Buying a home can be an excellent investment. The money you spend every month on rent is money you will never see again. On the other hand, making monthly payments on a mortgage puts equity in your home and you will recover it when you sell your home. The key to getting the most value out of a mortgage investment is by allocating the greatest amount of your payment towards the principle. You can achieve this by finding low interest home loans and avoiding extra fees that come out of your mortgage payment. Here are a few tips for using your mortgage to make a good investment:
- Work on your credit score. Mortgage lenders offer interest rates within tiers. The higher your credit score, the higher tier you’ll land in and you’ll be eligible for lower rates. In the months before you apply for a home loan, try to pay off debt, clear any defaults you might have, and fix any errors that your credit report might reflect.
- Pay down debt. Your debt-to-income ratio is a big factor in getting approved for a mortgage loan at a low interest rate. If your monthly debt payments exceeds 36% of your income, lenders will view you as a high-risk loan. If you get approved at all, it will be at a higher interest rate. Before you apply for a loan, work on getting rid of credit card debt.
- Save up for a down payment. Some lenders will extend a home loan to you with a down payment as low as 3.5% of the total purchase, but you might be required to pay for mortgage insurance that just protects the bank in case you default on your loan. Mortgage insurance doesn’t provide any benefit to you, but costs about .62% of the value of your loan. If your loan is $250,000, you’ll have to spend an extra $1,550 every year, or $129 each month, on mortgage insurance that doesn’t reduce your principle or provide any equity in your home. So while you are making payments to get out of debt before you apply for a mortgage, make sure to put some money in savings to go towards your down payment as well.
- Compare mortgages rates. There are a variety of home mortgage lenders and each one uses different criteria to determine their interest rates for home loans. Sometimes you’ll find the best rate with a credit union because they offer not-for-profit financial services. The bank that you already use might offer incentives to their own members for financing a mortgage. Or maybe a mortgage company will tailor a mortgage that specifically meets your needs. It is a good idea to compare mortgages from at least three lenders before choosing one. Keep in mind that if your credit report receives multiple inquiries, it might temporarily take a hit. You can avoid this by contacting all of the institutions you wish to compare mortgages within a span of 14 days. Inquiries of the same nature that occur within a 14 day window only count as one hit.
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