U.S. Mortgage Debt is Peaking at an Alarming Rate: How Can You Protect Yourself?
Owning a home is an investment many individuals and families save for years to take on. Many people not only purchase the house they live in but also to buy investment properties! Until recently, the U.S. economy was strong because Americans had jobs and were able to take on the risk of purchasing a house or investment property because they had a steady income to take on the burden of a mortgage. Buying a home is a significant life purchase for most families in the U.S. today. It means taking out a substantial loan and most likely paying that loan off for the next thirty years with interest.
So what can you do to make sure you end up with a reasonable mortgages payment each month and don’t end up drowning in the loan you take out for the property you are investing in? There are ways to ensure you can get the lowest interest rate available when you apply for a mortgage. Having a low-interest rate will keep your payments down and make it, so you pay less in the long run.
➤ Make sure your credit is cleaned up, and your credit score is as high as possible going into the mortgage process:
When going through the mortgage application process, there is no financial privacy. You need to submit bank statements for several months. The bank will do a credit check, and you need to submit W2’s for several years. Make sure you are knowledgeable about what your expenses are before you apply and how much outstanding credit you have, so there are no surprises during this process. It is vital to make sure you don’t have too much outstanding debt and that none of your debt is in collections. The higher your credit score, the lower your interest rate will be, and it will be that much easier to qualify for the loan you are looking to get.
➤ Try to put down 20% on your new property to avoid paying private mortgage insurance (PMI) for the first few years:
It can be overwhelming to think about saving enough money to cover the down payment and closing costs when entering the mortgage process. It used to be fine to put 5-10% down on the house, but with newer regulations, if you don’t put down 20% you end up paying private mortgage insurance (PMI) until you have 80% loan to value (LTV.)
Paying these monthly fees can take years to pay off and add hundreds of dollars a month onto your payment that doesn’t go toward your principal amount or interest rate. If you do end up paying PMI, try to overpay by $100 or so every month. Planning and overpaying will lower your LTV faster, and you will be able to get rid of the PMI payment in a shorter amount of time.
Other ways to make sure you are setting yourself up for success when applying for a mortgage include:
➤ Price shopping based on a specific budget:
Anyone looking to purchase a home has a picture in their head of what their dream home looks like as well as the perfect neighborhood for it, but make sure you are shopping in the price range you need to be in so you don’t go over budget. Finding the house you love and then not getting the mortgage you need would be devastating. You also want to make sure that once you do get that loan, that you will be able to make the monthly payments without too much stress.
➤ Set your monthly budget before you go shopping:
Make sure you know what your monthly expenses need to be before you start shopping. Don’t forget when you calculate how much you can afford every month, that you are not only adding up how much the property will cost. Make sure you include taxes and insurance into your calculations because you will be dealing with those payments through escrow. Budget is critical when setting yourself up in a good position when going into buying a home.
➤ Save ahead of time:
When you are planning to get into a mortgage loan, make sure you save the down payment and closing costs, as well as backup account and emergency account. These backup accounts are essential for new homeowners because the cost of the mortgage is a significant new payment, but houses always have unexpected expenses. You don’t want to add credit card debt to your new budget because you have expenses come up and don’t have the money to cover it out of pocket!
Owning your own home, apartment, or townhouse is an excellent investment. It can be overwhelming, but as long as you go into it with the essential knowledge you need and are armed with tricks to make it an easier process, it won’t be as difficult as you think.