Mortgage Planning


Why Own a Home?

To have a place to live is a reason to own a home, but it is not "the" reason to own a home. You can always rent a home to live in. Buying a home means that you are going to be tied to that property for a very long time. So you better off make sure you love the property you are going to buy. Never buy a property because you need a place to live, buy a property because you love it!

"House poor" refers to those who purchase a home beyond their means. People tend to purchase home a bit over their budget, either because of poor budgeting or the aura of luxury living. When things not going their way, they may have a hard time making mortgage payment, and in the worst case senario, they may lose their home to foreclosure.

For potential home owners, the most important factor in buying a home is the mortgage payment. Most mortgage lenders will look into the borrower's ability to payoff the mortgage on time before approving the loan. Two factors they particular pay attention to are the loan-to-value ratio and the mortgage payment-to-income ratio when evaluatiing a mortgage loan. It is wise not to have a mortgage payment more than half of your monthly income.

Mortgage payment is just one of the expenses related to home ownership. Tax and maintenance are also necessary. Mortgage has a fixed term, once you pay off the entire loan, mortgage payment ceases. But tax and maintenance will continue as long as you own the property.

Types of Mortgage

Mortgages are mainly divided into two types: Fixed Rate Mortgage and Variable Rate Mortgage. Fixed Rate Mortgage, as the name indicated, has a fixed mortgage rate throughout the mortgage term. Mortgage rate remains constant no matter how the market interest rate fluctuates. Thus, if the market rate goes up, the mortgage borrower benefits. But if the market rate comes down, the mortgage borrower would have to pay a higher interest payment.

Variable Rate Mortgage has a mortgage rate that changes as market rate changes. As market rate goes up, borrower will have to pay a higher interest payment, and if market rate comes down, the interest expense on the mortgage loan would be lower.

When to Buy a Home

Most people prefers to buy a home when interest rate comes down. They argue that when interest rate is lower, with the same monthly mortgage payment, they can borrow more and hence can buy a larger home. However, the might not be the case in reality. Because when interest drops, property price tends to go up, and potential home owner may have to pay a higher price for the same property. As a result, potential home owner may end up buying the same home but with a larger mortgage.

It may go against conventional wisdom, it is actually better off purchasing a home when interest rate is high. There are couple reasons for that. First, when interest rate is high, demand for property tends to decrease and property value goes down. It is a buyer's market. Second, as property value goes down, down payment and related expenses drop, so the upfront cost are lower. And last but not least, if prevailing interest rate is hight, the future interest rate is more likely to come down. So with a variable rate mortgage, the chance that future monthly payment will come down is higher. And for fixed rate mortgage, borrower can always choose to prepay the existing mortgage with a new mortgage at a lower mortgage rate.

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