Purchasing a home is likely the biggest financial commitment you will ever make, and if you plan to take out a mortgage to do so, it’s important to know the dos and don’ts of using this financial tool.
Many top money experts have shared their advice on mortgages, and if you’re in the market for a home loan, you’ll want to read these top tips. Here’s some sage mortgage advice from Dave Ramsey, Suze Orman and more.
Don’t Spend More Than You Can Actually Afford
Barbara Ginty, CFP and host of the “Future Rich” podcast, said that overspending on housing is the biggest money mistake you can make.
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“Before you buy a house, make sure you can actually afford it and the expenses that come with it — houses are expensive,” she said. “When it comes to buying a house, don’t forget insurance, taxes and a monthly contribution to an emergency fund for those unexpected home repairs. Spending too much on housing can detract from your other financial goals!”
Consider Buying a Rental Property
Preston Seo, a millionaire real estate investor and host of “The Legacy Investing Show,” recommends investing in rental property, as this is an investment that can pay for itself over time.
“On rental properties, your tenants are paying down your mortgage for you, thus increasing your equity position,” he said.
Avoid Taking Out a Mortgage If Possible
Dave Ramsey’s best mortgage advice is to not get one.
“Dave’s favorite way to pay for a home is with cash,” the Ramsey Solutions site states. “It may sound crazy, but people like you do it every day!”
Don’t Sacrifice Your Retirement Savings for a Mortgage
On an episode of “The Suze Orman Show,” a caller in her 40s asked Orman if it would be wise to tap into her savings and retirement fund to pay for a townhouse in a highly desirable location.
“I’m asking you to slow down,” she said, according to CNBC. “There will be other opportunities. This will not be the last time that you’re able to buy something. Do not touch the money in your retirement account. You’re going to be retired before you know it.”
Opt for a 15-Year Mortgage If You Can
Orman advises going with a shorter mortgage term if possible.
“I think a fixed-rate mortgage is the way to go for the vast majority of home buyers. But my preference is to challenge yourself to see if you can afford a 15-year fixed-rate mortgage, rather than a 30-year,” she wrote in a blog post. “Yes, the monthly payments are obviously higher on a 15-year loan, given that you are repaying the loan in half the time. But keep in mind that 15-year loans typically have a lower interest rate than the 30-year. And the real payoff is that you will owe thousands of dollars less in interest charges over the life of 15-year loan than you will with a 30-year. That’s a big financial advantage.”
Set Your Own Budget
Orman said to set your own budget, rather than defaulting to the limit set by a mortgage lender.
“Do not get sucked in by a mortgage lender telling you how big a mortgage you can qualify for. That’s irrelevant,” she wrote in a blog post. “Before you even start shopping for a home, you need to put some serious thought into deciding what size mortgage fits your financial life. A payment that is so big it makes it hard or impossible for you to save for retirement, or save for a child’s education is a mistake.
“Rather than focus on how expensive a home you can qualify for, I want you to aim for the least expensive house that meets your needs,” she continued. “The financial flexibility you will gain by not over-reaching is going to make a huge difference the rest of your life.”
Shop Around
Do some comparison shopping before taking out a mortgage to ensure you get the best terms possible, Orman said.
“Don’t assume your current bank is going to roll out the red carpet and offer you the best deal,” she wrote in a blog post. “I want you to apply at three different lenders. Ask friends for recommendations of credit unions and community banks; they often can have better terms than big national banks. And by all means, throw an online lender into your mix as well.
“If you don’t want to put the time into comparison shopping, consider working with a mortgage broker,” she continued. “A good broker will shop around for you.”
When deciding what loan terms are best, look at more than the interest rate.
“The advertised interest rate is a good starting point, but you also want to compare all the fees you will be charged for the mortgage,” Orman said. “The good news is that lenders now must give all applicants an easy-to-understand three-page Loan Estimate once you provide basic information.”
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