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5 Questions to Ask Yourself Before Taking Out a Mortgage

By Frugaling 1 Comment

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When it comes to buying a home, one of the most important things to consider is your mortgage. Not only do the rate and amount matter immensely, but prudent homebuyers will look deeper than the surface. This includes investigating personal financial factors that may impact your mortgage, as well as making sure you’re ready to take on this new investment.

Oftentimes, new homebuyers will get caught up in the excitement of the process and forget to look at the bigger picture. This hastiness may lead to complications with your home and finances in the future, and could have negative consequences if not thoroughly considered. Whether in terms of employment status, rates and payments, or anything in between, asking yourself key questions will greatly reduce the potential risks of taking out a mortgage.

Here are some of the most important things to consider:

How Will My Credit Score Impact My Mortgage Rates?

Perhaps the most important and influential factor that determines your mortgage rate is your credit score. Just like any other loan, those with higher credit scores are more likely to get lower interest rates when taking out a mortgage. One thing all prospective homebuyers should consider is where their credit score currently is, and whether it’s worth it to hold off on buying until you can increase it.

Specifically, those with scores of 740 or higher will qualify for the most competitive rates, while those with scores below 620 will get much higher rates. If you know your credit score and want to estimate the rates you could qualify for, using online loan calculators can give you an understanding of what to expect.

Is My Employment Status Stable Enough?

Just because your tax records and employment verification make you eligible for a mortgage, doesn’t always mean that it’s a good idea. Before taking out a mortgage, all potential buyers should think about their current employment: How long have you been with the company? How long do you plan on staying? What factors may lead to job instability in the future? Make sure you’re at the right place in your career, and that you feel comfortable with the security of the company or industry, before diving headfirst into a mortgage.

Have I Covered the Requirements Needed for a Mortgage?

Before even beginning the process, save yourself time by considering and covering any requirements that come with applying for a mortgage. Although each lender is different in what they require of borrowers, there are certain guidelines that are general across the board.

Having a debt-to-income ratio of less than 43 percent is required for most lenders, as well as having a 10 percent down payment if your credit score falls below 580. Before you’re able to fully close on your new home, most banks will also require you to compare homeowners insurance quotes and provide proof of a policy in case of any incurred damages. Keep in mind that there are other non-essential “requirements” that will greatly increase your chance of low mortgage rates if fulfilled.

Have I Saved Enough for the Down Payment?

Given your credit score is above 580 and the 10 percent down payment isn’t necessarily required, it should be noted that a higher down payment often means lower interest rates. Putting a 20 percent down payment on the home will not only get you a better mortgage package, but will also save you money on mortgage insurance. Those who put less than that amount are required to purchase either a PMI (Private Mortgage Insurance), or purchasing through the FHA.

Can I Afford a Mortgage Right Now?

This last question is perhaps the most significant, and requires honesty and discipline to answer. Sure, the prospect of buying a home is exhilarating, but it is vital to take a step back from the excitement and consider your financial situation. Are there any potential instabilities in the long-run? Are you positive that your income will not only remain the same, but increase in the future? Being completely honest with yourself when considering this can make the difference between a prosperous investment and a hasty one that proves detrimental in the years to come.

The questions above provide a general overview of things to consider before taking out a mortgage. However, they are just a starting point. Buying a home is a big, long-term investment, and therefore has a lot of components that go into it. Take the time to calculate your risk carefully, and make sure that you’re ready to take on a new challenge. That way, you can keep yourself away from complications, and buy a home at the most optimal time for you.

Filed Under: Money Tagged With: mortgage

Benefits of a 15-Year Mortgage

By Frugaling 2 Comments

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Benefits of a 15-Year Mortgage
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Most homeowners choose the standard 30-year fixed-rate mortgage when buying a home. While a 30-year mortgage offers lower mortgage payments, it also means paying tens of thousands more in interest. Many people buying a home automatically shy away from a 15-year mortgage due to higher payments, but the potential savings may be so high that it’s worth reducing your expenses or buying a smaller house to make it happen.

Here are the most important benefits of a 15-year home loan that you should consider before buying.

Reduced interest charges

Let’s assume you buy a home for $260,000 with $52,000 down for a total mortgage of $208,000. While the rate for a 30-year mortgage may be around 3.65%, the interest rate for a 15-year mortgage may be just 2.70%. This gives you a monthly payment of $957 for a 30-year loan and $1,407 with a 15-year mortgage.

While this big difference in monthly payments turns away many buyers, it’s important to focus on the cost of your mortgage over the life of the loan rather than focusing solely on the monthly payments.

Over the life of this 30-year mortgage, you will pay a total of $136,700 in interest. Compare tat to just $45,100 with a 15-year loan — a savings of more than $91,000! You can find out just how much you could save in interest with a 15-year mortgage by using a mortgage interest calculator.

Build equity faster

One of the most overlooked benefits of a 15-year loan is the ability to build equity in your home faster than with a 30-year loan. This is because fixed-rate loans have amortizing payments with the payment applied to interest and principal every month. A 15-year loan needs to be paid off faster, so more of your monthly payments will go toward the principal balance rather than interest.

In the above example, the first monthly payment of $957 for a 30-year loan will break down to $316 toward principal and $641 in interest. After five years, $379 of every payment goes to principal and $578 goes toward interest which means you will still be building equity very slowly. After five years of monthly payments, you will have built up just $20,800 in equity.

15-year mortgages work more in your favor. Your first payment of $1,407 breaks down to $939 in principal and $468 in interest. After five years, you will be paying $1,072 a month toward principal and just $335 in interest with total equity of $60,200.

Because you will build equity faster, you will have a buffer against changes in real estate prices and you’ll have equity you can tap with a home equity loan or HELOC if you need to. This can also potentially make refinancing your loan easier down the road because you will have a lower loan-to-value ratio with less risk for the lender.

Pay off your mortgage faster

Finally, a 15-year mortgage can help with paying off your mortgage early — a dream for many homeowners. Not only can you avoid having a mortgage hanging over your head for 30 years, you still have the option of making additional payments to principal over the course of the loan, whether you add a bit to your monthly payment or make lump-sum payments with your tax refund. A shorter loan term can help you live mortgage-free earlier in life so you can focus on savings or retirement.

About 85% of new mortgages today have a 30-year term, but it’s important to explore all of your options. A 15-year mortgage means making half as many mortgage payments and saving thousands in interest over the life of your loan while paying a lower interest rate. If you can afford the higher monthly payments of a 15-year home loan, there is almost no reason not to do it.

Filed Under: Money Tagged With: mortgage

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