While there are multiple causes for the current mortgage crisis, part of the responsibility lies with borrowers who purchased homes and took out mortgages they couldn’t really afford. Many people who did this have ended up hurting themselves, and in a classic ripple effect, have negatively impacted the entire global economy.
Thankfully, people who are buying a home now have the opportunity to strengthen our long-term economy and protect themselves by considering and acting on good financial advice. One of these key pieces of advice is to live within one’s means. This is true whether buying a home or choosing what to eat for dinner.
Heeding the advice listed below can assist you in living withing your means, having greater peace of mind, avoiding foreclosure, and creating greater stability in the economy.
1. Save for a large down payment. It’s still smart to follow the traditional guideline of a 20% down payment even though loans are available with down payments as low as 3%. Paying more for your home upfront lowers the amount of debt you’ll carry. It can also mean a smaller monthly payment, and correspondingly, less financial strain and stress. While saving for a down payment to buy a home means you may have to wait a year or two, it can bring great rewards.
3. Save enough reserves. Mortgage payments are major expenses and it is important to have enough in savings to cover your payments should you become unemployed or have unexpected emergencies. As a matter of fact, most loans require you to have a certain amount of savings for this very purpose. By keeping at least three to six months of mortgage payments in a savings account you can keep your credit good and avoid foreclosure if a significant financial challenge arises.
3. Look at all the costs. In contemplating how much you can afford as a homebuyer, you need to consider the expense of furnishing, improving, and maintaining your home. How much will the couch, table, chairs, beds, etc. cost? Can you afford both the house you’re looking at and everything that will go into the home?
4. Consider all your debts. It’s important to add all your current debts (credit card debt, auto loans, payment plans) to the amount of your proposed mortgage loan. Will paying off debt take up more than half your income? After you buy your home, home much money will be availabe for savings, investments and just everyday living?
Acting on the points above means you may have to exercise some delayed gratification and discipline, but doing so will help you enjoy the house you buy and play a role in preventing a future mortgage crisis.