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How to Avoid Trading in a Car with Negative Equity

A recent survey DealerRater conducted for Automotive News looked at the different ways car buyers deal with negative equity on their trade-ins. It found that the majority of consumers deal with this all-too-common situation in the worst possible way. 

Automotive News-DealerRater Survey

The Automotive News informal survey, conducted by DealerRater, looked at the most common actions that buyers take when trading in a car with negative equity ("negative equity" is when your car's value is less than the loan balance).

From May 5th to the 24th of this year, DealerRater interviewed 88,874 consumers who visited a dealership to shop or to have their car serviced. Of those, 46,700 respondents traded in their previous car when they bought or leased their most recent vehicle.

Over one third (37 percent) of those 46,700 respondents said they had negative equity in their trade-in. Here is how those buyers dealt with that situation:

  • 54 percent rolled their negative equity into their next loan or lease.
  • 21 percent "took some other action" (Automotive News did not specify what these other actions were).
  • 19 percent increased the amount of their down payments.
  • 6 percent opted to buy or lease a different vehicle than they had originally planned to.

Over half of the buyers polled rolled the debt into their next loan or lease. From a financial point of view, this is disappointing since this is the worst way to deal with this situation. Not only does it make your next loan or lease more expensive, it can put you in a debt spiral that's hard to escape.

Avoid Trading in a Car with Negative Equity at All Costs

Having negative equity is sometimes also referred to as being "underwater" or "upside down." Regardless of the word you use, negative equity is a growing problem with loan amounts rising and loan terms increasing.

Having negative equity isn't typically an issue if you plan to keep your car for a while and/or pay off the loan in full. It only becomes a problem when your vehicle is totaled, stolen, or you want to trade it in halfway through the loan term.

Let's look at an example of why being upside down can present an issue if you want to trade in your car. Say you have a balance of $12,000 left on your auto loan, but the vehicle is only worth $10,000. This means you have $2,000 worth of negative equity—and it isn't going to just disappear. Your options are to either deal with it now or deal with it later.

If you want to trade in your car, rolling the balance over into a new loan means paying on the new vehicle, plus the $2,000 from your last car. This means you're making payments on two cars at once, and your monthly payment and interest charges will be larger, as a result.

Worse yet, it typically means you'll be further upside down in the new loan. Rolling negative equity into a new loan just compounds your problem, which can create a debt cycle that can quickly spiral out of control.

For these reasons, every expert on the subject, including the team here at Auto Credit Express, will tell you that trading in a car with negative equity should always be viewed as a last resort option. This statement rings more true for those dealing with less than perfect credit, especially considering the higher than average interest rates these borrowers face.

Instead, it will be in your best interest to look at these alternatives:

  • Cover the negative equity out of pocket.
  • Find a new car with a big manufacturer rebate attached. If you don't have the cash to cover the difference out of pocket, this is a good alternative to explore.
  • Hold off on trading in your vehicle until you are no longer underwater or you have paid off the loan. Try making larger payments than your minimum amount to take care of this faster.
  • Try to sell the car yourself to get more than you would if you were to trade it in.

The Bottom Line

In an ideal world, you would always have equity in your vehicle so you could avoid this situation. Because negative equity is a common issue, however, it's best to figure out a way to avoid trading in a car when you are upside down in your loan. Buyers, especially those dealing with credit issues, should do whatever it takes to avoid this situation.

Another car buying roadblock can be your credit. Having bad credit or no credit can make it difficult to get approved for a car loan. Luckily, Auto Credit Express is here to try to make that process easier.

We connect car buyers to local special finance dealerships that know how to work with challenging credit situations. Our service is free of charge and obligation, so go ahead and get started by filling out our car loan request form right now.

