You've read or heard about the crisis that many homeowners are facing because they can't pay their mortgages. Some of these homeowners were lured into loans with extremely low rates (teaser rates) that adjusted up. When the rates reset, monthly payments rose beyond what many homeowners could afford, and some borrowers are losing their homes to foreclosure. Consequently, maybe you think this is a good time to get a deeply discounted property.
When loan shopping, remember there's a big difference between qualifying for a mortgage and affording it. Frequently, lenders will qualify you for mortgages that are too big of a stretch for your budget, so it's up to you to crunch the numbers.
Seek advice: Don't rely on a single loan officer for advice, recommends Paul Leonard, the California director for the Center for Responsible Lending, Oakland. "Consumers have to be vigorous in their own financial self-interest, not relying on recommendations of lenders who are not their financial advisor's," he says. Shop multiple lenders and fully understand the loan products you're considering. Seek advice from a real estate lawyer or a U.S. Department of Housing and Urban Development - certified counselor. For a list of HUD - certified, California based counselors, see www.hud.gov/local/indes.cfm?state=ca. "Even if a lawyer costs a couple of hundred dollars, it's money well spent before you lock into a financial transaction and put thousands of dollars at risk," argues Leonard.
Be a wise consumer: Don't base mortgage decisions on low teaser rates. When rates rise, will you be able to service the loan? Factor in principal and interest, as well as taxes and insurance, when considering the monthly payment. Know that taxes will likely rise. Consider other major expenses - saving for college and retirement, for instance - and monthly costs, such as gas, food, car insurance, and entertainment.
Be realistic: Rising housing prices aren't a sure thing. Don't sign a mortgage betting that housing prices will rise and that you'll sell if items get tough. Realistically evaluate your long-term ability to make the payments and only borrow what you can afford.
Crunch your numbers: There are a multitude of on-line calculators to help you determine how much house you can afford, whether to opt for a fixed or adjustable rate mortgage, and how different down payment amounts will affect your monthly payments. One source is www.credit.com/calculators/home_mortgage.jsp.
Debt-to-income Ratios: This term refers to how much you earn versus how much you own (excluding your mortgage). The ideal ratio is a matter of debate, and to determine you threshold for debt, you need to consider all of your expenses. Typically, financial planners recommend that this ratio not exceed 20 percent of your take-home pay. In addition, financial planners recommend that this ratio does not exceed 40 percent when including your mortgage payment. For more information visit http://www.debtsteps.com/
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