What young adults should know about mortgages before getting one
Buying a home is the great American dream. Ownership of a property is considered a status symbol. The government encourages its citizens to buy homes by making available finance at a very low rate of interest. Most men and women take a step in this direction as soon as they are settled in their careers. Surprisingly, these young adults have little in-depth knowledge of mortgages. All they know is that they can get finance for the purchase of their dream home. In this article, we will talk about important things related to mortgages that young adults should know before getting one.
1. Are You Prepared For a Mortgage?
Just because financing is available through lenders doesn’t mean you should rush to purchase a home. Obtaining a mortgage means making a commitment to the lender for a long period. Are you mentally and financially ready to bear this burden? If you have dreams and aspirations in your career, it is better to live in rented premises as you can go and live anywhere you find opportunities. You need a stable job and steady income to pay the EMIs to the lender comfortably. A mortgage is available to you even a few years down the line when you are fully ready for a home. Take a step in this direction when you have made up your mind for ownership.
2. Start Saving For The Down Payment
The government is indeed helping first-time homebuyers by making available money for the purchase of their dream homes. But these lenders want to ensure the stakes of borrowers in their homes by asking for a down payment. Do you know you are required to pay nearly 20% of the total value of the property upfront to the lender to make him comfortable? It means that you should have at least $80k in your bank account if you plan to buy a home worth $4,00,000. You need to start saving from today if you have a strong desire to move into your own home from your rented home.
You need money not just for the down payment but also to pay for many other closing costs. Keep in mind that your lender will add the cost of private mortgage insurance to your EMI if you are paying a down payment less than 20% of the total value of the property.
3. Hire Services of a Mortgage Broker
Buying a home is not easy especially if you are searching for your home in a seller’s market. You need to be prepared with your finances to have an edge over other buyers. It is not just a question of pre-qualification or pre-approval from a lender as you need the right mortgage at the right rate of interest. Remember that it is your hard-earned money that you will be paying to the lender in the form of EMI for a long time to come. By hiring the services of a mortgage broker, you can forget your worries about the best mortgage deal, Altrua Financial, with its wide network of lenders, matches your requirements with the mortgage products available from various lenders. Having a reliable and experienced mortgage broker by your side takes care of the mortgage worries you have in your mind.
4. Improve Your Credit if Low
Even the most experienced mortgage broker cannot secure the best mortgage deal for you if your credit is poor. As a young adult, you can be forgiven for running balances in your credit cards and for missing the deadlines of utility bills. But these habits hurt your credit score and lower your chances of securing a very low mortgage rate. Pull out a copy of your latest credit report to know your credit score.
Do not apply for a mortgage if your score is less than 700 or if the report has several red marks. It is better to wait till the time you can improve your credit score. You can expect a lower mortgage rate if you improve your credit score.
5. Keep Your Debt to Income Ratio Low
Young adults are known for their fiscal imprudence. They will collect several credit cards as status symbols and also have balances running in them. They also purchase phones and other gadgets in installments. What they don’t realize is that their capacity for repayment gets decreased because of these debts. Ideally, lenders want the debt to income ratio of not more than 30%.
If you are already paying a sizeable portion of your monthly income on various debts, you can very well forget the chances of securing a low mortgage rate. Pay off as many debts as possible to bring your debt to income ratio within manageable limits. Lenders add your debts to their EMI to calculate this ratio.
6. Fixed vs. Variable and 15-year vs. 30-year Mortgage
As a young adult, you are not expected to know the intricacies of different kinds of mortgages. However, as it is your hard-earned money at stake, it is always advisable to know as much as you can.
ARM or Variable Rate of Interest
Borrowers have the option of choosing an adjustable rate of interest which varies according to the market rates. You pay a low mortgage rate for an initial period of several months after which the lender charges the rate based upon the market rate.
Fixed-Rate
As the name suggests, this kind of mortgage remains the same throughout the loan period, and gives peace of mind as the borrower knows his EMI.
15-Year vs. 30-Year
You have the comfort of a low EMI when you opt for a 30-year mortgage. On the other hand, you enjoy a lower mortgage rate with a 15-year mortgage.
For a young adult, buying a home gives a very proud feeling of ownership. Financing is the only way to fulfill this dream. If you are financially prepared and enjoy good credit, it becomes easy to obtain a low mortgage rate from the lender. Saving early and observing fiscal prudence is necessary to realize your dreams of ownership of a home.
