If you have decided that 2020 is the year you will finally buy a home, there are a number of things you must know. The mortgage market is changing, and the strategies that worked a few years ago are no longer applicable. Here are 10 things you should know before you jump into the mortgage market in 2020.
1. Interest rates are still low
Interest rates have been fluctuating recently, but they are still quite low. That means 2020 should be a great year to buy a home. It also means that fast action is warranted. Interest rates will not stay this low forever, and if you fail to act now you might live to regret it.
2. Interest rates have nowhere to go but up
Mortgage interest rates may be historical lows, but that is a double-edged sword. On the one hand, low current mortgage rates make home ownership extremely attractive. On the other hand, the fact that interest rates are low now means they have only one way to go. Some experts expect interest rates to rise as 2020 progresses, and that makes shopping now even more important.
3. Your credit is more important than ever
It wasn’t that long ago that all borrowers had to do was sign their names to get a mortgage, but the financial crisis changed all that. Many mortgage lenders have gone to the other extreme, demanding high down payments and higher credit scores to qualify for a mortgage.
Your credit report will play a central role in the mortgage decision, so now is the time to clean it up. Paying down debt and being extra vigilant about payments can raise your score and make qualifying for a mortgage easier.
4. It pays to shop around
Different mortgage lenders use different underwriting standards, and that can mean vastly divergent interest rates on the same loan amount. Shopping around is still the best way to get a favorable rate, so cast your net far and wide. You can start with your own bank, but check out local credit unions, mortgage lenders and other banks as well.
5. Down payment matters
Down payment matters in a number of different ways. For one thing, making a high down payment will lower your monthly mortgage payment and make the loan easier to repay. Making a 20% down payment will also free you from private mortgage insurance (PMI) – a costly add-on designed to protect the lender from default.
6. A 15-year term will save you a ton of money in interest
While many home buyers still opt for a 30-year mortgage, a 15-year loan can save you a lot of money. Over the life of the loan, a 15-year mortgage can save you tens of thousands of dollars compared to a 30-year mortgage. The interest rates on 15-year mortgages are often lower than those on 30-year loans, and that could save you even more money.
7. Be conservative when deciding how much you can afford
Stretching to buy more home than you can really afford is never a good idea. Always err on the side of caution when shopping for a home or taking out a mortgage. If you can afford a $250,000 home, shopping for homes in the $200,000 range will give you more wiggle room and let you sleep more soundly at night.
8. A variable-rate mortgage can be particularly dangerous
Now may not be the time to take out a variable mortgage. The initial interest rate may be lower, but the risk of future increases is just too great. With interest rates at historic lows, the chance of an increase is virtually 100%. The only way a variable mortgage makes sense is if you will be moving before the teaser rate expires.
9. Uncle Sam may pick up part of the tab
Unlike other types of consumer debt, the interest on mortgage loans is tax-deductible. That means Uncle Sam may be able to pick up part of the tab and make buying a home easier. You will have to itemize your deductions to get the benefit, so grab a blank tax return and run the numbers before you buy.
10. A pre-approval could help seal the deal
Choosing a home first and then applying for a mortgage can be risky. There is always the chance your application will not be approved, and that could mean missing out on the home of your dreams. A pre-approval could eliminate that risk and make your buying position much stronger.
Now is a great time to buy a home. Interest rates are low and home prices are still recovering from the crash. If you have decided that 2020 is your year, the above tips can help you get the best possible deal.