Becoming a homeowner has without question been glamorized as the American dream. To make reality of this dream, you will endure risk, sacrifice and commitment. Keep your head up, only through risk will you receive the most reward. Before making this life changing decision, let us first illustrate the advantages and disadvantages, then we will consider the implications of homeownership against your dreams for the future.
Begin by considering your intended goals for the next 5, 10 and 15 years. Next take the time to gather documentation of your finances and create a detailed budget of your income, debt and monthly spending. Once you are locked in to your home, you will lose the ability to easily relocate and the cash necessary for travel, a luxurious wedding, that new car and you might even have to postpone plans for a new baby. Take the time to think of the following questions and evaluate if now is the right time to buy.
Do you have a significant amount of debt?
Debt is a financial obligation that lenders evaluate and it will be evaluated against your monthly income. A high debt-to-income ratio may disqualify you upon the application process, because you were deemed to high of risk to repay the loan ammount. That debt will also hold you back from maintaining the necessary disposable income for future purchases and living comfortably, while satisfying your mortgage payments, insurance, utilities, maintenance and taxes.
Do you plan to live in this home for more than 5 years?
As discussed, this is a long-term investment that will be very rewarding after the 5 year mark. If you are consider selling the home to relocate, you will take a loss on the upfront insurance cost, cash down payment and potential profitability from appreciation in the home's market value. You will be financially obligated to live in this city, where as renting is typically no more than a 1 year contract.
How good is your credit score?
Your interest rate is the cost of lending you this long-term loan. This interest rate is based upon the length of time you select for repayment and more importantly, your FICO credit score. As you know, the credit score is a value of your trustworthyness regarding responsible repayment of debt. A higher credit score will always bring down the interest rate you pay each month. Scores above 740 will receive the most advantageous interest rates available. Scores between 630 to 720 will receive reasonably affordable interest rates. Scores below 630 towards 580 are considered poor and reflect a bad track record of irresponsible debt repayment. It may be best to improve your score, which could take as little as a few months, before applying for a locked in rate for 15 to 30 years.
How much money have you saved?
The most desirable ammount for a down payment on your home is 20% of the mortgage loan. This means you will own 20% equity in your home, decreasing the overall risk that you may default on your loan. The minimum down payment is 3.5% - 5% for FHA (government insured) loan and conventional loans. As you only physically own 3-5% of the home, you are liable for another cost in addition to the interest, called mortgage insurance. This may require an upfront insurance cost as well. Depending on the loan, you may purchase private mortgage insurance or mortgage insurance premiums.
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