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Replace Your Transmission With An Auto Warranty

The transmission is an essential part in your car. It is also one of the most costly parts to replace or repair. If you have owned your car for a long period of time, it is a possibility that you will eventually need to replace or repair the transmission. Here are some telltale signs that your transmission needs replacement:

The first sign is that your car is leaking transmission fluid. Check under your car while it is parked. Look for fluid pools that have a reddish color. After, check to see if there is any metal in the fluid. If there is, it is important to replace the transmission since broken metal is a sign that the transmission is worn down.

In addition, inspect the fluid levels in your car’s transmission. If you have low levels, this may be an indication that your transmission is burning too much fluid or that it is overheating.

Also, if there is a rough transition between gears when driving, this is an indication that your transmission needs replacement. It may take longer to switch between gears or the gears may slip. This will reduce the acceleration in your car.

Transmission replacements can be costly. Therefore, it is smart to look into an aftermarket auto warranty company that you can buy an extended auto warranty from. The auto warranty will help reduce the costs of your repair bills. Lastly, be sure that you purchase an auto warranty that provides the proper amount of coverage for your car.

 

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9 Ways to Get the Best Refinance Rates

To earn the best refinance rate on your mortgage, build your credit score, shorten the term, resist a cash-out refi and get multiple quotes.

9_Ways_to_Get_the_Best_Refinance_Rates

 We adhere to strict standards of editorial integrity to help you make decisions with confidence. Many or all of the products featured here are from our partners. Here’s how we make money

In the hunt for the best mortgage refinance rate, there are some things you can control and some you can’t. Rates moving up just when you’re about to refi? Can’t control that.

But there are at least nine things you can do:

1. Look for errors in your credit report

Credit report errors happen more often than you might imagine, says Mary Anne Daly, senior mortgage advisor for Stearns Lending.

“I ran credit for someone who had a state tax lien and a charge off,” Daly says. “They said, ‘This isn’t mine. I don’t know anything about this.'”

She also remembers clients who had a credit score of 623. Their credit report had mistakes, and the customers wondered if an improvement in their score would be worth the effort of correcting them. By wiping the errors from their history, their credit score improved to 660, and the borrowers saved $95 a month on their home loan.

» MORE: Check your credit score for free

2. Keep credit card balances below 25% of your available credit

Daly says to consider asking your credit card providers to increase your available credit. Using a smaller percentage of your available credit lowers your credit utilization ratio and can earn you a better interest rate.

3. Don’t quit using consumer credit

Paying off consumer credit can be liberating, but you should continue making small purchases on your credit cards from time to time. Even if you pay the balances off each month, it shows you manage debt responsibly, which can actually improve your credit score, Daly adds.

4. Be wary of ‘no-cost’ loans

“That always tickles me,” Daly says of such loan gimmicks. “There are no free lunches.” All lenders will charge fees, whether they are paid upfront, rolled into the loan balance or built into the loan’s interest rate.

It’s not uncommon for closing costs to be tacked on to a loan. Joe Burke, a loan officer with Guaranteed Rate in Chicago, says paying them out of pocket can lower your interest rate.

» MORE: Compare mortgage refinance rates

5. Consider a shorter loan term

Burke notes that expanding your loan term may not be in your best interest.

“If you’ve already paid seven years into a 30-year fixed, for instance, putting you into a new 30-year fixed may not be the best financial decision,” he says.

Moving from a 30-year mortgage to a 20-year or even a 15-year term can earn you a lower mortgage interest rate, not to mention reducing interest payments over the life of the loan.

“A lot of people don’t know that,” Daly adds. She tells of customers who were considering several options on a mortgage. They had 10 years left on their loan, and they thought it wouldn’t make sense to refinance. Daly showed them that refinancing to a 10-year loan term with a lower mortgage rate would save $45,000 in interest, without significantly changing their monthly payments.

“They were just thrilled,” Daly says, “paying a little bit more [each month] but saving all of that money.”

6. Resist the urge to take cash out

A cash-out refinance allows you to draw some of your home’s equity as a part of a new loan. But it also increases your loan-to-value ratio. That will raise your interest rate in most cases, Daly says.

