Understanding what it takes to get a mortgage loan can seem so overwhelming. Personal financial planning decisions are some of the most important you will make in your life. Buying a home and obtaining the right mortgage loan are a big part of meeting these personal financial goals.
The down payment will be the most significant expense of obtaining a home loan. Down payments can vary from no down to all down, but 20 percent of the purchase price is what you’ll generally need to get the most favorable mortgage terms. Lenders generally want to see a down payment of between 10 and 20 percent of the total purchase price. The monthly mortgage payment is usually the single largest family budget item, which experts tell us should work out to around 25 percent of your gross pay, or 35 percent of your take-home pay. Your proposed monthly mortgage payment will be divided by your gross monthly income (before taxes). This figure should not go over about 28 percent.
Choosing a home and the right mortgage carefully are critical to a solid financial plan. Smart home ownership is about more than getting the most house for your money, but about meeting your personal financial goals. For many people, the increase over time on their home value may prove to be their largest single asset, it potentially will also be their largest monthly expense.
The general rule of thumb is that you can afford to buy a house that is equal to three times your annual household income. House poor does not mean you could not afford to buy the house. It means that the cost of ownership keeps you from other important things like vacations, saving for retirement, and paying for education. You will want to consider your other financial goals. Lenders have minimums and maximums, but don’t push those limits just because you can.
Fixed-rate mortgages allow for repayment of a debt in equal monthly mortgage payments over a specified period of time. Adjustable-rate mortgages, or ARMs, changes every year. ARMs come in many versions. For instance, a hybrid ARM features aspects of both adjustable and fixed rate mortgages. Hybrid mortgages are a type of ARM that offers a fixed rate for a predetermined period, and then an adjustable rate for the rest of the loan term.
For those buyers who need a rock-bottom payment for several years, the interest-only mortgage product, as its name implies, allows them the option of paying only the interest for the first few years of the loan. You can pay principal if you wish; interest-only is an option. Interest-only loans are structured like an adjustable-rate mortgage. An interest-only loan may be appropriate for homebuyers who believe their income will increase in the coming years — for instance, young families or a professional just starting out.
Life changes and so do interest rates and home values. Sometimes it makes sense to refinance a mortgage but the choices can be confusing. The questions of refinancing will keep coming up especially for those with adjustable-rate mortgages as interest rates begin to go up.
When deciding whether or not to refinance your mortgage loan, some key pieces of information are necessary in order to make a good decision. The interest rate, loan balance, and remaining number of months on the current loan are important to compare to the interest rate, number of months, and fees on the new loan.
Home ownership is not a retirement plan! Your home may be your biggest asset, but housing prices tend to go up and down with the market. Retirement planning includes mortgage planning and mortgage planning includes retirement planning.
The above is the opinion of the author and should not be relied upon as investment or legal advice or a forecast of the future. It is not a recommendation, offer, or solicitation to buy or sell any securities or any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes, and opinions are assumed to be true and accurate. Grand Canyon Wealth Management does not warrant the accuracy of any of these.
Michael J. Day CPA PFS™ is the founder of Grand Canyon Wealth Management, where he provides financial planning, estate planning, wealth management, and investment services.
For more information, or to schedule a complimentary consultation, visit grandcanyonwealthmanagement.com, call (480) 590-3590 or e-mail Michael.j.day@lpl.com. You may also follow him on Twitter @GrandCanyonWM. Securities and advisory services provided through LPL Financial, a registered investment advisor member FINRA/SIPC. Grand Canyon Wealth Management is not an affiliate company of LPL.