While 91 percent of homeowners deem equity in their primary home as an important financial asset, a nationwide survey released last week reveals that many may overlook their home as a useful financial management tool - indicating a gap in Americans' understanding of how to make the best use of a new or existing mortgage. For example, an older couple approaching retirement may think that paying off their mortgage makes the most financial sense. However, depending on their future plans and expected financial situation, there may be various mortgage solutions that, in fact, help them manage and achieve their changing financial goals. The study was conducted from October 10-12, 2006, by Harris Interactive® for Countrywide Home Loans, Inc.
While many Americans closely monitor and manage other investments within their portfolios, some are not using their mortgages as a viable financial tool. Many homeowners feel that they are tied to their original loan and underestimate their ability to use changes in their home loan strategies to meet short-term or long-term goals and match their current life stage. These homeowners may think of their mortgage as something they are stuck with until they sell their home.
"There's a prevalent misperception about mortgages that may prevent many Americans from realizing their home's full financial potential," said Dan Hanson, managing director of Countrywide Home Loans. "A number of home buyers and homeowners are not factoring in the prominence of a mortgage in their overall financial portfolio and do not manage it as they would any other significant investment."
Conservative Consumers
Amid reports of some Americans' reckless financial habits, the study portrays a more conservative consumer who prefers not to leverage their home's equity. Six in 10 homeowners would consider tapping equity as a source of funds and 70 percent of those say they would use the money for home improvements.
"There is a sense that many people are pulling cash out of their homes to pay for luxury items, but our survey found the opposite to be true," said Hanson. "In fact, most Americans are quite conservative and do not want to be heavily leveraged. While that is a positive trait, it also showed us that there is still room to educate homeowners about ways to make their home's financing work to their greatest advantage."
The array of loan programs available can enable both prospective home buyers and existing homeowners to better manage their mortgage to fit their lifestyle and financial situation. To help home buyers better understand the mortgage process, Countrywide, America's #1 home loan lender,* highlights the following tips.
Steps For Home Buyers
In order to help them find the right mortgage that could play an important part in enhancing their overall financial picture, home buyers may take a few initial steps:
1. Seek to be Savvy. It is critical that home buyers understand the details of this significant transaction and are ready to take on the responsibility. Home buyers should learn about financing options relative to their unique situation and honestly assess their ability to manage finances.
2. Evaluate Earnings. Beyond determining current income, it's important for home buyers to realistically evaluate future earning potential. If an anticipated increase in pay can accommodate possible higher monthly mortgage payments, then adjustable rate mortgages (ARMs) or fixed-period ARMs with lower initial interest rates may make sense.
3. Factor in Fluctuations. Income fluctuations from commission-based jobs or self-employment should be taken into account, as well as supplemental income (e.g., alimony, quarterly dividends, etc.). Loans with payment option features may allow flexibility to pay the minimum required in leaner months and fully amortized payments or more during periods of increased income-as long as home buyers understand potential added costs from minimum payments resulting in deferred interest, rising interest rates, or re-amortizing of option ARM and interest-only loans.
4. Estimate Equity. Home buyers can factor in how quickly they hope to build equity in their new home. Typically, loan balances decrease fastest with 15-year fixed-rate mortgages. In addition, conditions such as the rate of appreciation or depreciation in home values in home buyers' local market should be factored in the analysis.
Managing Your Home Loan
Homeowners may want to take a closer look at their monthly mortgage statement. Their current home mortgage may be leveraged as a strong financial management tool with options including:
1. Investigating Interest. Obtaining a new loan may be a smart move when homeowners have a current mortgage with an adjustable interest rate that's on the rise. They may consider loans with a lower rate, a fixed payment, a different loan term or other features that match their current financial situation or long-term goals.
2. Considering Cash-Out. A cash-out refinance can leverage equity as a source of funds needed to meet personal and financial goals, including home upgrades that may add to the property's value in the long run.
3. Unlocking the HELOC. Homeowners may choose to open a home equity line of credit (HELOC) to tap funds from available equity to be used for multiple purposes, or in an emergency. Interest rates and monthly payments are generally lower than on credit card or installment loans and the interest paid is often tax deductible (a tax advisor should be consulted). Plus, payments are not usually due until money is accessed, so the unused line of credit provides a safety net for emergencies.
4. Aiming for Another Home. Using equity from a first home can help homeowners springboard into a second home or other investment property to significantly build assets.
5. Reflecting on Reverse Mortgages. Homeowners at least 62 years old may consider a reverse mortgage to access equity as a source of additional funds. These programs can allow seniors to remain in their homes for as long as they wish, while receiving tax-free loan proceeds (a tax advisor should be consulted). And typically, the final amount owed does not exceed the home's appraised market value at time of loan maturity.
Interestingly, the survey also suggested the continued need for consumers to learn more about the home buying process. In fact, some of those surveyed said that programming a DVR/TiVo/VCR (55 percent); taxes (28 percent) or understanding the opposite sex (18 percent) are all easier to understand than the home buying process. As with any financial decision, consumers should carefully evaluate their options and fully understand the advantages and disadvantages before making a change.
To learn more tips and tools for managing a mortgage, home buyers and homeowners can call 800-570-9888.
# # #
*About Countrywide Home Loans, Inc.
Countrywide Home Loans, Inc., a member of the Countrywide® family - America's #1 home loan lender - (as ranked for 2005 by Inside Mortgage Finance, Jan. 27, 2006, Copyright 2006), originates, purchases, securitizes, sells and services home loans and is the primary subsidiary of Countrywide Financial Corporation (NYSE: CFC). Countrywide Financial Corporation, through its subsidiaries, provides mortgage banking and diversified financial services in domestic and international markets. Founded in 1969 and a member of the S&P 500 and Fortune 500, Countrywide Financial Corporation is headquartered in Calabasas, California and its family of companies has a workforce of more than 55,000 in over 900 offices across the country.
About Harris Interactive
Harris Interactive is the 12th largest and fastest-growing market research firm in the world. The company provides research-driven insights and strategic advice to help its clients make more confident decisions which lead to measurable and enduring improvements in performance. Harris Interactive is widely known for The Harris Poll, one of the longest running, independent opinion polls and for pioneering online market research methods. The company has built what could conceivably be the world's largest panel of survey respondents, the Harris Poll Online. Harris Interactive serves clients worldwide through its United States, Europe and Asia offices, its wholly-owned subsidiary Novatris in France and through a global network of independent market research firms. The service bureau, HISB, provides its market research industry clients with mixed-mode data collection, panel development services as well as syndicated and tracking research consultation. More information about Harris Interactive may be obtained at http://www.harrisinteractive.com.
Survey Methodology
This survey was conducted online within the United States by Harris Interactive® on behalf of Countrywide Home Loans between October 10 and 12, 2006, among 2,357 adults (aged 18 years and older) of whom 1,560 were homeowners. Figures for region, age within gender, education, household income and race/ethnicity were weighted where necessary to bring them into line with their actual proportions in the population. Propensity score weighting was also used to adjust for respondents' propensity to be online. With a pure probability sample of 2,357 one could say with a ninety-five percent probability that the overall results have a sampling error of +/- 3 percentage points. Sampling error for data from sub-samples would be higher and would vary. However that does not take other sources of error into account. This online survey is not based on a probability sample and therefore no theoretical sampling error can be calculated.