» MORE: Calculate your refinance savings

7. Lock in your best refinance rate

“Sometimes, believe it or not, we have a little bit of a crystal ball” about how mortgage rates may behave in the very short term, Daly says. That can be tied to major economic news, policy announcements or government reports.

After conferring with your loan advisor about an estimated time to closing, ask about a mortgage rate lock, which will prevent rising rates from affecting your mortgage while the loan is being processed — which can take weeks.

8. Consider how long you’ll live in the home

“One of the questions that we’re always asking people is, ‘How long do you plan on staying in the home?'” Burke says. “I think that’s a very important question that a lot of people don’t ask.”

For example, if you know you are going to be selling your home in five to 10 years, an adjustable rate mortgage, with an introductory rate lower than that of a fixed-rate loan, may be the right choice, Daly adds.

9. Shop rates — and know what they mean

Shopping more than one lender may be the most powerful way to earn the best refinance rates. Getting just one additional rate quote could save borrowers an average $1,500 over the life of a loan, according to research by Freddie Mac, a government-sponsored entity that helps fund the mortgage market.

But advertised rates that seem unusually low may have discount points built in — that’s when you pay upfront to get a lower interest rate. For the lender, factoring in discount points may be a ploy to drive business, but for borrowers, the points can be a part of a loan strategy.

“Most of the time, we find that the buy-down doesn’t make sense,” Daly says. To see if discount points work in your situation, consider your monthly payment savings against how long it will take to recoup the fees — and how long you expect to stay in a home.

Burke says borrowers often fixate on a low rate but miss important details in loan terms disclosed in the fine print.

“Looking at APR is absolutely one of the best ways to go,” he says. The stated annual percentage rate of a loan includes the interest rate you’ll pay on the loan, plus all fees. You’ll have to complete an application with each lender you’re considering to get all the information that impacts your offered APR.

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Is Guaranteed Issue Life Insurance a Good Option?

We often get asked questions along the lines of “My aging parent is very ill and medical bills have drained his/her savings account, but I cannot afford to pay for the funeral if he/she should pass away.  Can I buy life insurance on my parent?”  In this scenario, we do not advise purchasing “regular” fully underwritten life insurance.  More often than not, term life insurance is going to be ideal for most people, but not in this scenario.

Why we wouldn’t recommend term insurance in this case…

Term life insurance would typically not work in this case because the coverage amount would be too small, the client would likely be uninsurable because of health issues, and the client’s age would be outside the range a life insurance company would approve coverage for.

What we would recommend…

When we get this question, we usually tell inquirers that they have two options:

  1. Take the money you would have spent each month on term insurance and instead put it into a savings account so it can start accruing interest. You can then access these funds later when in need of money for your loved one’s final expenses.
  2. Purchase a guaranteed issue life insurance policy.

What is a guaranteed issue life insurance policy?

Guaranteed issue life insurance is a type of life insurance that you cannot be denied coverage on, hence “guaranteed”.  There are a few things you should know about this type of insurance.

  1. Guaranteed issue life insurance is typically known as “last resort” life insurance. It’s meant for those who may have been denied previously and/or are not in good health.
  2. Guaranteed issue life insurance policies are designed so that surviving loved ones can pay for your final expenses, such as a funeral, burial, and medical bills.
  3. Guaranteed issue life insurance premiums will never increase.
  4. A guaranteed issue life insurance policy accumulates cash value.
  5. Guaranteed issue life insurance policies have significantly lower death benefit amounts compared to term or permanent policies.
  6. There is no medical exam or questionnaire required for guaranteed issue life insurance. The only factor that is really taken into consideration is the age of the insured.  Because of this, guaranteed issue life insurance premiums are higher per thousand than most other types of life insurance.
  7. Benefits are limited to the first two years. This is called a Graded Death Benefit period.  What this means is that if you die within two years of buying the policy for any reason other than an accident, your beneficiaries typically only receive the total amount of what you paid in premiums.  (This can vary depending on the carrier.)

