Having a home is not just a dream but a priority for many people. In a 2018 home buyer report, around 15% of Americans said they have bought a house in the last 5 years. Thirty-two percent (32%) were planning to do so in the next half-decade.
If you’re part of the latter, prequalifying for a mortgage could be your top concern. Here are 5 things you should know about mortgages to help you better navigate the application process:
Audit Your Finances
Your financial health is the main factor in your application. But how much should your mortgage take up in terms of your household’s monthly gross income? Some say 28%, others put it at 33%. Work within this range and make sure to include property taxes, homeowners insurance, and maintenance costs.
The median household income in the U.S. is $57,652 annually. That gives you $4804.33 to appropriate monthly, with as low as $1345.21 and as high as $1585.43 going to paying your mortgage.
Buying Is Not Necessarily Riskier than Renting
After assessing your financial health, you now have an idea about how renting is actually costing you more in the long run. You believe paying a mortgage is a smarter investment. After all, you’re increasing your equity (the value you can claim) as you continue to return what you borrowed plus interest. When renting, you’re just spending money on a property you don’t and won’t own.
The risk, of course, is when an unexpected outcome happens. If you’re a couple paying for a house and one partner loses a job, you might fall behind on mortgage payments. But if you’re shelling out almost the same amount in rent, you could also end up in the same scenario and be kicked out of your place.
The More You Pay, the Bigger Your Equity Becomes
As mentioned above, your equity grows month-on-month (or over the period you choose to pay your mortgage). Your ownership of the house gets sealed when your mortgage balance becomes zero. And that’s enough motivation for some people to pay on time.
Compare Lender Fees
While you need a lender to write up your prequalification papers, you are not yet tied to that specific lender for good. You can still shop around. And when you do, compare various lenders’ annual percentage rates which include the lender fees.
Choose Between Interest-Only or Repayment Mortgage
You should also consider which setup is good for you. Interest-only mortgage requires lower monthly payments than repayment mortgage. But here’s why:
Interest-only mortgage lets you pay only the interest of the loan per month. You will still need to pay off the loan at the end of your mortgage term. On the other hand, repayment mortgage makes you pay the interest plus some percentage of the loan each month. By the end of your mortgage term, you’ll have been cleared of your debt.
Make an informed decision in each stage of buying a home. Keep these tips in mind when you’re planning to meet lenders and shopping mortgages.