New Year's resolutions for homeowners

couple_home_planning The turning of the calendar page to a new year is often a good time to make some resolutions about your home and mortgage, but this is especially true for 2025, because still-high mortgage and other interest rates means homeowners looking to save money will need to look beyond refinancing.

In 2024, mortgage rates remained mostly unfavorable for homeowners looking to refinance. The economy mostly hummed along and inflation has proven slow to diminish, so without additional slowing in either (or rising unemployment), it's unlikely that we'll revisit record low levels anytime soon, even if the Fed has started a new cycle of lowering short-term interest rates.

Interest rates remain well above their likely longer-run "normal" levels, making it a a good time to give some thought to the following New Year's resolutions. These may help you decide how current mortgage rates and might affect you and your plans to either move or stay in your home.

1. Revisit your homeowners insurance

In most areas of the country, home prices have continued to rise pretty strongly, and prices for furnishings and fixtures are high and remain elevated, This makes it a good time to make sure that your insurance coverage is keeping pace with these rising costs. You'll want to check the limits of your coverage to make sure you'll have enough insurance to repair or replace your home or any contents that may be destroyed. This is especially important if you've made home improvements over the past year that would add to the replacement cost of your home.

While you're at it, also review the value of your personal property and document any significant additions to that property. This includes jewelry, collectibles and other valuables. Pictures of the items, images of documents regarding them and receipts can all be placed on a thumb drive and stored somewhere safely off site (or in an on-site fireproof safe). Check with your insurance agent about whether you might need special coverage for certain items, or whether there are extra steps you need to take to document their value. Taking pictures and videos and storing them off-site somewhere can be a good idea, too.

Flooding has been in the news frequently over the past couple of years, and with climate change it might affect more areas than in the past. In fact, flood insurance might be especially cost-effective if you don't live in an area traditionally known for flooding. As Michael Kodsi, CEO of Choice Mortgage Bank in Boca Raton, FL told HSH.com, "it's not very costly if you don't live in a flood zone and it covers you for floods caused by storms." You can help gauge your risk by using FEMA's flood hazard maps.

2. Evaluate refinancing

Getting a lower monthly mortgage payment is the primary reasons people look to refinance, but there can be other reasons too, such as consolidating debt, getting cash to finance home improvements or changing the term or type of mortgage they hold. It is always worth exploring your options on a mortgage refinancing calculator.

Although it's not a great time to refinance at the moment, at least not to secure a lower interest rate, there can be value in some kinds of refinancing, but it all depends on your time horizon. For example, if you are planning to sell your home in a few years, a cash-out refinance may indeed bring you higher monthly payments, but only for a short while. Meanwhile, freeing up what may be a considerable equity stake at what is still likely to be the lowest possible cost may be a good opportunity for you. Even if the long-term costs may seem excessive, you won't be in the loan long enough for them to do much financial damage.

Here's a example:

A homeowner who took a 5.25% 30-year loan back in May 2022 for $300,000 would have a principal and interest payment of $1657, and by May 2025, will have a remaining loan balance of about $286,212.

A cash-out refinance with a $24,000 equity draw (loan balance $310,212) at 6.25% produces a monthly P&I payment of $1910, so this would be a $254/month increase.

Taking a home equity loan of $24,000 for 10 years at a rate of 8% brings a monthly payment of $291, so the cash-out refi would cost about $38 per month less than the equity loan (to make the payments roughly equivalent requires a home equity loan rate of about 4.875%).

If a mortgage refinance is in the cards for you, you'll also need to figure out the best way to pay for your refinance, so you'll want to run the numbers to determine the most cost-effective approach.

You might find you can cut costs by refinancing into a shorter-term mortgage, or perhaps use your home equity to qualify for a new mortgage that doesn't require private mortgage insurance.

If you or your parents have a reverse mortgage, it can also be a opportune time to refinance an HECM. Even though interest rates aren't nearly as favorable as they were over the last few years, both home prices and HECM loan limits have increased greatly in the last year, so a senior homeowner might be able to tap more equity in their home.

3. Consider prepaying your mortgage

If refinancing doesn't look like a viable option for you, you could still reduce your long-term mortgage interest expense by prepaying your mortgage. Paying down your mortgage faster means fewer years of paying interest.

Even simple prepayment actions can save big money over time For example, You can shave years off your mortgage by setting up biweekly payments, making one extra payment each year or rounding up your monthly mortgage payment every month. The difference prepayment makes depends on your loan balance, your loan term and interest rate and how much extra you pay.

Regardless of those individual loan characteristics, one thing is always true: The greatest savings come from starting prepayments as early in the loan as you can. If you should get some kind of windfall -- you know, the kind you might suddenly have from a bonus check or a tax refund, for example -- you might even consider prepaying with a lump-sum amount.

Prepaying your mortgage can also bring savings similar to a refinance without the hassle. HSH's Prepayment::Refinance calculator can demonstrate this for you. If you've got a target interest rate in mind, HSH's LowerRate prepayment calculator, calculates the prepayment you'll need to achieve the same interest savings as though you actually had refinanced to the interest rate you specified.

4. See if you can cancel PMI

If you bought a home in the last few years but didn't make a downpayment of 20% or more, you probably have a Private Mortgage Insurance (PMI) policy. Most PMI policies can be canceled; notable exceptions are Lender-Paid Mortgage Insurance (LPMI) and mortgage insurance on FHA-backed loans (MIP).

PMI will automatically cancel once you've paid down your original loan amount to 78% of the original price of the home, which means it can take a long time to get to a PMI cancellation point. However, you may be able to cancel your PMI as soon as two years after you bought your home if a combination of rising home prices and a falling mortgage balance have accelerated the process.