So, if you’re in relatively good health, fully underwritten life insurance may be a better option for you.  However, guaranteed issue life insurance is a great option for those with a desperate need.

How much does guaranteed issue life insurance cost?

While you can get millions of dollars’ worth of term life insurance coverage, guaranteed issue life insurance coverage often caps at $50,000.  Again, its design is based around simply helping your surviving loved ones pay for your final expenses.

Quotacy works with Gerber Life to provide guaranteed issue coverage options.  Gerber’s guaranteed issue policy is available in all U.S. states except for Montana.  Take a look at the examples and table below to get an idea on what a guaranteed issue policy can cost.

Example #1

 John Smith is 55 years old and has been denied for traditional life insurance because of his Stage IV prostate cancer.  He does not want to burden his children with his final expenses so he plans on purchasing guaranteed issue life insurance.

He’s automatically approved without having to undergo a medical exam or fill out any health forms.  John obtains $20,000 in coverage and his premiums are $91.30 per month.

If John passes away within two years, Gerber Life will refund to his beneficiaries all premiums that had been paid plus 10% interest.  However, if John happens to die because of an accident unrelated to his health within those two years, his beneficiaries will receive the full $20,000 death benefit.  After two years, his beneficiaries will receive the full death benefit regardless of how he dies.

Example #2

 Jane Doe takes care of her 79-year-old mother Sally.  Sally does not have any life insurance and Jane is worried that she won’t have the funds to give her mother the funeral she deserves.  Jane decides to buy a guaranteed issue life insurance policy on Sally.

A $12,000 policy is enough for Jane to ensure she can pay for a proper funeral and burial.  Sally is approved for coverage and the policy will cost $165.70 per month.

Although this type of policy is easy to acquire, it offers less coverage and higher premiums than traditional life insurance, so explore all your options.  If you aren’t sure if guaranteed issue life insurance is the best choice for you or want more information, contact us here at Quotacy and we can help you.

Recap of Guaranteed Issue Life Insurance:

  • If you’re between 50 and 80 years old, you can be accepted for guaranteed issue coverage regardless of your health.
  • There are no medical exams to complete or health questionnaires to fill out.
  • Cash value accumulates within the policy.

Remember, term life insurance quotes are free to run on E-Exchanger.com and there is no penalty for applying.  It doesn’t hurt to apply for term life insurance, then opt for the guaranteed issue if you end up being denied.  The more options you have, the better decision you can make.

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Should You ‘Restart’ Your 30-Year Mortgage When You Refinance?

we adhere to strict standards of editorial integrity to help you make decisions with confidence. Many or all of the products featured here are from our partners. Here’s how we make money.

Low mortgage interest rates have made refinancing a good option for many homeowners who can sign up for a lower rate and even take cash out of their home equity while still lowering monthly payments.

But what if the homeowners already have a few years of equity built up in the home — should they take on a new, 30-year loan or refinance closer to their current loan term, such as 25, 20 or even 15 years?

By extending to a new, 30-year loan, the homeowners would pay even less per month, because the loan amount would be spread out over a greater number of years than the current loan — but they would also pay more overall due to interest being applied for a longer period.

We asked Forrest Baumhover — a financial planner in Tampa, Florida, and a member of NerdWallet’s Ask an Advisor network — about the key factors homeowners should consider when deciding whether they should refinance.

 
 

What are the advantages of refinancing to a new, 30-year loan instead of keeping the same term?

The advantages of refinancing to a 30-year loan include being able to lock in a low refinance rate for such a long time, while freeing up your money to work for you in long-term investments. Also, locking in your rates for 30 years acts as a hedge against inflation, ensuring that your mortgage payment stays the same, even as house prices and rents go up over time.

What are the disadvantages of this strategy?

One issue that people might consider a disadvantage is that you pay more interest over the cost of the loan. While that’s true, you could also argue that the financial flexibility is more than worth it. First, with the power of compounding interest, the money you’re able to invest by having a lower mortgage payment will earn more over the life of the loan than the additional mortgage interest will cost you. Also, you have available funds in case of an emergency.

