Home ownership is a big part of the American dream. Owning a home means you (and not your landlord) get to benefit from the rise in property values over time.
It also means you get to deduct your interest payment from the taxes you owe each year. It also means equity you can borrow against and stability in knowing what you will be paying each month. The benefits seem to go on and on.
Before making that leap and buying your dream home, there are a few things you should know.
1. Make sure your credit is as good as you can make it.
The difference between the interest rate you get with excellent credit compared to what you will get with only good credit can mean thousands of dollars each year.
It can add up to hundreds of thousands over the life of your mortgage. Review your credit report for any errors and dispute them.
Also, work to bring down your debt-to-available-credit ratio. Finally, do not apply for any new credit within six months of when you plan to apply for a mortgage loan.
2. Prequalification versus preapproval
While it may seem a matter of semantics, getting preapproved can save you a lot of disappointment and heartache when you place an offer on a home.
That is because preapproval from a lender is based on your actual income, credit history and debt.
3. Know what you can afford.
This means not exceeding the general rule of 30 percent of your monthly take-home pay as a total mortgage payment.
Calculated another way, it means two and a half times your annual salary as a total mortgage value.
“Knowing these amounts will
allow you to be more practical.”
4. Points versus rate
When it comes to deciding on the mortgage you want, knowing the terms can save you a bundle.
Paying additional points can get you a lower interest rate, but is it worth it? Points are paid at closing and are upfront costs.
If you plan to stay in your home for five years or more, it may be worth paying the points for a lower interest rate, which will save you more over the entire life of the mortgage loan.
5. Consider resale value.
You may plan to stay in your home for a long time, but taking resale value into account from the beginning can ensure you get the most for your home if and when you do decide to sell.
Buying in a good school district and in a good neighborhood means your home will appeal to more buyers down the road.
6. Consider all of the costs of home ownership.
The amount you pay toward your mortgage loan is really only the beginning when it comes to the cost of home ownership.
There are also property taxes, mortgage insurance, association dues and municipal fees that may apply. Also, there are always repair costs to consider.
Home ownership is a long-term commitment no matter how you look at it. There are many things to keep in mind. The more you educate yourself, the better off you will be.
By taking your time and doing everything possible to ensure you are making the right decision at a time that is right for you, you are likely to have a more secure and financially positive experience for you and your family.
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