In my position—having spent the majority of my career working for financial institutions that offer mortgage loans—I’m often approached for advice about choosing a home loan. Since buying a home is the biggest, most complex financial transaction most of us will ever make, I take every question very seriously.
While each person’s personal and financial circumstances are likely to dictate what advice I give, there are a number of points that every person should consider—whether they’re buying a home or interested in refinancing an existing mortgage.
- Make Sure You’re Ready. Your home is probably the most valuable asset you’ll ever have, so you need to treat it as such. Never move forward until you’re certain that you understand all of the terms and features of the home loan you’re being offered. That means realistically considering your particular financial situation and investing substantial time in learning about the financing options available to you. There are educational resources designed to help deepen your understanding of the mortgage process. One good example is the mortgage education offered on the Federal Reserve Board Web site, at http://www.federalreserve.gov/consumers.htm.
- Be Aware that “A Low Amount Now = A Higher Amount Later.” Interest-only loans and adjustable-rate mortgages (ARMs) with payment options are two home loan choices that give you a lower initial mortgage payment. The added financial flexibility that these types of options provide may come in handy for some—however, never lose sight of the fact that a low payment now will translate into a higher payment later.
- Consider Your Prospects. In order to decide what type of home loan best matches your personal circumstances, always have an eye toward your future prospects. For instance, is your future income likely to be higher or lower than it is today? If you opt for a loan with a “lower now/higher later” payment plan, you should have a realistic expectation that your future income will increase enough to accommodate the increased payments.
- Know Your Timeframe. Timing is everything. Determine how long you plan to be in a home and then choose a mortgage that makes the most sense for your intended stay. In addition, if you do intend to move in the near future, do you plan on keeping your house or selling it? These decisions will affect key elements of your financing options, including the type of loan you select, specific loan features and what kind of rate/points combination you should be targeting.
- Plan for the Unexpected. Every family experiences unexpected and unpleasant events over time, such as job loss, divorce, illness or death of a family member. It pays to plan for these by having adequate savings. Misfortune is stressful enough without adding the pressure of being unable to pay your mortgage and other monthly bills.
- Don’t Exaggerate Your Financial Circumstances. Low documentation loans are now widely available. However, even with one of these “low doc” or “no doc” loans, it is critical to offer accurate information on your loan application. First, you don’t want to end up with a home you can’t afford. Second, knowingly providing inaccurate information on a loan application is not only fraudulent but also a potential violation of Federal law.
- Don’t Rely on Increases in a Home’s Value. Real estate isn’t a sure thing. Over time, the housing market has been cyclical. Because the value of your property might decrease, it is never a good idea to rely on expected increases to help you afford your loan. In addition, compared to other investments, real estate sales have high transaction costs, so you typically would need to increase your home’s value by about 10% just to break even when you sell.
The benefits of home ownership can be plentiful—both from an emotional as well as a financial perspective. The best way to reap the benefits of this experience is to enter a situation equipped with as much information as possible. When it comes to choosing a home loan, always stay within your financial means and never commit to anything without being 100% sure that it is in your household’s best interests. If you follow these basic principles, you should be well on your way toward a rewarding experience.
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John P. McMurray is Chief Risk Officer for Countrywide Financial Corporation (NYSE:CFC), a diversified financial services provider and member of the S&P 500.
© Countrywide Home Loans 2006
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