change, the bank may still charge you the old amount, unless you tell them.
"Sometimes the mortgage company over assess and ends up owing you money," Babb says.
Additionally, be cognizant of how much you are paying for private mortgage insurance, which typically ranges from 0.3% to 1.15% of the loan. This is charged when the loan-to-value ratio is higher than 80%. In other words, when you don't make at least a 20% down payment on the loan, this insurance is charged to compensate the lender for taking on additional risk.
As you pay off your mortgage and should your home increase in value, your loan-to-value ratio fluctuates, sometimes falling into the threshold where private mortgage insurance is not charged. If you fail to keep an eye on this, you'll end up paying private mortgage insurance for no reason.
"Homes appreciate much faster than the time it takes to pay down 20% of your loan," Babb says. "But if you have equity, you can get the home reappraised and have the private mortgage insurance taken off."