You refinance to a lower rate, and you get a lower payment. But the opportunities don’t stop there.

Reduce your balance faster. With a lower interest rate, you pay more principal with each payment, especially in the first years of the loan. 

Example: After five years of payments on a 30-year loan of $200,000 at 4%, you would pay $19,706 in principal vs. $17,105 on the same loan at 5%. That's an extra $2,601 in benefit on top of the $7,052 of interest savings. Total advantage = $9,653.

Own Free and Clear Sooner. There are two ways to make this happen:

• Pay extra principal. Apply your monthly savings toward principal to shorten your loan term by several years. Example: Using the same loan terms from above, pay your $118/month savings as extra toward principal and cut the loan from 30 to 24.33 years.
• Refinance for a shorter term. Rates on 15-year loans are typically lower than 30-year loans, so a payment on a shorter term may still be within a comfortable range for you.

Maximize Your Rate of Return Through Investments. If you deposit the $118 monthly savings from the example above into a tax-deferred account earning 6% over time, it will grow to $81,852 in 25 years. If you use the savings to increase your 401K contribution with a 50% employer match, that figure would equal $122,782. Earning 6% on your money may be tough right now, yet historically, returns on a properly balanced and diversified portfolio are 7% or better. Always consult with a properly licensed financial advisor when making investment decisions.

Tap Into Your Equity. If you need to make repairs or improvements, you may be surprised at how much cash you might be able to free up without increasing your monthly payment. The same can be said for financing college educations or purchasing a second home or investment property.

Enjoy Peace of Mind. There’s comfort in making a prudent decision and putting a plan into action.

We're here to review your options and help you decide what might be right for you.

This article originally appeared in an article published here.

Getting a Mortgage Loan for a Fixer-Upper: A Primer on FHA 203k Loans

The idea of buying a fixer-upper and turning it into your dream abode can seem so perfect — every nook and cranny just to your specifications! The reality, however, can be harsh. When you realize how much it will cost to remodel, you often also realize that you can’t afford it. Or you find out that a lender won’t give you a loan because the home is considered “uninhabitable” as it is. That’s where an FHA 203k loan comes in.

An FHA 203k loan is a loan backed by the federal government and given to buyers who want to buy a damaged or older home and do repairs on it. Here’s how it works: Let’s say you want to buy a home that needs a brand-new bathroom and kitchen. An FHA 203k lender would then give you the money to buy (or refinance) the house plus the money to do the necessary renovations to the kitchen and bathroom.

Often the loan will also include: 1) an up to 20 percent “contingency reserve” so that you will have the funds to complete the remodel in the event it ends up costing more than the estimates suggested and/or 2) a provision that gives you up to about six months of mortgage payments so you can live elsewhere while you’re remodeling, but still pay the mortgage payments on the new home.

Which Repairs Qualify?

There are two main types of FHA 203k mortgage loans. The first is the regular or standard 203k, which is given for properties that need things like structural repairs, remodeling, a new garage, or landscaping; the second is the streamlined or limited 203k, which is given for energy conservation improvements, new roofing, new appliances, or non-structural repairs such as painting.

Among the other repairs that an FHA 203k will cover:

• decks
• patios
• bathroom and kitchen remodels
• flooring,
• plumbing
• new siding
• additions to the home such as a second story
• heating and air conditioning systems
• And more

The program will not cover so-called “luxury” improvements such as adding a tennis court or pool to the property. It also does not cover any improvement that does not become a permanent part of the property.

How Much Money Can You Get?

The maximum amount of money a lender will give you under an FHA 203k depends on the type of loan you get (regular vs. streamlined and purchase vs. refinance loan).

With a regular FHA 203k, the minimum amount you can borrow is  $5,000.

With a regular FHA 203k  loan, the maximum amount you can get  on a purchase loan is the lesser of these two amounts:

• The Nationwide FHA Mortgage Limits

OR

• The appropriate Loan-to-Value (LTV) ratio from the Purchase Loan-to-Value Limits, multiplied by the lesser of:
  • 110 percent of the After Improved Value (100 percent for condominiums), or
  • the Adjusted As-Is Value, plus the following:
    • Financeable Repair and Improvement Costs, for Standard 203(k) or Limited 203(k);
    • Financeable Mortgage Fees, for Standard 203(k) or Limited 203(k);
    • Financeable Contingency Reserves, for Standard 203(k) or Limited 203(k); and
    • Financeable Mortgage Payment Reserves, for Standard 203(k) only.

Refinance limits are similar but also take into account the amount of the existing debt and fees of the existing loan.

With a streamlined loan, you can get a loan for the purchase price of the home plus up to $35,000 with no minimum repair cost plus the cost for energy improvements. To determine the as-is value of the property or the estimated value of the property post-repair, you may need to have an appraisal done. You will be required to put down 3.5 percent, but the money can come from a family member, employer or charitable organization.

What Kinds of Properties Qualify?

Qualifying homes for a FHA 203k loan include:

• A one- to four-family home that has been completed for a least a year
• A home that has been torn down, provided that some of the existing foundation is still in place
• A home that you want to move to a new location
• The home cannot be a co-op, but some condos are eligible

Your property will also have to qualify under the usual FHA requirements. For example, its value cannot exceed a certain maximum amount, which depends on where you live.

What Are the Pros and Cons of These Loans?

The main benefit of these loans is that they give you the ability to buy a home in need of repairs that you might not otherwise have been able to afford to buy. Plus, the down payment requirements are minimal, and often you get decent interest rates (note that the interest rates and discount points will vary by 203k lender, so it’s important to make sure that you’re getting a good deal on the loan).

The downsides are that not all properties qualify, there are limits on the funding you can get and applying for the loan isn’t easy. For example, to apply for the loan you may need to hire an independent consultant to prepare the exhibits required (to get the loan, you have to provide a detailed proposal of the work you want to do and cost estimates for each item). Click here to get more information on 203k loans.