One disadvantage is that some 30-year loans might have a higher interest rate, although you might find some loans where 15- and 30-year mortgage rates are similar.

Is there anything else homeowners should keep in mind about mortgages?

Homeowners or people looking to buy a home should keep in mind that looking at a mortgage as strictly a tax write-off is a bad approach. Toward the end of a mortgage, many people find that if their mortgage is their only itemized deduction, it may be less than the standard deduction, making it worthless. This is especially true in areas with low real estate taxes.

 

 

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Refinance calculator

 
Why should you consider a mortgage refinance?

In many instances, you should refinance to save money on your home mortgage. You’re a good candidate to refinance if you’re planning to stay in your home for a while and are refinancing at a lower interest rate, switching off an adjustable-rate mortgage, or looking to eliminate private mortgage insurance.

The top reasons to refinance are:

  1. Get a lower interest rate: Lowering your mortgage rate can reduce your monthly payment if the repayment term (duration) remains the same. However, keep in mind that a refinance can carry fees ranging from 2% to 5% of the loan balance due.

    Mortgage refinancing for a lower rate can make a lot of sense, especially if your credit score has improved. In that instance, you might qualify for a significantly lower mortgage rate today. Check your credit score and history before you go any further.

    Nerd Tip: Rather than simply focusing on reducing your monthly payment, it’s wiser to refinance when you can save money with a lower interest rate, without extending the loan term.

  2. Switch from an adjustable-rate mortgage to a fixed rate: An adjustable-rate mortgage typically comes with an initial period of a steady interest rate then resets to a floating rate for the rest of the loan. It makes sense to use an ARM if you know you’ll live in a home for only a few years; you could save a lot of money with a lower interest rate in the interim.

    Converting to a fixed mortgage from an ARM is especially useful if you plan to stay in your home long-term. For example, if you have a 5/1 ARM, you could complete a refinance by the end of the fifth year and lock in a steady rate with a 30-year fixed-rate mortgage.

  3. Eliminate private mortgage insurance: If you buy a home with less than 20% down, you typically are required to pay private mortgage insurance, or PMI, which protects the lender in case you default on the loan.

    Annual PMI premiums can cost between 0.5% and 1.5% of the mortgage. Sometimes, homeowners are able to cancel mortgage insurance once the balance on the mortgage falls below 80% of the value of the home. However, loans insured by the Federal Housing Administration require mortgage insurance for the entire life of the loan.

Where can I find out more about the refinance process?
 
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Love and Mortgage: Should Newlyweds Buy or Rent a Home?

Somewhere in your mind, you might have an idealized image of a newly married couple triumphantly sweeping into a dream home with the wife in the husband’s arms. As corny as the tradition might seem, you can also see it as a powerful symbol — two people making their first entrance into the home they now share as owners.

Curious what your home is really worth?

Should you and your new spouse follow that example, or do you have reservations about adding a mortgage to the mix? Consider some of the pros and cons of renting vs. buying as newlyweds, and then take your time in deciding whether home ownership is another threshold you want to cross together.

Your Solution Depends On Your Situation

You’ve probably made dozens of decisions together on your way to the altar, making the call on everything from the registry to the diplomatically arranged seating chart at the reception. And now’s not the time to give in to judgment fatigue.

Take some time to evaluate the respective merits. You may find that personal finances, career aspirations and even the value you place on independence vs. convenience could influence your decision of whether to rent or buy.

Check your home value

The Case for Renting

Some of the reasons that could make renting a home preferable to buying include:

Lower Start-Up Costs — Moving into an apartment typically means paying some moderate expenses, such as first and last month’s rent, specified deposits and the like. Buying a home typically means spending several thousand dollars on a down payment, closing costs, agent’s commission, attorney’s fees and more. If you still haven’t figured out how to pay off the honeymoon, the initial investment could loom large in your decision-making.

