We have been in a fairly severe mortgage crisis in our country. I cannot believe the number of For Sale signs that I see in yards as I drive around. It’s so sad to see people’s dreams crumble like that. It’s too bad that so many people have been sold down the river by mortgage brokers, well meaning and otherwise.
If you are fortunate enough to still be in your home, or you desire to purchase one, I’ve got a few tips for you to help speed up the process of getting that mortgage paid off and truly owning your home.
Don’t Search for the Smallest Down Payment
First of all, you need to start off with a loan that is of a manageable size. Too many people got into trouble because they bought too much home and not only had trouble making payments, but they also ended up upside down due to the housing market crash coupled with too small of a down payement. That small down payment may have seemed like a blessing when buying, but the result is that a small drop in the housing market can leave your loan amount higher than your home value.
The 20-15-25 Rule, 20% Down
To prevent this problem, follow a 20-15-25 rule. First of all, put at least 20% down. It may seem too difficult, but this will accomplish two things. First of all, it will prevent you from having to pay Private Mortgage Insurance. This insurance is paid to the lender until you have 20% equity in your home. It benefits you in no way whatsoever. A 20% downpayment also will help keep you from becoming upside down because there would have to be a 20% drop in the housing market before your home’s value would drop to your loan balance.
15 Years
The next component of the 20-15-25 plan is the length of your mortgage. You need to get a 15 year mortgage length max. Your early mortgage payments are almost entirely interest payments. It has very little impact on your loan balance. This effect is exaggerated in a 30 year loan. The faster you can drop the loan balance, the more equity you will have in your home, and the less chance there will be for a drop in the housing market to cause you to become upside down.
25% of Your Budget
The final component of the plan has to do with the percent of your budget that the mortgage payment makes up. With few exceptions you should not let it exceed 25% of your budget. You’ve got to eat; you need transportation; no one wants to go for years without a vacation. Make sure your payment size allows you to still enjoy life and doesn’t end up controlling your life.
Buy a Starter Home
If any of these don’t seem feasible, then perhaps you need to downgrade what you are looking for in a home. You’re better off stepping up to your dream home over time rather than putting yourself into an unmanageable situation. If you follow these principles, you will be building good equity in your home, so you should be able to use that equity to step up in homes over time.
More “Secrets” Revealed
Following the 20-15-25 plan will help you make sure you quickly build equity in your home regardless of the status of the housing market. In the next post we’ll discuss a couple of tips to help you pay off that mortgage more quickly once you have finalized the detail.