Mortgage Financing Advice
Mortgage financing provides entry into the real estate market for homebuyers. Effective housing debt strategy begins with a personal financial assessment, where you may work to establish a more attractive credit profile. From there, you are better able to negotiate better mortgage loan terms. Familiarize yourself with the separate classifications of housing debt, in order to operate as a more informed consumer.
Preliminary Financial Review
Review your banking statements to calculate the monthly cash flow available for housing payments. According to the Department of Housing and Urban Development, you should spend less than 30 percent of your income on housing expenses. After calculating a proposed housing budget, you may then comparison shop for affordable mortgage loans.
Mortgage lenders review your credit history when making approval decisions. In preparation, you should make timely debt payments, while aggressively paying down any expensive credit card debt. To monitor progress, you are eligible to receive one free credit report per year through AnnualCreditReport.com.
Mortgages are secured loans, which are backed by real estate as collateral. The mortgage contract grants foreclosure rights to lenders. In foreclosure, mortgage lenders seize your property and auction it off, as compensation for loan default. Because of these terms, mortgages generally offer lower interest relative to credit cards. Credit cards are unsecured loans, and riskier products for banks. Credit cards are backed only by good faith in your ability to make payments.
For individual mortgage loans, banks set interest rates according to risks. People with relatively higher levels of debt and weaker earnings power are subject to elevated mortgage rates. Lenders also negotiate higher interest rates for larger loans offerings. You may increase the down payment on a home to reduce its mortgage balance, and command lower interest rates.
Fixed Vs. Adjustable Rate Mortgages
Home loans are classified into either fixed, or adjustable-rate mortgages (ARMs). Fixed-rate mortgages carry level interest rates throughout their duration. Fixed mortgage rates may be locked in for 30 years, which is ideal for long-term homebuyers. ARMs, however, are associated with variable rates that shift alongside economic conditions. Adjustable-rate mortgages often feature fixed rates for an introductory period, before variable rates alter every subsequent monthly payment. The introductory period generally lasts from between 12 and 84 months. ARMs with teasers, or low introductory rates, target upwardly mobile consumers that expect significant additions to income in the near future.
The Economic Cycle
Economic recessions are ideal periods for you to secure affordable mortgage financing and buy cheap real estate. In recession, property values collapse, and Federal Reserve authorities purchase U.S. government debt to increase the domestic money supply. The higher money supply effectively lowers mortgage rates, and eventually improves real estate demand. Alternatively, speculative capital typically floods into real estate and the mortgage market immediately prior to outright bust. Today, many property owners, consumers, and investors are still reeling from the aftermath of the 2008 credit crisis.
Recession and weak property values may translate into negative equity for your existing home. At that point, the actual home is worth less than its underlying mortgage balance. Distressed homeowners that fall behind on payments would then face the prospects of foreclosure and eviction, because the home cannot be sold for enough money to pay off.