Mortgage Crisis and Buying a Home
While there are multiple reasons for the current mortgage crisis, part of the responsibility lies with borrowers who bought homes and acquired mortgage financing they couldn’t really afford. The result has been many people hurting themselves, and in a classic ripple effect, harming the entire global economy.
The good news is that current homebuyers have the ability to strengthen our long-term economy and protect themselves by following sound financial principles. Foremost among these is living within one’s means. This pertains to items small and big, from the food a person purchases to the home a couple buys.
Heeding the advice listed below can assist you in living withing your means, having greater peace of mind, avoiding foreclosure, and creating greater stability in the economy.
1. Wait until you have a larger down payment. Although loans are available with down payments as low as 3%, the traditional guideline of a 20% down payment is still smart. A higher down payment lowers the amount of debt you’ll carry. It can also mean a lower monthly payment, and correspondingly, less financial strain and stress. It’s true that saving for a down payment to buy a home takes time, but it can bring great rewards.
2. Retain sufficient savings. It’s also important have the equivalent of a few months of mortgage payments readily available in a savings account in case of job loss or other emergency. In fact, most loans have a reserves requirement. Having three to six months worth of payments in a bank account can bring peace of mind and help you avoid foreclosure or dings on your credit should something happen to your source of income or if unexpected expenses arise.
3. Take into account the extra costs of buying a home. A mortgage isn’t the only cost when you purchase a house. Besides possible HOA fees, property tax, property insurance and possibly flood insurance, you’ll also have the costs of maintaining, improving, and furnishing your home. How much will the new bedroom and kitchen sets costs? How about the lawn mower for your new yard? Can you afford the additional costs of home ownership along with your mortgage?
4. Consider all your debts. It’s important to add all your current debts (credit card debt, auto loans, payment plans) to the amount of your proposed mortgage loan. Will paying off debt take up more than half your income? After you buy your home, home much money will be availabe for savings, investments and just everyday living?
You may have to exercise some delayed gratification and discipline in order to follow the advice above, but doing so can mean greater enjoyment of the house you buy and play a role in preventing a future mortgage crisis.
