A Home of One's Own
One of the best reasons to borrow money is to purchase a home. Houses are extremely expensive, but the benefits of owning a home are great. In the first quarter of 2006, the median sales price for a single family home was $217,900 (National Association of REALTOR S, Metropolitan areas). Do you have $217,900 sitting around for a home purchase? Depending on where you live, $217,900 might buy a castle, or it might get you a small condo.
Help from Uncle Sam
Homeownership is a national priority because of the benefits to society. In addition to helping individuals build equity that they can use later on, communities grow and improve thanks to homeownership. If you own a house, you have a vested interest in keeping it nice, and you'll be more engaged in the surrounding community. You'll want it to be a safe community with commerce and culture. This helps the economy and your neighbors (who are also helping you), and you stand to make a few dollars over the years.
How does a tax deduction help me save money?
A tax deduction allows you to reduce the amount of income that you have to pay taxes on. If you get a tax deduction, you subtract the deduction from the income you report to the IRS. You take your tax deductions when you file your taxes each year.
To make it possible for more people to own their own homes, the United States government has a few programs. The Department of Housing and Urban Development (HUD) is just one resource that helps increase homeownership. In addition, government agencies like Freddie Mac and Fannie Mae help add liquidity, and some studies suggest that these agencies result in lower borrowing costs for homeowners. Next, you get a tax break for owning a home. The interest you pay on your mortgage, as well as on some home-equity loans, may be tax deductible. In essence, the government helps to subsidize your interest costs, especially in the early years of a loan.
Bridging the Gap
In order to enjoy the benefits listed above, you pretty much have to borrow. Unless you are born with a huge trust fund that provides for all of your needs, a mortgage may be the only way you'll ever own a home. If it makes you feel any better, mortgages are actually considered good debt. They are a type of installment loan, so they are viewed favorably by lenders. While you should have a mix of different loan types for optimal credit, installment loans, and especially mortgage loans, are good to have. Because they require so much structure (a minimum dollar amount must be paid every period), they show lenders that you are responsible and dependable.
Why do some people
They had not built credit, or they had bad credit
If they had bad credit, they were rejected or offered very expensive loans
If you have to borrow, at least do a good job of it. Elsewhere in this book you can read about special topics for first-time homebuyers. In this section, you'll find some very basic information that you'll need when you go shopping for a mortgage loan.
Getting a Good Loan
Most experts suggest that you get preapproved before you go house-hunting. By getting preapproved, you are in a position to pull the trigger and actually buy a place if you find the one you want. How do you get preapproved? Ask a lender. They will gladly review your background and find an amount. Keep in mind that you should not borrow too much — when you get preapproved you might see some big numbers. You do not need to borrow every penny that they will lend you. Think of their numbers as a maximum.
How do lenders decide how much money to offer you? They use a variety of methods, but one important factor is your debt-to-income ratio. The debt-to-income ratio looks at how much income you have per month, and how much your monthly debt payments are. Lenders want to make sure that your income will support the payments you are signing up for. To do this, they might require a 28/36 ratio. The first number, 28 percent, means that they want no more than 28 percent of your gross income per month to go toward your housing payments. Housing costs are typically defined as principal, interest, taxes, and insurance (PITI). The second number, 36 percent, tells you that they only allow up to 36 percent of your gross income to go toward all debt payments — PITI, as well as your other debt payments like credit cards and car payments.
Adjustable or Fixed?
When you borrow money, you have many choices to make. One of them is whether to use a fixed-rate mortgage or an adjustable-rate mortgage. The choice you make can save or cost you thousands.
A fixed-rate mortgage has a fixed percentage rate throughout the life of the loan. An adjustable rate has a rate that changes. Which is better? It depends on a variety of factors. With a fixed-rate mortgage, you know what your payment will be every month and you can budget for it, and you know that your payment will never change. You can keep making the same payment for fifteen years, thirty years, or until you sell the house.
There are only a few factors that determine how much house you can buy. The interest rate, the length of the loan (in years), and the monthly payment are enough to figure a loan amount. Once lenders figure out the maximum payment, they can determine a maximum loan amount. The interest rate is influenced by your credit.
However, it might be a bad thing that your mortgage payment never changes. If you got into your mortgage when interest rates were relatively high, you'll be paying more interest over the life of your loan. In addition, your monthly payments may be greater than they would be if you had a lower interest rate. With an adjustable-rate mortgage, your interest rate changes with interest rates in general. When they go up, the mortgage's rate goes up. When they go down, the rate follows.
What about Points?
A final consideration on wise borrowing for your home relates to points. Should you pay points? As with most things in life, the answer is frustrating: it depends. Points (discount points, to be specific) are payments you make in order to lower the interest rate on your mortgage loan.
By paying a little bit more up-front, you can lower the rate and your monthly payments. A lower rate means that you'll spend less on total interest over time. So, having a good idea of how long you'll keep the house is essential to determining whether or not to pay points. In general, the longer you'll be in the house, the more likely it is that you should pay points. Yes, it might hurt a little more up-front, but it can save money over long periods of time. To figure out exactly how long, ask your lender. If you're mathematically inclined, you can even calculate the break-even point yourself.
