Mortgage Debt
How can I determine how much I can afford to spend on a mortgage?
When mortgage lenders make loans, they use a formula called the 2836 formula. They look at the amount of your mortgage payment plus additional costs, like the taxes or insurance that you have to pay, and they like that to be no more than 28 percent of your total gross pay per month. They like your total debt repayment to be no more than 36 percent of your total gross income per month. That's a formula that you can use, but of course, as always, it's about how much you feel comfortable with. Don't take on more debt than you can afford, or that you're going to feel comfortable with.
Should I get a "fixed rate" or "variable rate" mortgage?
I think most people would prefer to have a fixed-rate mortgage because that means you know exactly what the interest rate is on the mortgage. Your payments are going to be the same for the entire term of the loan; nothing is going to be changing. There's really a lot of comfort in knowing that. With a variable rate loan, the interest rate is going to change periodically, it may change annually, it many change every of couple of years. It is true that there is very often a cap on how much it can change. If you're getting a loan like this you should know what that cap is. If there is a possibility that that rate is going to go up in the future, you want to make sure that you're going to be able to pay a higher payment if the worst happens. That's something that makes people a little bit nervous and that's why if you can get a fixed-rate loan at a relatively low interest rate, most people are going to want to go with that.
How should I choose a mortgage?
One way of choosing a mortgage is by calculating how much you think you can fit into your budget comfortably. You don't necessarily want to go for the most money that you can qualify for. So, choice number one is to buy what you can fit in your budget, and choice number two is between a fixed rate and variable rate mortgage, which kind of depends on some factors like how long you are going to be in the house. For example if you know that you are going to be there for couple of years and then transfer to another job, a very low rate mortgage might make sense because it is very possible that you would be moving from the house before the rate even adjusts. So in this situation if you can get a lower rate on a variable rate loan than you can on a fixed rate loan then a variable rate mortgage might make more sense. If, however, you know that you may be there for next seven, eight, or ten years you might want go with the fixed rate loan, and you would want to shop around for the best you could find on that.
How can I get a great deal on a mortgage?
To get the best deal on a mortgage, start about six months ahead of time before you want to apply. Check your credit report, check your credit score, and make sure it's a good one, because the better your score, the lower the rate you're going to qualify for. So if you want to spiff up that credit rate a bit, this is the time to do it. Make sure you're paying your bills on time; pay off some of your outstanding debt, that sort of thing. Another thing to do if your credit isn't so great is to look into a loan that is guaranteed by the Federal Housing Administration. You might be able to get a better deal than just going out into the market on your own. Another thing you can do is to make a down payment, to put at least twenty percent down, because the more you put into the house, the more favourably a lender is going to look upon you. It really is a good thing, as a lot of people have gotten into trouble with zero down payment mortgages. If you put ten percent or twenty percent down, you're going to get a more favourable loan rate.
When should I consider refinancing?
You should consider refinancing your mortgage if you can qualify for a lower rate. Maybe you took out a fixed rate loan at a certain percentage and rates have fallen in the interim. That way you can get a better deal and you can lower your monthly payments, which is what you are aiming for when refinancing. Perhaps you want to do some remodeling on your house - you might consider taking out a refinancing loan. I would not do this frivolously, it really has to be something that's in your best interest, which usually means it's a lower interest rate or you're doing something to improve the value of your property.
