Whatever other financial commitments you make in life, taking out a mortgage is likely to be your biggest one. Buying your first home can be a step onto the property ladder, with the home you buy representing your most significant asset. Understanding how mortgages work and assessing the affordability of home ownership, in advance of applying for a mortgage, can make a crucial difference.
Your mortgage can become a millstone round your neck or a financial product which serves its purpose well. There are some vital steps you should take before you apply for your first mortgage, which will help you to turn your home into an asset rather than a financial liability.
Far too many people have had their dream of home ownership turn sour, primarily by buying more home than they can afford. One of the first things to consider is the total cost of home ownership, rather than just the mortgage payment in isolation. Home owners are liable for property taxes, maintenance and repairs, all utilities, and additional things such as buildings insurance. You need to ensure that your income will cover all these expenses and not borrow so much on a mortgage that income is stretched to capacity.
Understanding what a mortgage loan actually is and how it works, is vital before applying for one. The Federal Reserve released a study showing that the majority of people have no knowledge about the basic fundamentals of their mortgages, even to the extent of failing to understand that a rise in interest rates will affect the cost of the monthly mortgage payment.
Make use of an online mortgage calculator to work out the differences which a few points rise can make in a mortgage payment, and work out if you could afford a monthly payment which rises over time. Never make the assumption that refinancing will be an available option if mortgage payments become too high to service.
Acquaint yourself with the different types of mortgage on offer and their repayment methods. A traditional mortgage which allows for the principal to be repaid along with the interest has proven over time to be the safest model. You will need to consider if you want to take out a variable interest rate mortgage or look for a fixed rate mortgage. If you know your options in advance you are less likely to fall for some fancy sales pitch which sells you an inappropriate mortgage for your needs.
Similarly you should consider the length of term of the mortgage, bearing in mind that the longer the term the more it will cost you in interest payments. Always look for a product which does not penalize you for making extra payments.
A good down payment is vital when purchasing a property, as it gives you immediate equity. The lax lending which lead to 100% mortgages has now been stopped, and having equity protects you from market fluctuations in property prices. The larger the down payment, the better the interest rate you should be able to secure.
A down payment of at least 20% will save you the additional costs of purchasing mortgage protection insurance which insures the lender against possible default. As well as a down payment you should have additional savings to cover the costs associated with buying a property, which include valuations, legal fees, and mortgage closing costs.
At least six months prior to applying for a mortgage you need to ensure your credit score is good, preferably excellent. A high credit score demonstrates that you are fiscally responsible and will open the doors to preferential interest rates. These can save you thousands of dollars over the term of your mortgage. If your credit score isn’t top notch then work to improve it. Don’t apply for any form of credit before applying for your mortgage and pay down any outstanding debt you carry.
All these things should be given careful consideration before you even think about applying for your first mortgage. When you are confident that these vital steps have been taken you will be in a much better position to apply for a mortgage which suits your needs and pocket, and won’t leave you with a burden which you regret undertaking.