June 19th, 2017 3:48 AM by Jackie A. Graves, President
1. Your credit score doesn't
matter as long as you're approved
you don't need perfect credit to get a mortgage, the higher your score, the
more favorable a rate you'll snag. Unfortunately, some borrowers don't realize
that, if they apply for a mortgage when their credit isn't great, they'll get
stuck with a less-than-stellar rate for as long as they hang onto their loans.
Here's an example using today's
rates. If you were to take out a $300,000, 30-year fixed loan and had a credit
score of 760 or above, you'd snag a 3.608% annual percentage rate (APR), and an
associated monthly payment of $1,365. With a 650 credit score, on the other
hand, you'd qualify for a 4.651% APR, and that would come with a $1,547 monthly
All told, in this scenario,
you'll end up paying $65,520 extra for your mortgage if your credit isn't great
when you apply, so it often pays to wait until you're able to boost your score.
2. You're safe to get a mortgage where the
monthly payment is 30% of your income
Most financial experts agree that
your housing payment shouldn't exceed 30% of your income. So if you get a
mortgage where the payment equals 30% of your take-home pay, you might think
Not so fast, though. While your
actual mortgage payment might constitute the bulk of your monthly housing
expense, that 30% figure is actually meant to encompass your peripheral costs
of homeownership, like your property taxes and homeowner's insurance, as well.
Max out that threshold on your mortgage payment alone and you'll leave yourself
with dangerously little wiggle room in your monthly budget.
3. You don't need to put down 20%
Technically speaking, you don't
need to make a 20% down payment to buy a home. But if you fail to come up with
20% of your home's purchase price at the time you sign your mortgage, you'll
have to pay in the form of private mortgage insurance (PMI).
Private mortgage insurance is a
premium that's added to your monthly mortgage payment when you don't manage to
put 20% down. PMI will typically equal 0.5% to 1% of your loan's value, which
means that if you're looking at a $300,000 mortgage with 1% PMI, you'll be
charged an extra $250 a month. If you're already stretching your budget to
afford your home, those additional payments might push you over the edge --
which is why it often makes sense to hold off on buying until you've saved
enough to cover 20% of your home's cost.
4. A 30-year mortgage is best
Just because the 30-year fixed
mortgage is the most common option for financing a home purchase doesn't mean
it's the best choice for you. In fact, if you can afford a larger monthly
payment, getting a 15-year loan instead of a 30-year loan could shave thousands
of dollars off your total cost.
Imagine you're looking at a
$300,000 mortgage. A 15-year loan might come with a 4% APR based on your
credit, while a 30-year loan might come with a 5% APR. Your monthly payments
under that 30-year loan will be smaller, but if you can handle the larger
payments, you'll save $180,000 over the life of your loan, all thanks to your
lower interest rate coupled with a shorter repayment period.
Along these lines, if you're not
planning to stay in your home very long and are eligible for an extremely low
rate, it might pay to sign up for an adjustable-rate mortgage (ARM). Say you
expect to stay in your home for the next 6 to 7 years. Signing up for the
popular 5/1 ARM will allow you to lock in a competitive rate for the next five
years, after which time, you'll only be taking your chances for another year or
two as your rate resets. There are different mortgage options to consider
outside the classic 30-year fixed, so it pays to play around with different
financing scenarios and see which one makes the most sense for you.
By Maurie Backman - To view the original article click here