Securing a mortgage is, undoubtedly, the easiest path to homeownership. With a mortgage, you can potentially secure a lot of property for relatively little money. These days, many mortgage lenders are willing to issue mortgages to those who put just five percent down—or even less. That means that someone with $20,000 could, theoretically, secure a home worth as much as $400,000 without needing to jump through any additional hoops.
The benefits of owning a home are well-documented. In 2021, for example, the average rate of home appreciation in the United States was 14.6—certainly a pretty strong rate of return. And though last year was indeed generally more profitable, the mortgage market often produces higher rates of return than you’d find in other speculative markets, such as the stock market. Furthermore, you can’t “live in a stock”… Owning a home can help significantly increase your overall quality of life.
Keeping all of these things in mind, you might find yourself very excited about the possibility of securing a mortgage. And, despite the occasional stresses that come along with it, securing a mortgage is something that might be much easier than you initially assumed. Just be sure to ask yourself these essential questions:
1. How Much House Can I Afford?
Among the most important things to keep in mind when you are applying for a mortgage is the amount of “house” you can afford. As suggested, it is now relatively easy to get a house with a simple five percent down payment—much less than the 20 percent down payment that was standard in previous decades. However, just because you can qualify (or at least pre-qualify) for a mortgage doesn’t mean you just spend at the higher end of your budget.
There are no universal “rules” that will apply to everyone but there are a few general guidelines you should keep in mind. Some of the most important things to consider when setting a budget for your home will include the amount of liquid capital you currently have (i.e., money that could easily be used for a down payment), your current income, and the amount of debt you currently possess. In many cases, your mortgage will become your largest source of debt. The final debt-to-income ratio will fluctuate and can vary based on the current debt owed and the chosen loan program.
2. What Are My Goals as a Property Owner?
Not everybody purchases property for the same reasons. Some people are looking for a forever home and genuinely intend on living in the home for 30 years (the most common length of a mortgage or more). Others are looking for a place where they can build equity in a short amount of time—perhaps they already have plans to move—while others might look to purchase a property for other reasons, such as commercial reasons or turning it into a rental.
Regardless, it is definitely a good idea to define what your property goals actually are. If you are looking for an investment property, then you’ll probably be much more concerned about the given property’s potential return on investment. If you are looking for a place to raise a family, you’ll still want to think about ROI, but other factors (such as school district, layout, etc.) will probably be more important.
3. What Type of Mortgage Will Be Best for Me?
There are currently many different types of mortgages available, with various pros and cons. The most common type of mortgage in the United States is the 30-year, fixed-rate mortgage. This mortgage is generally easy to qualify for, has predictable interest payments, and also has relatively low monthly payments.
A 15-year fixed-rate mortgage is a popular option for people who want to pay down their mortgage debt in a shorter amount of time. With a 15-year mortgage, your monthly payments will be higher but the total amount of money you end up paying will be less. You might also want to consider an adjustable-rate mortgage (ARM), which has a rate that adjusts with changes in the economy.
4. Is Now the Right Time to Buy?
As you’d probably expect, timing will play a key role in the mortgage application process. If your personal financial situation has recently improved—perhaps you raised your credit score by a few points, got married, or received a recent promotion—then applying for and successfully obtaining a mortgage might be a very real possibility.
But in addition to your personal financial situation, you should also take a look at the overall state of the market as a whole. If you are looking to buy property in a fast-growing area, then you might want to act fast before you end up missing out on the property you wanted or, at the very least, missing out on a potential return on your investment. You should also take a look at the current state of interest rates. If there is evidence that interest rates might increase—as there currently seems to be—you’ll want to close on your house as soon as you feasibly can.
Naturally, there are many things to consider when exploring the mortgage market. Just be sure to keep these essential questions in mind.
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