If you've got a fairly recent FHA-backed mortgage and put less than 10% down, refinancing to a conventional loan is the only way you can cancel the FHA MIP.

If home values have risen strongly in your area, you might be a candidate to cancel PMI. If you think you are, contact your mortgage lender or servicer and ask about their PMI cancellation policy; you may be required to pay for an appraisal of your home to prove its current value, but that could put you on the path to saving money every month.

5. An ARM might be worth consideration

There are particular circumstances where an adjustable-rate mortgage can make sense -- especially if you don't plan to be in your home for more than a few more years. With long-term fixed mortgage rates remaining rather closer to recent highs than all-time lows, an ARM might be a consideration in a refinance right now.

With the Fed already cutting short-term rates by a full percentage point and at least a couple more trims in rates expected in 2025, the short-term interest rates that govern ARMs are starting to decline, and should be heading at least somewhat lower in the coming years. In turn, this means a potential decrease in your current monthly payment and improved prospects that they will head downward in the fairly near future.

Many of the newest ARMs are governed by the Secured Overnight Financing Rate (SOFR), and feature routine interest rate adjustments every six months rather than the one year period which has been the standard. More frequent rate changes can be your friend when interest rates are declining, since your rate can adjust downward more quickly..

Of course, ARMs aren't for everyone, and there's never any guarantee that interest rates will trend favorably over a given time horizon. Focus on what risk you face of having your mortgage payments becoming difficult to afford if interest rates should to rise in the future. The longer you plan be in your current house with an adjustable rate mortgage, the greater this risk is.

Still, it you're considering a refinance, or have an eye toward selling your home in the next few years, an ARM might offer a chance at some savings.

6. Check your HELOC terms

Home equity lines of credit, or HELOCs, generally have variable interest rates. HELOCs can be especially convenient if you are making a series of repairs to your home over time and need to access financing at different points. With interest rates high but starting to head downward, the interest rates on your HELOC should be adjusting downward, too.

Check your HELOC repayment terms and potential interest rate adjustments. If you don't need to access additional financing, you might consider refinancing your HELOC balance into a fixed-rate home equity loan to stabilize your payments. Some lenders allow you to break off a piece of your line of credit into a fixed-rate, fixed-term repayment schedule while preserving the open line of credit for future needs.

If you still need routine access to that home equity, it's still a good idea to do a review of the terms -- it's possible to refinance a HELOC to another HELOC at more favorable terms and save interest cost. Nearly all HELOCs are based on the Prime Rate, an index that is out of the lenders control; however, lenders do control the margin they add on top of the index value, and margins can range from zero (as in Prime + 0) to Prime + 3 or more. The average markup is about 2 percentage points, but the most competitive HELOC lenders in most markets should be offering better deals than that. If your HELOCs margin is average or above, it may be time to shop around for savings.

7. Decide whether this is the right time to make a move

Young couples planning to start a family may have been considering moving into a larger home. On the other end of the spectrum, older homeowners might be thinking about downsizing. For others, work-from-home opportunities may still offer expanded choices as to where they can -- or want -- to live. Deciding whether to upsize, downsize or rightsize this coming year is something almost all homeowners should ponder.

Whatever type of move you are considering, and whether you're buying or selling a home in these conditions, oscillating mortgage rates could represent an opening or closing window for following through on your plans. For potential homebuyers, low mortgage rates ignited home prices and depleted inventories of homes available to buy, making conditions challenging. Conversely, these same conditions make it a great time to sell a home -- provided you can find another place to buy or rent at an acceptable cost and location.

Look at whether conditions are right for you to make the move you've been considering, or whether it is better to wait (or even reconsider) as things can change appreciably over the course of a year. In the current climate, home price increases are starting to flatten while mortgage rates are fairly stuck at elevated levels, so deciding whether to move or improve -- or whether an existing or new home will better meet your needs -- might be something to ponder sooner rather than later.

8. Maintain and repair

Your home needs an annual physical to make sure systems are running right. This means checking conditions both inside and outside, and this is vital whether you are getting a home ready for sale or trying to keep it in top shape to live in for the long run.

On the outside, make sure your roof and siding are in good condition. Letting problems with either go can result in structural damage to your home. Take a look at the surrounding trees to see if overhanging limbs threaten your house, or if fallen leaves are clogging gutters and drains.

On the inside, think not just about the condition of your major appliances, but also their energy-efficiency. In the case of very old equipment, energy savings can go a long way toward making an upgrade cost-effective. Also on the inside, don't let nagging problems like drips or dodgy wiring go any longer. These can quickly turn into much bigger problems if you don't address them. The turn of a new year is a good time to get maintenance and improvement planned and scheduled for the coming seasons.

Get your document filing in order

As a homeowner, it more important that you may think to keep good records. That includes receipts and warranty information for everything from appliances to furniture you may have purchased. More important are those for any significant home improvements you may have made last year (or will make in the coming year). Home prices have risen very quickly and significantly in recent years, while the capital gains thresholds for selling a home have not. Improvements such as a adding a bedroom or bathroom lifts the "cost basis" of your home, and you may need those receipts for home-improvement expenditures to offset their effect on your tax bill if you should sell in the coming year.

It's always a good idea to have proper filing in place, so even if you do nearly everything related to your home online, it's good practice to print out and save copies of statements and more on at least an occasional basis.

Here's hoping you have a great 2025. Following through on these resolutions could help keep your home and finances healthy, and that should make it easier to be happy.

This article was updated by Keith Gumbinger.

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