Buying a home is a huge decision, and with so much to consider — location, size, down payment, interest rates, and more — it can get overwhelming quickly. Luckily, there are steps you can take to break down the process and figure out what mortgage and price range are right for your financial situation. Here are five things to think about before taking out a mortgage:
1. What is your budget?
When you think about your budget, it can be helpful to consider both the price of the home and what your monthly payments will be. A way to roughly figure out what home price you can afford is to calculate what monthly payment you can comfortably afford and work backwards to determine what seems reasonable. The down payment you’ve saved will likely factor in as well. It can also help to get pre-approved for a mortgage: the lender will approve you up to a certain amount, which can give you a rough price ceiling.
When assessing your monthly budget, consider all your monthly expenses and income. This will help you to determine how much money you can comfortably afford to spend on mortgage payments each month.
2. What is the interest rate?
Mortgage interest rates can vary from one lender to the next. They also depend on current market rates and can change over time. While factors like your credit history, down payment, and loan term will determine your rate, it’s still important to shop around and compare rates before deciding on a lender. Additionally, the interest rate will affect how much money you end up paying for your home over the life of the loan. A higher interest rate means you’ll pay more in interest, while a lower interest rate means you’ll pay less.
3. What loan term do you want?
The term of a mortgage is the length of time you have to repay the loan. Mortgage terms typically range from 10 years to 30 years. The shorter the term, the higher your monthly payments will be. However, you’ll usually pay less interest over the life of the loan with a shorter term. A longer mortgage term could mean lower monthly payments, but you may ultimately pay more in interest over the life of the loan.
4. Don’t forget about closing costs.
When buying a house, there are many additional costs to consider beyond the home’s purchase price. Closing costs can include attorney fees, loan origination fees, appraisal fees, inspection fees, and more; they can add up to thousands of dollars. Be sure to factor these additional costs into your budget when considering what home price you can afford.
5. Consider payment protection
Private Mortgage Insurance, or PMI, is a type of insurance that helps protect lenders if a borrower defaults on their mortgage loan. Lenders typically require borrowers to carry PMI if they borrow more than 80% of the home’s purchase price (make less than a 20% down payment).
While mortgage insurance protects the lender, buyers may want to consider other ways to protect their investment. After all, a home is the largest purchase most people make in their lifetimes. It can be a good idea to take out a life insurance policy. Life insurance could leave your family with a death benefit that could help pay off your mortgage, even if you’re no longer around.
Deciding on a mortgage
When you’re thinking about buying a home, it’s essential to weigh all your options and make a decision that’s best for you. There are many things to consider when taking out a mortgage loan, but with careful planning, you can find a loan that fits your budget and lifestyle. Be sure to ask questions and shop around for the best interest rates before deciding.