More Mobility — The U.S. Census Bureau reports that after age 18, the typical American can expect to move nine times. If you happen to get a new job in a different state, you’ll have a much easier time (relatively speaking) breaking a lease than you would be selling a house.

Repairs Aren’t Your Responsibility — If the toilet springs a leak at 3 a.m., a renter can call the landlord to get it fixed. For homeowners, the burden of arranging and paying for repairs, and possibly filing an insurance claim, falls entirely on them. When it comes to upkeep, a conscientious landlord can be a real convenience.

The Case For Buying

Factors such as these could tip the scales in favor of homeownership:

It’s Usually More Economical — For couples who plan to stay in the same area for several years, buying a house is generally considered the more affordable choice. The expert consensus favors ownership as a much better source of value than renting in just about every U.S. housing market. Also, you can help protect your investment with a home insurance policy that may provide coverage for weather damage, break-ins, and other hazards.

Ownership Builds More Wealth — One aspect of the pro-buying argument revolves around the central idea of wealth accumulation: Homeowners nurture an investment in something that will one day belong to them, rather than simply renting space from month-to-month or year-to-year. Even if you move to a new house before you pay off the mortgage, you still have the equity you’ve built up in your current home.

A Sunnier Market Outlook — Although memories of the housing bubble bust still linger, many indicators point to a stabilized recovery. New regulations have helped curtail risky lending practices, home prices have reached realistic levels and the economy has rebounded. With mortgage rates at historic lows, 2016 could be an advantageous time to become homeowners.

Whichever Way You Go, Go Thoughtfully

The decision to buy or rent as newlyweds depend on immediate realities and long-term possibilities. Do you have plenty of money on hand? Do you have job security? When might you start a family?

You’ll need to consider all these factors, and more, as you figure out whether crossing the threshold right away is a realistic option or just a romantic notion.

Get further info

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How to Refinance Your Mortgage

 After setting your refinance goal and researching your home's value, compare refinance rates and fees from multiple lenders.

 
 

we adhere to strict standards of editorial integrity to help you make decisions with confidence. Many or all of the products featured here are from our partners. Here’s how we make money.

You made it through one of the toughest challenges: buying a home. Now, perhaps just a few years later, you’re ready to refinance your mortgage. How hard can it be? You may be surprised to find that it’s not a couple-of-emails-and-a-phone-call-or-two process. In fact, there may be more paperwork involved this time around than when you first bought your home.

Let’s consider some important initial steps of a mortgage refinance — and then run through the rest of the process step by step.

Why you might want to refinance

Before you begin, it’s important to consider why you want to refinance your home loan in the first place. That guides the mortgage refinance process from the very beginning.

» MORE: Notify me when I can save by refinancing.

Lowering your payment is usually the goal. And it’s tempting to refinance with another full 30-year term to really knock down that monthly payment. But that means you’ll end up taking even longer to pay off your house and paying more interest.

You’ll want to take into account how much interest you’ve already paid on your old loan and how much you’ll pay with the refinance. Loans are front-loaded with interest, so the longer you’ve been paying, the more each payment is going toward paying off the principal balance — and the more interest you’ve already paid. Comparing what you’ve paid in interest so far and what you will pay on your current loan versus the refi will give you a solid idea of your total loan costs for either option.

By resisting the urge to extend your loan term, you can instead refinance to reduce the term and to get a lower interest rate, which could significantly reduce the amount of interest you pay over the life of the loan.

Choosing a suitable loan term for your mortgage refinance is a balancing act between an affordable monthly payment and reducing your borrowing costs.

Use a mortgage refinance calculator

Once you know you have a good reason and you’ve determined it’s the right time to refinance, it’s time to work the numbers. Using a mortgage refinance calculator can help you shop for the best mortgage.

You’ll need to know (or make some educated guesses about) your new interest rate and your new loan amount.

After you input the data, the tool will calculate your monthly savings, new payment, and lifetime savings, taking into account the estimated costs of your refinance.

