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5 Important questions which you need to ask before taking out a mortgage


Despite of the terrible housing bubble, the young generation is still interested in becoming homeowners. Right now, 70% of the young people want to get a house within the next 2-3 years, and nearly 90% expect to do so in the near future.


But are you prepared for the challenge? It's quite a huge commitment, and one that can be a bit alarming when you think about the decision you're taking. The only way to make it easier is to divide it into smaller parts. If you can find impressive answers to the following questions, then you're on the right path of home-ownership:

1. Can you afford it?

It is not only about being able to afford the monthly home loan installments. Being a homeowner, you’ll have few important ongoing or sudden expenses. You need to have that ability to cover these costs as well.

Your mortgage installments will cover more than just the mortgage itself. Your bank statement will include bills for your property taxes and homeowner's insurance. If you’ve contributed a small amount as down payment, you may have a charge for mortgage insurance as well. After adding these, your monthly bill can easily increase by 25% or more.

In addition to your monthly home loan installments, you also require an amount for repair and maintenance costs. You may decide on spending an average of 1% of your home's price each year. But you mustn't forget it’ll surely increase in future. Big, irregular costs such as new flooring work or furnace repair will surely come out. So, you'll spend more in a few years.

2. Can you make a down payment?

This question is correlated to the above-mentioned question. But, it totally depends on the amount you save over your earning per month. Fortunately, it's not a big issue as many people think it out to be. You only require to down 3.5% of the total loan amount to qualify for an FHA mortgage loan. You may also qualify for other conventional loans aided by Fannie Mae or Freddie Mac. You only need 3% of the loan as the down payment.

Mortgages with minimal down payments are more expensive than other loans. There is high fees or huge interest rate, so there are some advantages in making a bigger down payment if it’s possible for you. You can even put down 5% rather than only 3% on a conventional loan. It means you'll get a cheaper interest rate and low mortgage insurance. If you can afford 20% down, you'll get the best interest rate while avoiding mortgage insurance completely.

3 How is your credit?

For most people, credit isn't the big issue for having a mortgage. Practically, almost 3/4 of the total population has 650 or above FICO score. This score is perfect for anyone to qualify for a mortgage. People having a score in between 600-649 range can face some issues, but it's not impossible to qualify for a loan.

The main problem with a low credit score is that it makes the mortgage cost high. So, it becomes tough to qualify with such cost. People with FICO score 740 or more get the best rates. As you go below that, the rates on conventional loans will begin to rise with speed.

That's why FHA loans are the best deal for borrowers with below 700 scores. The FHA doesn't charge high interest for low score borrowers. But it does apply for a greater mortgage insurance than a conventional loan. So Fannie/Freddie mortgages are the best for high credit borrowers, and FHA loans are often suitable for people with scores below 600.

4. How secure is your job?

The common home loan for a first-time homebuyer is a 30-year loan. It means people assume that they'll be able to repay this loan for the next 30 years, and they’ll get the continuous cash inflow over a month after month.

A lender will generally like to know about your current job or career status. So, you need to provide him at least two year's job information before they'll grant you a mortgage loan. But you also need to be sure that you have a job for paying off all your expenses.

You can’t be absolutely sure about your job's future. If you have a good sense of what's going on with your employment, your business or your company, it might be better to back off from buying a home. If you don't have a solid ground, you can't take the risk of getting a mortgage.

5. Are you ready to be your own landlord?

Many individuals get immense pleasure, as they increase their sense of being an owner. They'll have full independence and competence towards owning a home. Of course, you can minimize your maintenance cost if you buy a condo. The property management will take the responsibility of the exterior of your condo. But, you'll still have the responsibility for taking care of your interior.

Choosing to become a homeowner is a big decision. But if you work through it properly, you'll be able to make the right one.

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