Over the past decade, property builders have been cautious about constructing residential properties after the scar left by the Global Financial Crisis. That fact is viewed as the main culprit behind the housing shortage in the US.
In 2020, interest and mortgage rates dropped to near-zero levels to reinvigorate the economy after the pandemic recession. But policymakers didn’t expect the huge demand influx that would send home prices skyrocketing to new all-time highs.
At $420,800, the median price has slowed by 5% from the peak level. Yet, it remains much higher than pre-pandemic levels, at least 29%. Even so, many would-be homebuyers remain engaged in the market despite fears of another slowdown. With the decreasing inflation, interest rate cuts may be implemented after months of delay. Likewise, mortgage rates, which remain high at 6.92%, may follow the downtrend.
At this point, you may also wish to live inside a house you can call yours. You may also wish to have one for investment purposes. Whatever your reason is, you should be financially and digitally aware of the risks and opportunities in the market.
So, in this article, we will give you some savvy finance and tech tips for first-time homebuyers like you.
Finance Tips
Here are some finance tips you can apply to your strategies.
Know the difference between a liability and an investment
Understanding the difference between a liability and an investment can go a long way. Knowing this will help you determine your purpose for buying a house. Applying for home mortgage loans is crucial since this can be a lifelong commitment. That, of course, depends on the number of years to pay the loan.
A liability takes money out of your pocket, while an investment puts money into your pocket. If your primary purpose is living in it with your family, that’s considered a liability. But if you wish to have it leased or rented out to another person, that can be a good investment.
Suppose you took out a loan of $500,000, payable within twenty years. Without the mortgage rate, you will have a liability of $2,083 every month. But if you rent it out for $5,000, you will have an investment return of $833 ($5,000 – $4,167) monthly or $9,996 annually. That way, you can pay your mortgage loan while enjoying extra earnings.
Make extra payments for the principal
After getting your dream house, getting out of mortgage debt may be your primary goal. However, many people make the mistake of just doing the bare minimum. Making your monthly payments religiously can help you maintain a good credit score, but it makes your loan more expensive. It’s challenging for those with variable rates like HELOC.
Suppose you took out a mortgage loan of $400,000 and made a 20% downpayment or $80,000, so the borrowed amount was $320,000, payable within 20 years with a rate of 5%. Given this, using this formula, your payment would be $2,112 monthly or $25,344 annually. After twenty years, your total payment will be $506,880, leading to an interest payment of $186,880.
But if you make extra payments of at least $100 per month or $1,200 per year, you can reduce your interest payment by $15,700. For $200 extra payments, you can cut it by more than a year or $28,820.
Stay away from subprime lenders
When your credit score does not reach the standards of banks and other mortgage lenders, your first impulse may be to go to more lenient lenders. Subprime lenders may be your go-to option for easier transactions. However, these can be risky as they have been notorious for being predatory over the years. They have also contributed significantly to the US real estate bubble and GFC.
Another problem to consider is the potential harassment you may face if you do not pay them on time. The constant reminders can cause additional burden and stress, affecting your mental health and work productivity. Indeed, subprime lending has hidden costs that are higher than you expect.
Create an efficient and realistic budget
Taking mortgage loans to buy a piece of property is another financial responsibility. With that, you must be more prudent with your money management. You must adjust your monthly budget to squeeze in mortgage payments.
Suppose you earn $7,000 monthly and save half of it after reducing your fixed and variable expenses. After considering mortgage payments, your savings may decrease to $1,388 ($3,500 – $2,112). That’s barely 20% of your income if you follow the 50-30-20 budget rule. As such, you may consider checking your variable expenses to determine which spending you can reduce to increase your savings.
Earn more
Creating and sticking to an efficient and well-thought-out monthly budget can significantly change your finances. It allows you to ensure consistent mortgage payments and savings. Yet, it can be challenging during certain times. For instance, you wish to replace your old phone that’s no longer working correctly or fix damages in your house. These events will hurt your monthly budget and savings, especially with no emergency funds.
As such, you must think about finding new or extra income sources. Entering the stock market or working part-time can help you get additional earnings. The good thing about working part-time is that you can accept and do projects at your most convenient time. You can even do it while traveling to work or watching your favorite show on Netflix.
Image by Towfiqu barbhuiya on Unsplash
Tech Tips
Here are some tech tips for home mortgage loan application and payment.
Go digital
In today’s age, digital platforms are almost everywhere. The same goes for banks and mortgage lenders. Going digital for home mortgage loans can save you time, money, and effort. The application process and approval can be as efficient as in traditional banks. Many digital banks and financial institutions also offer home mortgage loans aside from credit cards. They are also secure and lawful, unlike many subprime lenders.
Utilize mortgage calculators
Everything is accessible on the internet, including online mortgage calculators. Yet, many people fail to recognize its crucial role for many mortgage lenders and borrowers. You can be a math whizz, but it’s better to be safe than sorry. Confirming your estimates using an online mortgage calculator can help you ensure the reliability and transparency of lenders.
Also, consulting online mortgage calculators can help you make a realistic budget. It lets you know how much you should earn and set aside for your investment and borrowing plan. That way, you can find ways to improve your money management and find ways to earn more.
Autopay
Enrolling in autopay for discounts is also applicable for mortgage loans. This method automatically deducts and transfers money to your lenders. That way, you will not have to consider paying mortgage loans on time and ensuring a good credit score. Also, it can give a 0.25% discount. By paying $2,112 for your mortgage loans, you can save about $60 per year.
Bottom Line
Whatever your reason is, whether for your dreams or investments, buying a house can be a great milestone. In a society that expects a lot from every individual, having a place you can call your own can make you feel good to some degree.
Even so, you must be prudent with your finances as the property market remains tricky today. Assess your plans and strategize carefully before rushing into mortgage lenders so you can make well-informed decisions.
