Understanding Your Mortgage
One of the biggest financial decisions people will make in their lifetime is the choice to buy a home. Why would anyone want to make such a large financial commitment when renting is cheaper, flexible to where you want to live, and short term in obligation? The reasons are quite straightforward: homeownership allows you to build equity and allows you a deduction for mortgage interest paid, which makes it the single biggest tax break available to most taxpayers, not to mention all the intangible benefits that ownership has to offer. When you are buying a home your monthly payouts will increase and you’ll need to set a few dollars aside for those unexpected expenses, but owning your home can be one of your most rewarding decisions if you play your cards correctly from the start.
In simplest terms, a mortgage is a long-term loan designed to help the borrower purchase a house. In addition to repaying the principal, the borrower is obligated to make interest payments to the lender, and the home and the land around it serve as collateral. But if you are looking to purchase a house, you need to know more than these generalities. In this article, we’ll look at how a mortgage functions and how it is paid off.
Tips Regarding Mortgages
Have A Contingency Plan
Hard times are not exactly the most fun thing to think about, especially when you’re on the exciting journey of finding a home, we know. However you will benefit greatly from having a plan in place just in case you lose your job or can no longer work for one reason or another.
How would things play out if you were unable to make the income you are making right now for 3 months, 6 months or a year? If there are two incomes in your house, could you temporarily living off of only one income and banking the other for your mortgage payments? Maybe you already have a nest-egg of savings to cushion you financially.
If, in the case of emergency you would have a hard time making your continued mortgage payments, it might be wise to wait a while before diving into homeownership.
You Have 20% Saved as a Down Payment
If you are going to buy a home with anything less than 20% of the home’s cost, you may be asking for trouble. Having 20% saved is the going rate for what is required by mortgage lenders before they will offer you financial assistance.
This large chunk of money not only helps ensure the successful purchase of your home, it also proves that you are able to save that kind of money and that you are financially ready to take on the extra cost of a home.
You Have Additional Savings Set Aside
It’s well-known that your entire net worth should not be placed in a single asset. You do not want all of your money tied up a house. So once that down payment is paid, will you still have any savings?
We have already touched on the extra costs of owning a home, but there can be unexpected repairs that can not be post-poned and will require great amounts of money to fix, such as a roof leak or broken water heater needing replacement. You will need to fork over that cash and still pay for the mortgage, so having a decent cushion is imperative to living life stress-free in your new home.
You Aren’t Depending on Anyone Else
If when you are doing your calculations, you are factoring in that you will have tenants who pay rent to help cover your monthly mortgage, you are not ready to buy a home.
It is unwise to rely on anyone to pay your mortgage except yourself. If you happen to have tenants, consider their rental income a bonus to put towards the mortgage, but not a necessary income to owning a home. With the possibility of tenants needing to move for any reason, you will have to maintain the payments regardless, so be sure that you can afford the cost of your home all on your own.
A good rule of thumb is your home should cost no more than 2X your income. It could go up to 3X your income, but if you are a first-time homebuyer or your income is anything less-than-stable, the 2X ratio is used so that you can comfortably afford your home.
The bottom line is that owning a home is a big investment of money, time and energy, and we want to ensure that each of our clients are well-prepared for the gravity of this kind of a purchase. If buying a single-family home is not yet in your reach, perhaps the more affordable cost of owning a Condo might be more your style at this time.
Read more: Understanding The Mortgage Payment Structure
Read more: Understanding Your Mortgage
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