Homes are an essential investment for many parents. It's no wonder over 65% of the population has a home. But, homes are more than just a place to stay. For many families, a home can be drawn upon for their child's college/university tuition. It can also be their own personal retirement plan.
While a home is a significant investment, it's important to remember that it's also a considerable expense. According to the Motley Fool, the median home price in the U.S. is $420,000. While the median house price in Australia's combined capital cities is $928,000. This means that half of all homes cost more than this amount and half cost less. It's why home loans / mortgages are the best option to secure funding when buying a home.
What Exactly is a Mortgage?
A mortgage is a loan that helps you finance the purchase of a home. Since not many people have the cash to purchase their family home, a mortgage is a way to make this possible.
So which Mortgate is right for you?
There are different types of mortgages, but the most common is a 30-year fixed-rate mortgage.
With a 30-year fixed-rate mortgage, you'll have the same interest rate for the entire term of the loan. This means your monthly payments will stay the same every month, making it easier to budget for your new home purchase.
Several factors will determine your interest rate:
- Your credit score
- The type of loan you choose
- The current market conditions
It's crucial to know these things before you get a mortgage. It's also vital that you prepare your family before getting one.
Preparing Your Family for a Mortgage
Now that you know more about mortgages, it's time to start preparing your family for this significant investment. Here are five ways you can do this:
Find the Right Lender
Getting the right lender can dictate how your mortgage will work. That's why you must visit multiple mortgage lenders before deciding. You should get quotes from at least three different lenders. It will help you compare rates and terms to find the best deal. Remember, the lender you choose should have your best interests in mind.
Once you find the right lender, you can start saving for your down payment and closing costs. According to Bankrate, the average down payment is 10% of the home's purchase price. So, on average, the average downpayment today is $42,000. Additionally, you'll need money for closing costs, typically 2%-5% of the loan amount.
If you don't know how you can start saving, try these principles in saving:
- The 30-day rule: When you get paid, put 30% of your income into savings immediately. Then, you can use the rest of your money to cover your expenses.
- The 50/30/20 rule: This budgeting method is straightforward. 50% of your income goes towards essentials, like housing and food, while 30% is for wants, like travel and entertainment. The last 20% is for savings and debt repayments.
Choose the right principle for your lifestyle, and ensure to inform your family about it.
Create a Debt Repayment Plan
Creating a repayment plan is essential before buying a home if you have debt. This will help you pay off your debt more quickly and improve your credit score. In addition, a higher credit score will help you get a lower interest rate on your mortgage.
Some tips on how you can create a debt repayment plan are the following:
- List all of your debts from smallest to largest
- Pay off the smallest debt first
- Make the minimum payments on all of your other debts
- Once you've paid off your smallest debt, use that money to pay off the next smallest debt
By following these steps, you can create a plan that will help you repay your debts quickly. Be sure to involve your family in this process so they understand what's happening.
Get Your Credit Score in Tip-Top Shape
Your credit score is one of the most important factors in getting a mortgage. That's why getting your credit score in tip-top shape is essential before applying for a loan. You can do this by paying your bills on time, maintaining a good credit history, and using a credit monitoring service.
Ask Family to assist
Many lenders allow two families to combine their respective incomes in order to jointly purchase a house. Both households will need to meet the minimum qualifying loan requirements, which may vary from lender to lender.
Save for a Rainy Day
It's always a good idea to have savings set aside for emergencies. This is especially true when you have a family and you are taking out a loan to purchase a home. Many lenders have re-draw services, so you might like to use your home loan repayments as a way to say by paying more than you are required to, knowing that you are assisting your interest on repayments and have the money to redraw when necessary in case something unexpected happens, like a job loss or medical emergency.
You should aim to have at least three months' worth of living expenses saved before buying a home. This will help you cover your mortgage payments if you face financial difficulty.
Creating a family home to raise your children in, is a dream for many parents. Following these tips can help your family make the best decision for your future.