Buying a home can be a perplexing business, especially if you are going through the journey for the first time.
Everyone wants to get the best home without costing more than necessary. So how do you do it?
What's in this article?
Start by reviewing a comprehensive guide to the mortgage process. After that, maybe try some advice from some of the keenest thinkers of the financial world.
The following are some high-profile financial gurus’ best advice on mortgages, just for you.
Dave Ramsey
After going bankrupt, Dave Ramsey went on a quest to find out where he went wrong with money.
Ramsey went on to self-publish the hit book “Financial Peace.” That led to six other best sellers and a nationally syndicated radio show.
He’s advised how to get out of sticky financial situations for decades. We’ve put together some of this financial guru’s best advice on mortgages.
Get a fifteen-year, not a thirty-year mortgage
The great myth of thirty-year mortgages, Ramsey says, is that people think they can pay it off in fifteen.
But, unfortunately, that extra fifteen-year safety net is an illusion. According to the FDIC, 97.3% of people don’t make regular extra payments.
Unforeseen expenses will always crop up. You’ll likely carry the mortgage for the entire term and all the added expense that comes with it.
Put down at least ten percent
100% is the best downpayment. However, most of us can’t afford that.
According to Ramsey, the second-best target for a downpayment is 20% or more of the total home cost (e.g., a $200,000 home would have a $40,000 down payment).
Anything less than 20% is usually riskier for the lender, meaning that it may be harder for you to qualify and you’ll have to add private mortgage insurance (PMI).
Try to save the 20% down payment over two years. You can try with as little as 10% if you don’t quite make it, especially first-time buyers.
There are, however, mortgage loan options available that allow for a lower down payment. If 20% isn’t possible for you, talk to your lender about your options.
Avoid adjustable-rate mortgages
Dave is not a fan of adjustable-rate mortgages (ARM). They may seem like a good idea at first by saving money when compared to a conventional loan.
With an ARM, the bank sets an initial rate when you finance your home for the first time, usually a point or so below a fixed-rate mortgage.
But the rate of an ARM can go up. Waaaaay up.
After an initial period, the lender can adjust the rate to the capped maximum in the agreement. If interest rates are low when you start, like they are now, that means you’re almost guaranteed to pay more in the future.
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Barbara Corcoran
Most people know Barbara Corcoran as the sharp, formidable, blond entrepreneur on ABC’s “Shark Tank.” Many may not know her meager beginnings, however.
After borrowing a mere one thousand dollars, she quit her waitressing job in her early twenties and started a small real estate company in the Big Apple.
The Corcoran Group became “the largest and best-known brand” in the highly-competitive brokerage world.
Here’s some of this financial guru’s best advice on mortgages.
Know what you can afford
Barbara often emphasizes buying within your means. Overtaxing your budget to get that dream house can put you in a very uncomfortable position.
A good precedent is to keep your “housing costs” within 30% of your paycheck. If your costs exceed that, you’re setting yourself up to be financially tight.
That includes expenses like property taxes, insurance, homeowners association (HOA) fees (if applicable), and the mortgage payment itself.
Select a location first
A home is sometimes more than just a place you live—it can also be viewed as an investment.
Corcoran frequently points out that if you buy in an up-and-coming neighborhood, there’s a better chance for more affordably priced homes than in an established area. A lower home price means lower payments.
You could also be setting yourself up for a windfall if your neighborhood becomes mainstream and property values escalate accordingly.
Get a pre-approval
Real estate is Corcoran’s business. She knows that a good deal in a desirable area can mean getting caught in a bidding war even when the market is cold.
Submitting a pre-approval letter with your offer shows sellers that you have the means to afford this home according to a professional lender who has done due diligence on your finances.
That also might give you an edge against other bidders. The less contingencies included with your offer, the better.
A second benefit of mortgage pre-approval is that you can see precisely how much you’re qualified to borrow, which makes your search simpler.
Suze Orman
Suze Orman is a bestselling author, online and magazine columnist, writer, producer, and highly successful motivational speaker. She was the contributing editor for Oprah’s “O” magazine and hosted “The Suze Orman Show” on CNBC for 13 years.
She also has two stellar credits on her resume: the single most successful fundraiser in public television history and a winner of eight (count ’em, eight!) Gracie awards.
Here’s this financial guru’s best advice on mortgages.
Polish your credit before buying
In her thirteen years on CNBC, Suze Orman frequently emphasized the importance of your credit score.
Credit scores and credit history not only make a difference in getting your mortgage—but also in how much of a loan you might be eligible for and how much it might cost you.
Suze suggests you evaluate your credit at least six months before you apply for a mortgage.
On a typical 30-year mortgage, it’s possible to end up paying $50,000+ extra in interest fees!
But, if you can boost your credit score sufficiently, you might shave a half or a full percentage off your interest rate. Over the life of your mortgage, that could add up!
Don’t automatically choose a thirty-year mortgage
The go-to standard for housing loans these days is 30 years. But that’s not the only option.
Orman believes more buyers should consider looking at shorter-term mortgages.
The more time you have your mortgage, the more it will cost you in interest fees. By the time you pay off your 30-year loan, the cumulative fees could wind up costing you 50% more for your home.
If you can manage a 15-year loan:
- You can pay off the mortgage in half the time
- You will save more than half the interest of a 30-year loan
The trick will be dealing with a higher monthly payment in the meantime. But, if you can manage it, it can pay off in the long run.
Prioritize mortgage payoff
As we age, Orman suggests we rethink the common wisdom to funnel as much cash into your retirement accounts as possible.
She encourages those near retirement to focus on paying off their existing mortgage. If you pay off your mortgage, it’s easier and less stressful to budget your retirement years when you completely own your home.
Having said that, she adds, you shouldn’t cease contributing to your retirement funds altogether. This is especially true if your company matches your contributions.
The Best Advice
While these pointers can be beneficial, there is always more to learn about your financial future.
Getting advice directly from a professional mortgage loan officer can quickly close the gaps in a homebuyer’s knowledge.
Contact Compass Mortgage to get the ball rolling and find the best house in your budget.
We’re always glad to talk and answer questions about mortgage options available.