Buying a home is one of the most liberating experiences that a person can go through. Financially speaking, it is the biggest investment that most people will make in their lifetime. That said, if you incorrectly approach the subject of applying for a mortgage, you could end up putting yourself through a great deal of stress.
When shopping for a home loan, you should avoid shopping the way that you would for a box of diapers. The most for lowest cost is the wrong way to think about the subject, and the “best deal” isn’t always the best choice. Low interest rates and high principles are a good thing, but they aren’t everything.
Instead of looking for the biggest loan you can get your hands on, start by finding out how much you can reasonably spend on a mortgage each month. This is best determined through personal experience rather than budgeting. Start saving as much money as you can each month in order to find out what you can stand to save while still having enough money leftover for fun.
This serves two purposes. Not only will you discover how much you will be able to spend each month, you will also start saving up for the down payment on your home.
Only after you have a reasonable understanding of how much you can spend each month should you start speaking with lenders. From this point forward you can talk to them about what size loan you can get approved for based on the size of your monthly mortgage payments.
Rather than seeking approval for a loan at this point, the goal is simply to find out what size loan you are capable of qualifying for. You can use this information to determine how much to save up for your down payment. While 95% mortgages are tempting because the wait is much shorter, this isn’t always the best choice. In fact, in the long run it is actually quite a bit more expensive.
Most financial experts recommend saving up for a down payment of about 20% the value of the home. This way you can typically avoid the extra expense of lender‘s insurance, and you can live in a higher quality home for the same monthly mortgage payment. The total amount of interest that you pay will be lower because the period of the mortgage is shorter and the interest rates are typically lower.
Everybody’s situation is different, but this strategy allows you to gauge your ability to pay for a mortgage, and ensures that you are fully prepared by the time you start looking at homes.