The process of buying a house feels like trying to finish a level on Super Mario World—one minute you’re bumping along on Yoshi and the next minute you miscalculate and sink into a bottomless pit. Here are four things to watch out for before you run out of lives.
- Your credit score doesn’t matter for anything other than approval. Ouch! That’s not a Koopa but it’s close—your credit score determines not just your approval but your rate. The rate you’re going to have to live with for the duration of the loan. Make sure your credit score is looking healthy using these tips. (link)
- Your payment is 30% of your income, next level! Not so fast. The rule that your mortgage payment should not equal more than 30% of your income is more complex than it seems. Think of it this way—there’s more to home ownership than just the mortgage payment. There are maintenance expenses, taxes and homeowner’s insurance. If you fail to calculate those expenses into this thirty percent, you will be putting yourself in a sticky financial situation.
- You don’t really need a down payment. While this may be factually true—you aren’t required to put down 20% –it’s not a good idea for long term financial house. If you don’t put down a down payment, you will be required to purchase private mortgage insurance, which can be a substantial extra cost in your monthly mortgage payment.
- A traditional 30-year mortgage is the way to go. The 30-year mortgage is certainly the most common choice for mortgages, but it may not be the best choice. If you can afford a larger monthly payment for a 15-year loan, you will end up spending a lot less money over the life of your loan. Adjustable rate mortgages can be a good option if you are in a vigorous housing market and only plan to be in a house for a few years—before the rate resets, you will have moved.
We don’t all have to fall into the bottomless pits—in many cases a good real estate and mortgage broker can help you get through these levels and rescue Princess….I mean, buy the house of your dreams.
Photo by Cody Hughes @clhughes21
Have you ever sat on your couch on a quiet night, swirled your merlot, and looked at your house like, what a waste I can’t use this equity right now to pay off current unsecured debt in order to improve my long-term financial situation.
Well, think about it now. Your home is typically your biggest asset, and if you have equity you might be able to use it to pay off debt. They key to making this work is knowing three things.
- Decide how much you need.
- Confirm how much you currently owe.
- Figure out how your current interest rate compares to today’s interest rates.
There are two options for using home equity and your answers for the above questions decide which one will be a good fit.
When refinancing your mortgage, you take a loan of a specific sum out from the equity of your home. If interest is at least half a point higher than current rates, refinancing makes a lot of sense. Also, if interest rates are about the same it might not be worth it. Keep in mind, closing costs are about $3,000, so depending on how much you need to borrow the fee might eliminate this option.
A Home equity line of credit works like a credit card, drawing on your home equity as you pay it back. Home equity line of credits don’t have closing costs. But, the interest rate is adjustable and will probably trend upwards as interest rates have been rising.
Used smartly, your home can be a great tool in your long-term financial plan.
Photo by Cody Hughes @clhughes21