Housing costs continue to rise, squeezing renters and homeowners alike, but owning real property is one of the most important long-term investments a person can make. Unlike cars and other high-dollar purchases, real estate generally tends to appreciate over time, though the market is cyclical and can suffer periodically during economic downturns.
Having a mortgage on your credit report that is always paid on-time can provide a tremendous boost to your VedaScore, which can save you money on other purchases and services as well. Developing equity in your home can give you additional leverage in times of crisis or new opportunities; since we all must live somewhere, it makes sense to attempt to build equity in the place you call home so you can benefit from your hard work down the road.
There are government assistance programs that can help First Home Owners, as well as other educational programs that can assist a potential buyer in making the smartest financial decision in terms of financing and property management. If you are already paying a monthly rental amount but building no equity, now is the time to research the path to homeownership.
Unless you can afford to pay cash, it’s likely you’ll need to obtain a mortgage. You may have seen commercials for various kinds of mortgages and wondered “how does a fixed-rate home loan work?” Fixed-rate mortgages consist of a set amount of money borrowed over a finite amount of time with a rate that doesn’t change during the predetermined introductory period.
Loans can be fixed with a lower rate for an introductory number of years, and then the rate becomes variable at a new interest rate (depending on market conditions at that time) for the remaining portion of the loan. It can be difficult to predict what the market will do in the future, but the benefit of rate variability is that your payments can go down if market rates decline.
It’s important to maintain the highest possible credit score once you obtain a mortgage so that your ability to refinance to a lower rate in the future is not hampered. Additionally, how you make your payments, whether monthly, bi-weekly, or fortnightly can impact the speed at which your mortgage is paid off and the amount of interest you pay over the life of the loan.
Your monthly mortgage payment amount will consist of a certain amount of principle, or balance owed, and a certain amount of interest on that principal. Some loans may also require Lenders Mortgage Insurance (LMI) if the down-payment provided was less than 20 percent of the home’s value. You’ll also need to set aside a monthly amount for required insurance; you can use a Home and contents insurance calculator to estimate how much you’ll need.
If your home is located within a managed association, condominium, or townhouse complex, you may also need to pay monthly maintenance fees to a Board of Directors. If you plan on renting your home out in the future, you also may need to pay a property management fee as well. Planning for these extra costs up front when considering how much property you can afford will save you time during the formal application process when your banker verifies that your monthly payments won’t exceed your capacity to pay.
Even if you think you’ll need to move one day, you can plan to hold onto your property while it generates monthly income as a rental, allowing it to continue appreciating in value over time. Some people factor property ownership into their plans for retirement income, letting long-term appreciation build while they rent out multiple properties.
Keeping your home in good repair and well-insured is a crucial part of maintaining your equity over time. Doing so means you’ll have financial security as you age, with the potential to receive a lump-sum of cash upon selling or refinancing a property that can help pay for medical expenses, vacations, tuition, and more.