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7 Things to Think About Before You Take Out a Mortgage

Monday, May 17, 2021

For most people, a home is the biggest purchase they will make in their lifetime. The median home price in the US is over $330,000, which is a significant increase from just one year ago. 

This means that most people need to take out a mortgage to purchase a home, as even if you can save up a sizable down payment, most people would take decades to save up that much money to purchase a home. Before you jump in, however, there are some things you should consider before you start the mortgage loan process. 

1. Current Mortgage Rates

Mortgage rates are constantly changing. They change on a daily basis (and sometimes multiple times a day). You should be aware of the overall mortgage rates when you are considering buying, as your mortgage rate will greatly impact how much you pay each month. For example, in 2020, the Federal Reserve greatly reduced the interest rate, which resulted in the lowest mortgage rates in decades. 

That rate has been growing, however, and is back up in 2021. Pay attention to these rates or find a mortgage broker who can advise you on the best time to buy and when to lock in your mortgage rate. 

2. Cost of Owning vs. Renting

You may hear from many people that renting means you are paying someone else's mortgage and that you are throwing away money each month. While the first part of that statement is true, the second part is not. While you are paying rent to someone else who holds the mortgage, you are not throwing away money, as you are paying for a place to live,

No, you aren't building any equity, but there are also non-financial benefits of renting, such as the ability to pick up and move easily. There are many benefits of owning a home as well, such as the aforementioned equity, tax breaks, and the fact that in most parts of the country, a mortgage payment is less than rent.

You have to consider all of these factors, as well as the general costs of home ownership, such as upkeep and repairs when deciding if renting or buying is best for you. 

3. Down Payment Amount

It used to be that you could not even consider taking on a mortgage without a 20% down payment. This is generally not the case anymore. There are many different home buying programs out there that require low (or even no) down payments, such as FHA loans, VA loans, and first-time homebuyer programs. 

Of course, if you can put down 20%, that's even better, as it is that much less you will have to pay over the life of your loan. Consider what you can put down and what types of mortgage loan programs are available to you when you are weighing the pros and cons of buying a home.

4. Your Budget

While you might be lucky to have a monthly rental amount that includes things like utilities, your mortgage payment will not. In addition to the mortgage, you will also have to pay your interest, taxes, and insurance. Taxes and insurance depend on where you live and in some cases, your mortgage company will require you to escrow them, meaning you pay towards them each month, and then your mortgage company makes the payments for them when they come due.

Don't forget about taxes and insurance when calculating your monthly payment, as they could add several hundred dollars (or more) to your monthly payment amount.

5. Your Needs and Wants 

What you need in a house may be different than what you want in a house. Needs are things like location, size, and certain features. You may need a home with a first-floor master bedroom or a master bedroom close to the other rooms, if you have children or others to care for. 

You might need a fenced-in yard for your pets or kids, but you might want a yard with a pool. Unless you have an unlimited budget, you will often have to compromise and strike a balance between your needs and wants. While you might want an updated kitchen with top-of-the-line appliances, you don't really need that (unless you're a professional chef).  

6. Your Long Term Plans

When choosing a place to live, especially if you are going to purchase a home, you should think of your long-term plans. How long do you plan to be in the house? Experts typically say that you need to stay about 5 years for it to be worth it. 

If you plan to stay longer, think about how different your life might look in the future. While you might not need extra bedrooms now, if you plan to have kids in the next few years, a bigger house might be the better option for you. 

You should also consider the layout. If you purchase a home with the master bedroom on the first floor but the rest of the bedrooms are on the second floor, that could be a problem if you have young children or plan on having them in the future.

7. The Overall Housing Market

The housing market ebbs and flows and whether it's a buyers' or sellers' market depends on a lot of things. In a sellers' market, you might expect to be one of many bids, pay full price (or even higher) for a home, and have to act very fast in looking at homes and putting in offers. 

If it's a buyers' market, you typically have more room to negotiate price, don't have to move as quickly, and may be the only offer on a home, meaning you aren't competing with other offers. You need to take the pulse on the current market conditions when making the decision to purchase a home and decide if it will work for you. 

Are You Ready to Take Out a Mortgage?

If you think you're ready to take out a mortgage, use our guide to think through the pros and cons of getting a home loan. If you're ready to take on a mortgage, find a reliable mortgage lender who can walk you through the process. 

When you find the right home and you're ready to close, contact Heartland Abstract for all of your title insurance needs.

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