Working with a refinance calculator will give you a good idea of what to expect. Even better, when you have a few estimates from mortgage lenders you can enter the terms they offer you into the calculator to help determine which one offers the best deal.

It’s also key to shop the best refinance rates

Now it’s time for a little legwork — or more likely web work and phone calls. You want to shop for your best mortgage refinance rate and get a loan estimate from each lender. Each potential lender is required to issue the estimate within three days of receiving your basic information.

The estimate is a pretty simple three-page document that details the loan terms, projected payments, estimated closing costs and other fees.

Compare the loan details from each lender and decide which one is best for you. This is a good time to really work that mortgage refinance calculator.

 

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Find out how much your home is really worth

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How can I change the details of my mortgage?

We trust the data you tell us about your mortgage. If you do not think the data we have is correct, which we get from your credit account, linked account, or information you have told us, you can change it at any time by scrolling to the top of this page and clicking "Edit information." This opens a modal with your mortgage details. If you confirm the mortgage information, we'll update everything based on that.

What is a home's value?

Home value has a slightly different meaning if you ask a homeowner, appraiser or tax assessor. But in most cases, home value means the amount for which a house would likely sell, otherwise known as the current market value.

Mortgage lenders — as well as buyers and sellers — typically rely on professional property appraisers to calculate market value, but there are ways to determine home value on your own.

How do I determine how much is my home worth?

The home value calculation uses data gathered by Zillow. Known as a “Zestimate,” this home valuation algorithm looks at the recent sale prices of similar properties gathered from public records, such as tax assessments, as well as user-submitted data. The home’s physical attributes and location, as well as market conditions, are also taken into account by the formula, according to Zillow. Together, information about recent sales and asking prices helps determine what a house could be worth. Zestimates have a median error rate of 4.3% nationally. This means half of Zestimates were within 4.3% of the final selling price, while half missed the mark by more than 4.3%. The error rate may be higher or lower in your market.

Remember, this estimate of how much your home is worth is only a starting point. Hire a professional appraiser or get a comparative market analysis from a qualified real estate agent before buying or selling.

How does the home value impact what financial decisions I can make?

For home buyers and home sellers, knowing current market value helps you make smart decisions about how much to offer on a house you want, or how to price a home you’re selling.

As a homeowner, value is also directly related to your home equity. Equity is calculated by subtracting the mortgage balance from the home’s current market value. You build equity as you make monthly payments and pay down your principal, but other factors, most notably home price appreciation, can speed up or slow down the equity-building process.

With enough equity, you may be able to refinance into a loan at a lower interest rate or drop your private mortgage insurance. You might even be able to remodel your bathroom or pay off credit card debt through a cash-out refinance, home equity loan or home equity line of credit.

These are important financial decisions that should be made only after obtaining an accurate estimate of your home’s value.

What is home equity and how does it impact my financial freedom?

Home equity is the value of your home minus the balance of your mortgage. To put it another way, home equity represents the portion of the house you’ve “paid off” and therefore own. Equity increases slowly with each mortgage payment, but may grow faster if you make value-boosting home improvements or if home values rise in your area.

As a homeowner, equity is a valuable asset that directly affects your financial freedom. More equity means more ways to achieve financial goals. You can make home improvements, consolidate debt, cover emergency expenses or even pay college tuition by tapping home equity.

Don’t cash out or borrow against home equity just because you have it, though. Tapping equity can add years to your mortgage payoff and means less cushion if the home loses value. And if you have trouble paying the loan for any reason, such as losing your job, the lender could foreclose on your house.

You can tap your home equity with the following loans:

  • Cash-out refinance: Mortgages your house for more than you owe. You can generally turn 80% to 90% of your home’s equity into cash, and in some cases, get a lower interest rate than your previous mortgage.
  • Home equity loan: Allows you to borrow up to 85% of your equity at a fixed interest rate. Home equity loans are disbursed in a lump sum and repaid through monthly payments.
  • Home equity line of credit (HELOC): Allows you to borrow up to 85% of your equity at a variable interest rate, which means your payments could change every month. Instead of a lump sum of cash, HELOCs provide a limited line of credit you can borrow when needed, much like a credit card. Interest is paid only on the amount you take out.

