Managing your mortgage

Why do 44% of homeowners regret buying their house? The first thoughts that come to mind might be: layout issues, outgrowing the number of bedrooms/bathrooms, or location. What about planning for one monthly payment only to be surprised when it might almost double with unexpected expenses and fees? When deciding if you are ready to buy a house or rent there are some things you need to consider. How long will you own the house? Will you be living there or is this an investment property? Could this be an investment property after you move out? If it is an investment property, are you buying it because you like the kitchen or because it will offer the highest return on investment?

Due to the transaction fees on both the buying and selling side of a house, there is a minimum time you will need to own the house to break even. These transaction fees can range from 3-6% of the total purchase price of the house. Along with all of the other expenses to budget for yearly, you can expect to reach your break-even point between 5-7 years after purchase compared to renting. This is just an estimate! You will need to do your due diligence for your situation for a more accurate number! Owning the home for less time than your break-even point means you will lose money on the purchase and would have been better off renting. The added benefits of renting are the freedom to leave the rental without finding a buyer and the convenience of passing maintenance/repairs along to the owner.

Part of the house shopping experience is determining how much money you plan to apply toward your down payment. A larger down payment can improve your chances of your mortgage application being approved, better interest rates, and lower monthly payments. In most cases (and depending on your credit score), a minimum down payment for a mortgage is ~3%. However, when putting less than 20% down your lender will likely require you to carry mortgage insurance. Putting less money down is seen as a higher risk for the lender and mortgage insurance protects the lender in case you stop making payments. This insurance can cost between $30-$70/month per $100,000 borrowed.

Twenty percent is a pretty lofty goal when the median house price in January 2021 is $346,000 which would mean a down payment of $69,200. The average down payment for first-time homebuyers is closer to 6% according to The National Association of Realtors. If you are willing to give up some of the benefits of a 20% down payment, you can get away with draining less of your savings upfront. Saving up for your down payment is a very important time! This new financial goal is a great time to evaluate your budget to find opportunities to save more within your current income and avoid buying a more expensive house that will put a strain on your finances.

There are some loan types that can change how much you should put down for a house. A Federal Housing Administration (FHA) loan allows for a down payment as low as 3.5%. Mortgage insurance will still be required if the down payment is less than 10%. To qualify you will need a good credit score (500 with a larger down payment or 620 for 3.5% down). You will also need to not have a high debt to income ratio. If you have debt payment obligations that are more than 50% of your income, you will not qualify. The property must also meet certain requirements and the total loan amount is limited depending on the state you are buying in.

Veterans have the option to apply for a VA loan backed by the U.S. Department of Veterans Affairs. No down payment or mortgage insurance is required with a VA loan while still receiving competitive interest rates! You can even reduce the closing costs on your home purchase. However, these loans are only for properties you will be living in and cannot be applied to investment properties. To qualify you must be either be on active duty or a surviving spouse of someone who was lost during active duty. While VA loans do not have a minimum credit requirement, the lender can impose certain standards that you must meet.

A mortgage is a very long-term commitment for either 15 or 30 years. The 15-year mortgage will provide better interest rates, however, there are some other considerations when taking out a loan for such a long time. When taking out a loan on the scale of decades, the interest rates are very low and can come very close to the rate of US dollar inflation (1-3% in the 2010s according to Statista). With such low-interest rates, you very well could do better signing for a 30-year mortgage and invest the money your would be paying toward the higher monthly payments of a 15-year mortgage. The lower monthly payment of a 30-year mortgage also give you the freedom to pay more toward the principal or pay the minimum payment if you run into unexpected financial hardship

Interest rates on mortgages are near historic lows. Since there is not much more room to the downside on interest rates, locking in a fixed-rate loan instead of a variable interest rate has some advantages. Your payments with a fixed interest rate will be predictable over the entire length of the mortgage, allowing you to budget accordingly. The option to refinance is available if interest rates do dip further at some point during your repayment.

Why would you want to refinance your home? You could potentially get a better interest rate either due to national interest rates dropping since you took out your initial loan or an improvement to your credit score. You might also want to switch to a fixed rate or a variable interest rate. You can also borrow money against the equity (what your home is currently valued at minus what you currently owe) you have built-in your home. This equity can be applied to renovations or even the purchase of another property.