Understanding Mortgages: Step One Affordability
You have often heard people joking with the phrase ‘stick to your lane.’ And when it comes to any type of mortgage, you should think long and hard before committing to a certain property. As the purchaser, you need to work out a few things. Apart from the purchasing price, you also need to look at additional costs or overheads such as local city taxes, insurance, maintenance among others. A mortgage is typically secured against the house. This means that the mortgage lender has a lien; a right that entitles them to hold onto an asset, in this case, your house until a certain payment of debt is cleared. Therefore, if you are unable to keep up with your repayments of the mortgage, they will exercise that right. The mortgage lender can repossess your home (known as a foreclosure) and sell it. After all, they are in the business of financing and must get their money back.
Debt to Income Ratio: Step Two Improving your Debt-to-Income Ratio
Putting aside technical terms, the debt-to-income ratio is the percentage of your income that you spend on a periodical basis (be it monthly or quarterly) taking into account your other financial obligations. It looks like this your total income / your total monthly bills -your DTI ratio total up your car payments, credit card debt payments, and other bills you must pay on debts and obligations you have. These can also be things like student debts, outstanding loans, and so on. Take your gross income and divide that by your total monthly bills.
Don't include living expenses such as utility bills, food, and entertainment for more accurate results. IE: If you make $4,000 a month and you pay $3,200 a month in bills. Your DTI would be 80%.
Do not be shocked if this number is very high if this is the first time you have looked at it seriously. Most of us tend to live just within our means. That is why at the end of the money (from our pay) many of us still have a month left.
Here you can find a helpful online debt to income ratio calculator
Banks will not want to finance someone who is bound to default on their repayments. They will therefore critically analyze your finances. A reputable mortgage lender will request that you avail details about your income and expenditure. You will also be asked to provide information on your spouse and children if any. It might look intrusive but this is standard procedure. And in addition, financial institutions will hold your data securely and safely.
To improve your debt-to-income ratio, you should consider increasing your income. You should start thinking about getting a promotion at work or expanding your business. A side business could also come in handy. This goes hand in hand with reducing expenditure. One thing that significantly makes up your overheads is debts such as student loans and credit cards.
For many of us eliminating debts by paying off our smallest debts first allows us to feel a sense of success and progress and may help us tackle those debts faster. Note: Most financial advisors may encourage you to pay off higher interest debts first. From the standpoint of interest that makes sense. When I talk to people, I encourage them to feel successful about paying off debts by starting with smaller debts first like your credit cards and paying them off fast. This gives you the motivation to keep going and is critical to your long-term debt reduction success.
Another example is getting back in shape. Once you have let yourself get out of shape, you should not run into the gym and try and work out as you did a year ago. No, instead you start slow and give yourself some short-term achievable goals and set up rewards for yourself. With finances, people also get the best results when they experience success early on. So, if you have a small debt pay it off first then mentally celebrate. Honor your effort then keep working on it. When you eliminate things like eating out as much, or entertainment for just a few weeks most people will see a major financial improvement. The more debt you eliminate the more income you will have available to pay off other debts. Even just freeing up $100 a month will help move you in the right direction.
To show your commitment, you will be asked to make a deposit. Our advice is to save up and make a significant down payment (at least 20% is recommended). For most lenders, the bigger the down payment the lower your interest rate. This is known as a loan to value ratio calculated by comparing the size of the loan (value of house minus the deposit) to the price of the house. With a bigger deposit, lenders consider you less of a risk and are willing to give you a lower interest rate. Also, on your first home, you may not have perfect credit or even well-established credit history. So the more you can put down towards a down payment the better.
Understanding Mortgages: Step Four Types of Mortgages
There are a number of mortgage options to choose from. Choosing one that fits your goals and financial capability can help you manage your repayment plan better. One of the most common types of mortgages is an FHA loan. In this type, you pay off the interest and part of the principal amount (capital) every month. Most repayment mortgages have a term of 25/30 years and with dutiful periodic payments, your home will be free of any liens. You can also have 15-year loans as well. It is likely that for your first mortgage you may need the 30-year loan period to make the payment more affordable. When choosing a longer-term mortgage do not worry there are many options if you stay in the home longer than the average 7 years and want to pay down the debt faster. Some of those are handled by refinancing the home and the others can be done just by making bi-weekly payments, instead of monthly to your mortgage company. Contact your accountant for assistance with these and other options. Interest-only mortgages were quite common in the past. Payments made to the lender would only pay off the interest and not touch on the capital. As you can imagine, homeowners still had a huge debt to pay and lenders become worried about its feasibility. With the right mortgage advice, you can have a hybrid loan, which suits your financial capability. And this is where having a reputable and experienced mortgage lender comes in handy.
