6 Financial Figures to Consider When You Shop for a Loan
Common wisdom says that owning a home will likely save you money over renting. You will build equity instead of having money disappear every month. These adages are, in most cases, true. Homeownership helps people invest in themselves and build wealth and stability over time.
However, how true that will be for an individual depends on a few decisions that they make during the buying process. The decisions you make now can have a big effect on your life for decades.
If you're wondering what actions to take in your specific situation, consult with your lender and/or a financial advisor.
Keep these facts and figures in mind before applying for a mortgage or shopping for a home:
Your Credit Score
Many people are more knowledgeable about credit scores than they were even a few years ago. This is because many get their FICO scores regularly from a credit card company or another free source. The average credit score for a conventional homebuyer in 2016 was 753. However, if your score is lower, it doesn't mean that you are out of the running. FHA-insured loans are available to people with scores as low as 500.
The higher your score, the better a deal on your mortgage you will get in most cases. By taking some time in the months before you apply for a loan to do the things that can raise your credit score, you can save thousands over the life of your loan.
How Much You Have for a Down Payment
Many people think that they need to save up 20% of more before they can buy a house. While there are significant advantages that come with a large down payment, it is not always necessary to get a loan and start getting the benefits of homeownership.
If you qualify for a VA loan, you can buy a house with no down payment at all. These loans are available to veterans, people who are on active duty in the military and some members of the Reserves and the National Guard.
With a score of at least 580, you may also qualify for an FHA loan with a down payment of just 3.5%.
How Much Additional Savings You Have in Reserve
The costs of buying a home don't stop with the down payment. Your lender will also want to see that you have cash left in reserve after paying the down payment and closing costs. This is because they want to ensure that, should something come up, you have an emergency fund to keep you paying your mortgage.
Situations ranging from plumbing problems to utility deposits can eat at your funds when you are buying a home. Make sure that you have enough to cover these without putting a strain on your finances.
The Monthly Housing Costs
This is going to include taxes, insurance and utilities. Is the place bigger than the home you live in now? Expect higher power bills. Property taxes vary greatly based on the area and the size of the home.
Estimate these costs before choosing how much home you would like. In general, people try to avoid spending more than a third of their income on housing. If you dedicate more than that to the housing portion of your budget, it may leave you with little else per month to spend on other purchases.
The Right Mortgage Terms
In general, mortgages come in 15 or 30 year terms. A 30-year mortgage will usually have lower costs, but may have a higher interest rate. You also pay on the loan longer. Fifteen-year mortgages mean that you will be done paying the mortgage much more quickly, meaning that you can save thousands in interest over the life of your loan in some cases.
If you are not sure whether you will be able to swing a 15-year mortgage, look at how flexible the 30-year ones are. See if you will be able to make extra payments toward the principle in between regular monthly payments. This way, you can see some of the advantages of a 15-year mortgage without the commitment.
How Much Closing Costs Affect Your Interest Rate
Typically, if you pay closing costs, you will get a lower interest rate than if your lender pays them. Even if there is a half a percent difference, this can mean thousands of dollars saved over the life of your loan. Which is a better fit for you will depend, in part, on how long you wish to stay in the home.
If you think you will sell in around five years, a loan with no closing costs may save you money. If you think you will be there longer, you may save money by paying closing costs out of pocket. However, if it means you will make a smaller down payment, you may wind up paying more in the end; a lower down payment may mean having to shell out for mortgage insurance each month. Talk to your lender about several scenarios to see which is best for you.
The choices you make when you buy your home can affect how much you pay for decades to come. By looking at the long term effects of every choice, you can increase the chances that you will make the ones that will help you financially over time. Assess every aspect of the home buying process to see ensure that you spend the right amount and grow your wealth.