Most homebuyers decide they want to be a homeowner and then go straight to see a mortgage consultant. That’s a mistake. If you’re interested in buying a home, you should “consult yourself” before you ever contact a mortgage consultant. When consulting yourself, the first action should be to assess your financial situation. Consider all of your monthly and annual expenses—household, education-related, child / spouse support, etc. Once you’ve tallied that, move on to calculating your monthly and annual income—salary, payments from investments, annuity awards, etc. Note savings and retirement investments but do not calculate them into your income tally. Keep in mind that this is not the time to sugarcoat things. The more realistic and honest you are in assessing your finances, the more you’ll understand precisely how much wiggle room you have in your budget. That will help you to determine the maximum mortgage payment you will be able to afford.
Next, take some time to research the type of mortgage loans that are available. Mortgages are generally classified as conventional or unconventional. Conventional mortgages require a minimum 20% down payment but unconventional mortgages allow buyers the flexibility to make a down payment of less than 20% - and sometimes nothing at all! While conventional loans have a fixed interest rate, unconventional loans may be fixed rate mortgages, adjustable rate mortgages, or a combination. Additionally, conventional loans have a 30-year loan term; unconventional loans can be for a few years or up to 40 years.
Finally, think about your plans for the future. How long do you plan to live in the home you’re planning on buying? Will you be buying a “starter home” that you only plan to live in for a few years or will you be buying a home that you plan to live in for the next 10 or more years? It’s important to know this when determining how much of a down payment you should pay. As a general rule, the longer you plan to stay in a home, the greater the down payment should be. Making a greater initial down payment will typically make you eligible for a lower interest rate and will decrease your overall costs in the long run. However, if you plan to stay in a home for just a few years, you won’t “get your money’s worth” if you place a hefty down payment. Why? You will not be as likely to earn the down payment back in the appreciation of the home. Thus, in that situation, it’s a better financial decision to pay a smaller down payment and pay the higher interest rate.
So, how does all of this thinking, researching and assessing help you to know which type of loan is best for you? Well, a candid assessment of your financial situation will clue you in as to what is a feasible mortgage payment and using that amount, less about $100 to cover private mortgage insurance if it’s required, will allow you to calculate your target home price range. Meanwhile, knowing your plans for the future will help you to identify the types of mortgage loans that are ideal for you.
Once you have a clear picture of the type of mortgage that is best for the life you live and plan to live, it’s a good idea to become a student of the real estate industry. This means reading about the real estate trends in your area and studying the changes in interest rates. The goal is to predict what the real estate market will be like once you’re ready to place an offer on a home. Of course, you’ll also want to educate yourself on how to find a good mortgage consultant and what fees to expect when its time to close on your new home.
