4 Tips for Financing the Smart Way

When you’re in the market to purchase a new Chicago suburbs home, there’s a lot to consider. Of course, there’s your list of wants and needs, but even more so whether you’ve got the cash to meet the price of this criteria. No matter the size of your future dream home, it’s crucial to consider your money when thinking about your next purchase. There are loan types, rate types and percentages, and lots of fine print that go into each step of the process for securing a mortgage. Cutting through all of the extra paperwork and highlighting vital information is key in making the right financing decisions. This list seeks to do just that, providing you with the takeaways you need to reach the best financial solution for you.

There’s bad advice going around that says you should want to own your home outright. In fact, this is a major goal for more homeowners than not. What this line of thinking does, however, is set you as the buyer up for inconvenient financial pitfalls. Many of which could have been easily avoided if you hadn’t paid your home off free and clear. At the forefront of this decision is money.

For well-qualified buyers, mortgage interest rates can be a tool they can use to leverage the market. At times where rates are low, buyers can take advantage of fixed rates to pay less money in interest over time than their adjustable-rate counterparts. While there is still capital sunk into interest, the cost balances out come tax time. If you’re one of the many who take the time to itemize your tax returns, you can utilize specific deductions. These can include deductions on mortgage interest loans up to the IRS’ limit, which currently sits at $750,000. There are also better chances of increasing your return on investment if you’re continuously paying off the mortgage at low rates in combination with using tax deductions. As a result of the overlap between the two, your rate is actually lower than it would be if you’d just paid closing costs and annual taxes.

When you make the decision to finance your home, you’re taking responsibility for only a portion of the home payment instead of paying in full. If you’re holding a healthy amount of liquid assets, such as cash, instead of using them to pay off your mortgage, the funds are available to allocate elsewhere. You can easily invest in the stock market, purchase a rental property, or store it in high-yield savings instead of kissing it goodbye and handing it over to your lender.

When many think of a home mortgage, they picture a conventional mortgage. A 20% down payment and a great credit score are the backbones of a conventional mortgage, which makes homeownership seem impossible to those with lower incomes. While the restrictions in place aren’t as overbearing for those who have the capital to sustain the monthly mortgage payment, they may not always be the best option for you. If you’re looking for a federally-backed mortgage, this isn’t the loan you need. Let’s quickly go over why a conventional mortgage may be useful to you.

 

 

First, a sizeable down payment on the home means you don’t have to pay a premium for insurance. The equity within the home is enough to absorb any potential expenses or damages the lender could incur on your behalf. Typically, these mortgages are fixed-rate, meaning the interest rate you pay to the lender will always be the same from when you first agreed on a price, instead of being subject to annual rate changes. Additionally, you may save money in closing fees or costs if the lender offers accommodations to buyers of conventional mortgages. There’s no maximum income amount for conventional mortgages, which makes them a desirable option for wealthier buyers.

The Department of Veteran's Affairs offers VA loans for surviving veterans, military spouses, and active-duty military members. Typically, these are similar to conventional loans. You don’t pay for mortgage insurance, and the fees you’re responsible for paying are lower than those of other loan types. There are a few key differences to consider if you qualify for this loan. If you choose this home finance route, keep in mind you’ll be subject to paying a funding fee. This is to offset the cost on behalf of the taxpayer. Though you’re not required to make a down payment, this amount would be taken into account along with which branch you served in.

Certain rural areas across the United States are eligible for USDA loans. These loans do take into account your income as well as every individual of your household, yet they can be advantageous over other loan options. For instance, buyers who purchase homes with USDA loans don’t have to pay for private mortgage insurance. Instead, they’re subject to paying a guarantee fee, which is often more affordable, especially when paid upfront at one percent of the total loan amount. This loan type does require you to agree to take up primary residence within the property, which means no renting it out for profit. If you’re not looking for this to be a permanent dwelling, it’s best to steer clear of this option.

Backed by the Federal Housing Administration, FHA loans are the go-to for individuals with poor credit scores. With a score as low as 580, someone can purchase a home! The drawbacks incur after perks needed by those in lower-income brackets. Smaller down payments make the mortgage more attainable but come at the cost of paying mortgage insurance premiums each month. Similar to a VA loan, you’re unable to purchase a second property, and it must be your first home purchase. Don’t let yourself be fooled by the jargon, though — the parameters for who qualifies as a first-time homebuyer are a little looser than you may imagine. First-time homebuyers can encompass individuals who haven’t owned a home in the past three years or have had their name on a mortgage agreement within the same timeframe. 

If you don’t have a head for math, the mention of a ratio may make you take pause. Yet understanding your debt-to-income ratio (DTI) and how it plays into the finances of your home is well worth it. Lenders use this ratio to determine if the amount you make in gross monthly income is enough to qualify for a mortgage with their company. Specifically, they look at the percentage of your income that is put towards paying off your debts. This is divided into two types. The two types of DTI are often presented in a format as follows: # / #. The first numerator accounts for the percentage of gross income spent solely on the housing expense, while the second is the percentage of the housing expense plus your recurring expenses.

The principal mortgage payment, hazard insurance, and property taxes are merely a portion of your debt they look at when determining your ratio, but these expenses fall under one type of DTI, while the second type covers the rest. These other debts include payments that are recurring, such as credit card payments, car loans, student loans, and alimony or child support. The type of loan you choose will determine the ratio the lender requires you to meet. Conventional mortgages require a limit of 28/36, with the second not exceeding more than 45%. The others measure up as follows: the FHA loan at 31/43, the USDA loan at 29/41, and the VA loan at roughly 41/41. A general rule of thumb for the DTI is to keep it lower or equal to conventional debt-to-income ratios. 

 

In today’s housing market, there’s a strict need to be competitive with the offer you’re bringing to the table. While paying more than the asking price may or may not be a key factor when purchasing your home, a few moments of planning ahead is almost always a worthwhile investment. This includes getting pre-approved for a home mortgage loan. It’s important you get pre-approved and not pre-qualified. Getting qualified is less intensive and often doesn’t cover all of the key areas your lender will look at when determining whether or not you’re eligible for the loan. The benefit of preapproval is it’s more specific and truly readies you for the home search process. As you shop around the market for your dream home, you can relax knowing there’s one less step in the home closing. All that’s left to do now is shop around at multiple lenders and make your final decision. 

When you’re ready to take the next step in purchasing a home, don’t work alone. There’s no greater asset than the consult of a highly awarded and top producing real estate agent. Look no further than the RE/MAX Legends real estate team. Specializing in homes for sale in Downer’s Grove, Oak Brook, Oakbrook Terrace, Elmhurst, and more, this highly awarded group of top producing agents has experience in matching the most luxurious of homes with the right owners. Reach out today for a thorough consultation.