Financing Unpacked

Written by Posted On Wednesday, 21 June 2017 12:28

Financing can be an intimidating prospect, and if you aren’t responsible about it, it can be disastrous. For most people, financing is a critical aspect of the homeownership experience. While most people only think of a home loan as a part of the buying process, the reality is that you can use financing strategically both before and after you actually purchase your home. With a closer look at how responsible financing can help you to achieve your real estate goals, you may be ready to start comparing loan terms today.

When You Are Saving for a New Home Purchase

In most cases, it’s best to place a down payment of at least 10 percent on your home, and often as much as 20 percent. There can also be thousands of dollars in closing costs, in addition to the purchase price of the home. Before you think about purchasing a home, it’s best to have a reasonable amount of money saved up so that you don’t unwittingly put yourself into crippling debt for years to come. Besides that, you need to position your finances and credit rating so that you qualify for a new home loan in the first place. For example, you can improve your credit score by paying off your credit card balances. A debt consolidation loan may be an option to help you gather all of your loans into a single manageable payment. In the best circumstances, you can transfer high interest rate debt to a low interest rate consolidation loan with a fixed term. This may yield lower monthly payments while reducing your debt balance at the same time. It can also help you to increase your credit rating over time.

When You Purchase Your Home

After you have saved up money for a down payment, ensured that your credit rating is acceptable, and paid down unsecured debts, you may be ready to apply for your new home loan. Many first-time home buyers will make the mistake of buying more house than they can actually afford. They believe that if a lender tells them a loan is affordable for their budget, then they’ll have nothing to worry about. However, you should always review your budget to determine how much you can really afford as the first step in the process. You can use an online mortgage payment calculator to estimate your monthly loan payments based on different loan sizes, interest rates, and terms. You may also explore the market through online listings to see if you can afford the ideal size and quality of home that you desire. If not, you may need to continue saving for a larger down payment for a few more years or adjusting your expectations and buying a smaller or simpler house.

When You Want to Make Repairs or Upgrades

After you have purchased your home, you will accrue equity in the property, if the market behaves. Your initial down payment forms the basis for your equity, and that equity grows with each mortgage payment you make. Your home can gain additional equity if your property value increases over time. Many homeowners are pleasantly surprised to learn that they are sitting on a healthy nest egg of capital through their home. You may decide that you want to use some of this equity as a resource for financing a pool or for making other repairs and upgrades to the home. Keep in mind that you typically can borrow only up to 75 or 80 percent of the property’s current value when you refinance a home or take out a home equity loan.

Knowing How Much You Can Afford to Borrow

Regardless of which type of loan you are currently thinking about applying for, you need to know how high of a loan you can realistically afford to borrow. Prepare a budget, or update your existing one, to take into account the new loan payment, housing-related expenses, and more. Ensure that you are still leaving ample room in your budget for savings on a regular basis. The best loan to get will not cramp your lifestyle or prevent you from meeting future financial goals. Revisit this budget each month and make adjustments as necessary to make sure you have the money to afford everything. It’s easy to slip into the trap of living beyond your means, only to find that you’re now in so much debt that you can no longer afford your home.

Financing can be used strategically throughout various stages of homeownership to help you achieve different goals, but be careful. It is easy to get in over your head with different types of debt. For each loan that you apply for, always review an updated budget to ensure that the payment is truly affordable. This will help you to stay on track with your finances while also achieving your real estate goals.

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Carol Evenson

Carol is a home renovation specialist with a background in organization and sales. She assists realtors with business management and growth.

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