Why might I want to refinance my home?

Refinancing replaces your existing mortgage with a new loan. Some reasons for refinancing are directly related to home value, while others aren’t. Refinancing might be a good idea if you want to:

  • Lower your interest rate:

    If mortgage interest rates drop after purchasing your home, refinancing could allow you to lock in a lower rate, reducing your monthly payment.
  • Change your loan term:

    Refinancing into a shorter-term loan, for example 15 years instead of 30, may increase your monthly payment, but it will also reduce payback time so you pay less in interest and own your house sooner.
  • Drop mortgage insurance:

    Refinancing can remove mortgage insurance in two ways. First, you can refinance from an FHA loan (these loans always carry mortgage insurance) to a conventional loan without paying PMI if you have built up over 20% equity on your existing loan. Second, you can refinance from a conventional loan with PMI to another without it if your current home value and mortgage balance puts you over the 20% equity mark.
  • Pull cash out of your home:

    As you pay down the loan and your home gains value, equity increases. When your equity stake is large enough, you may be able to turn some of it into cash through a cash-out refinance.

Use our mortgage refinance calculator to see how much a refinance could save you and get customized lender recommendations.

What factors can affect how my home value changes over time?

Unlike other assets, such as your car, a home often appreciates over time. In general, real estate appreciates because there’s only so much space for new development. As time goes on, there’s generally more demand for less land, driving up value. If demand drops, however, prices could go down.

Other factors that can influence changes in home value are:

  • How much the house sold for in the past
  • Quality of the neighborhood
  • Market conditions, such as the number of homes available and strength of the economy
  • Tax assessment
  • Nearby amenities
  • Square footage
  • Age and condition of the house and property

 

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Buying Peace of Mind: How to Buy a Used-Car Warranty

A certified pre-owned car with a warranty provided by the manufacturer is the safest bet in the used-car world. But if you’re not buying a CPO car from a franchise dealer, can you still get a warranty? Yes, but buying one can be tricky. The fact is, we all hope to find a company that will warranty a used car with 150,000 miles on it, sight unseen. But such companies don’t exist because there’s no way they can, as an example, buy everyone a new engine and transmission and still stay in business. So let’s look at the realistic options: Some dealer groups and used-car chains offer their own CPO warranty programs, but coverage is usually minimal. CarMax, which has more than 100 locations across the country, certifies its own cars, and everything it sells has a “limited 30-day warranty,” which is actually 60 days in Connecticut and 90 in Massachusetts due to local laws. CarMax also offers “MaxCare,” an extended service plan that expands the coverage to most of the mechanicals except for wear-and-tear items, fluids, wheels, glass, and trim. Check the website, which details what is and isn’t covered. Prices vary according to the coverage and car.

2010–2012 Chevrolet Camaro: A Certified Pre-Owned Guide
Feature: Pre-Owned Programs by Make and Model
Certified Pre-Owned: 2005–2009 Ford Mustang GT
There are also aftermarket warranties: In December 2009, we checked these out, and we didn’t like what we saw. A cluster of companies, most based in the St. Louis area, used high-pressure tactics to get signatures on warranty deals. One of the biggest, US Fidelis, previously known as National Auto Warranty Services, went bankrupt, and at least two of its executives went to prison. To avoid a scam, look for a company that has been in business for a long time. EasyCare, for instance, has been around since 1984. It was formerly purchased and owned by Ford, but the company’s employees and equity partners bought it back in 2007. The company sells its contracts outright, or through more than 2000 dealers, and while it recommends that you use the selling dealer for service, any licensed repair facility is acceptable. There are four different levels of coverage, and price varies by the level, the vehicle, and its mileage. The costs, however, are often negotiable.

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