Managing the Mortgage

In the survey, conducted for the California-based lender Oct. 10–12 by Harris Interactive, 91 percent indicated that home equity is “important” among their assets, but the data indicated 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 the best move financially would be to pay off the existing mortgage. But depending on their future plans and expected financial situation, paying off the mortgage might not make the most sense.

“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, in a news release. “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.”

According to the survey, many homeowners feel that they are tied to their original loans and underestimate their ability to use changes in their home loan strategies to meet short-term or long-term goals.

Unlocking a home’s assets

Countrywide recommends that borrowers examine monthly mortgage statements to determine whether the existing loan could be leveraged as a financial management tool through any of several options:

• Interest rates. Obtaining a new loan may be a smart move when homeowners have a current mortgage with an adjustable 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.

• Cash-out options. 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.

• Home equity. A home equity line of credit may enable homeowners to tap into funds from available equity, and the money can be used for multiple purposes, such as emergencies.

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 adviser should be consulted). Plus, payments are not usually due until money is used, so the unused line of credit provides a safety net for emergencies.

• A new home. Using equity from a first home can help homeowners move into a second home or other investment property to significantly build assets.

• 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 (again, an adviser should be consulted). And typically, the final amount owed does not exceed the home’s appraised market value at time of loan maturity.

Other findings

The study portrays more conservative consumers who prefer not to tap into their home equity. Six in 10 homeowners said they would consider tapping equity as a source of funds, and 70 percent of those said 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,” Hanson added. “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.”

A continued need for consumer education about the home buying process was also illustrated by the survey. Of the respondents, 55 percent said programming home electronics such as a VCR is easier to understand than the home buying process. Another 28 percent found taxes more comprehensible than buying a home, and 18 percent said understanding the opposite sex is the easiest of the two options.