Remember our rent vs. buy debate discussed in previous episodes of The Money-Guy Show? While that episode covered the arguments for and against both renting and buying, it didn’t take a deep dive into the actual process of financing a home. Today, Brian and Bo look at the ins and outs of applying for a mortgage and cover what you need to know before you borrow money.
Mortgage financing can be tricky (especially if it’s your first time going through the process), but Brian and Bo share 10 things to know so you can come to the table prepared.
Know What You Need Ahead of Time
It’s important to take inventory of what your house needs are before applying for a mortgage. Otherwise, someone else will fill in that blank for you, and it’s easy to fall for possible traps when you’re not informed.
Mortgage brokers and realtors might suggest you can afford a house that’s around 35% of your salary, for example, (while Brian and Bo suggest keeping it at 28% or less), and they may try and convince you to purchase more house than you actually need.
Vision Plan the Future
The Money Guys return to vision planning, and for good reason. You need to sit down and figure out what you want your future to look like. How long are you planning on staying in this house for? Will the desire to have a family mean you need more space in the future?
What stage of life are you in right now? If you’re close to retirement, you might want to consider a house you can pay off in 15 years so you enter retirement debt-free. If you’re younger, you might be okay with a 30 year mortgage as you’ll have time to pay it off.
Understand Your Down Payment
A down payment of 20% is optimal to avoid private mortgage insurance, of course, and the more you put down the lower your monthly payments will be over the life of your loan. But the guys say that if you have to get creative with your financing, it’s okay to have a lower down payment. PMI, while not an ideal expense, is at least deductible. And if a lower down payment means more cash in your pocket which you can then invest in other ways, that might make more sense for your situation.
What’s the Lock Period?
Underwriting can be a lengthy process when applying for mortgage financing. As such, you want to make sure your rate is locked in longer than you’ll be in underwriting for. Brian recommends looking into a 45 day lock for refinancing, and at least a 60 day lock for purchasing.
What About Points?
Brian briefly touches upon mortgage points, and suggests doing a break-even analysis to judge whether or not paying is worth it. Figure out what you’ll be saving per month, and divide that by what you’d be paying for the points. Then see how long it will take you to recoup the cost.
Plan for Contingencies
You don’t want to end up house-rich and life-poor. You must plan for contingencies (which should be part of your overall vision planning process). Leave yourself with enough breathing room so you can handle any curveballs life throws at you.
Overall, make sure you shop around and get the best rates. Know that most mortgage brokers and realtors aren’t going to be looking out for your best interests — that’s your responsibility. Get information from unbiased third parties, and save as much as you can.
Want to pick up the full 10 things you need to know before applying for a mortgage? Make sure you tune in to this episode of The Money Guy Show!