Proper Mortgage Planning Helps Avoid Financial Challenges Later On

April 25, 2012

Financing a property is considered to be a good investment. If you plan properly and take out a mortgage for your home, down the road, it may turn out to be a great asset for you. However, if you make a wrong decision, then it can lead you to face severe financial challenges later on. So, proper mortgage planning is very important so that you can lead a stress free life after you take out a loan.

6 Tips to help you plan your mortgage better

Here are a few tips which will help you in planning and managing your loan in the best possible way:

  1. Use online mortgage calculators: These calculators are simple and user-friendly tools, available free of cost, to the consumers. They will help you in getting a prior idea about the amount of mortgage you will be able to borrow and afford, the interest rate you may get, the type of mortgage best suited for you, etc. Thus, they will guide you in taking out the right kind and amount of loan.
  2. Save money for down payment: We all know that the down payment plays a very important role when we speak of a home loan. If you don’t have the right amount of down payment saved in your bank account, you will be liable for paying private mortgage insurance (PMI). It is very difficult to get rid of the PMI later on. So, if you want to take out a conventional mortgage in the next 2-3 years, start saving money for a down payment now. You need to have a 20% down payment for a conventional loan to avoid PMI and around 3.5% – 5% down payment for FHA loans.
  3. Take care of your credit: To qualify for any kind of mortgage, you should have good credit. Unless you have the required credit score, none of the lenders will be interested in giving you a mortgage. In order to qualify for the best rates with a conventional loan, you need to have a score of 720 or more. FHA does not have a credit score requirement but the FHA lenders normally want the borrowers to have a score of at least around 620. You should also make sure that you don’t have many negative items mentioned in your credit report. Too many negative items will not only create problems while taking out a loan but it may even hamper your chances of refinancing later on.
  4. Take out a small loan: If you take out a lesser amount of mortgage, it will make sure that you can easily afford your total monthly housing costs with your present income. Thus, it will be easier for you to afford that mortgage, even in times of sudden financial crisis.
  5. Emergency fund for mortgage: A financial emergency can arise suddenly. In order to be on the safer side, you should create an emergency fund for your mortgage payments. You can save 2-3 months of mortgage payments in that emergency fund so that you can continue making loan payments for that period of time.
  6. Ask for help when you can’t pay the loan: If you have lost your job and can’t find one for quite some time or when you’re facing a medical emergency, you should immediately contact your lender and seek help. Government has introduced different plans and programs for borrowers who are in financial distress. HARP, HAMP, etc. are some of the options available to the delinquent borrowers. Apart from that, normal loan modification is also available in order to make your payments affordable to you.

Don’t get pressured into buying a home. You should take out a mortgage and buy a home only when you feel that you will be able to afford it.