As you all look forward to the day you are going to own your home, lets not forget that the current financial crisis started in the housing sector. Shelter is one of the basic human needs. Taking a mortgage could be a very wise decision, because finally at the end of repaying your mortgage payments, you’ll get title to your house. But just because having a house is one of the basic necessities of life, does not mean that you can take any mortgage that comes your way, as it can eventually spell doom on your financial life. So, as we all look forward to living in our own home, kindly assess your circumstances before committing yourself to the contract as explained in the following article by Nap.
Living under a bridge would be quite miserable. If you plan your life so you always have a roof over your head, you can go to the local food pantry for food when your financial circumstances dictate the need. At least you will be protected from Mother Nature’s elements. This means that you have to take some risk to provide your housing, a basic need, but the smart person will limit their risk because of the unknown certainties of the future.
In order to minimize your risk, there are some guidelines.
The first item is your down-payment. The larger your down-payment, the smaller the mortgage loan. Better to not stretch your budget at the beginning of the mortgage loan. Your mortgage payment should not exceed 25% of your disposable income (net wages). If your job pays weekly, calculate a month on only 4 weeks because you don’t receive a paycheck for 1/3 week. Every quarter there are 13 weeks. This fact will yield one week where you do not have to budget your mortgage payment. Here is an opportunity to limit your risk. You could apply the extra week to the principal of your mortgage. This method will allow you to pay off your mortgage earlier than the contracted term and save you some interest.
The interest is calculated on the outstanding balance each month. Example: Mortgage loan balance = $98,000. Rate = 6%. Interest calculated as follows: $98,000 X .06 divided by 12=$490.00 interest for current month. Now, if you applied the extra week of the quarter to principal, you will have reduced your mortgage loan balance by at least the weekly budgeted amount of the mortgage payment. Looking at the above model should tell you how important it is to make any extra payments of principal early in the term of the mortgage loan. It has a cascading effect. Need I mention it will benefit you to write your mortgage with no prepayment penalty?
Now let’s discuss circumstances that can be a disaster when you haven’t followed some of the risk reducing theories. When you purchased your home, you were possibly earning a good salary. Disaster comes in the form of a job layoff. Unemployment will never meet your former salary. Now the budget is a lot tighter. I know someone who purchased their home in the 1940’s. Sure enough disaster hit, and there wasn’t the money to pay the mortgage payment. However,they continued to make their interest payments. This cost them more because the principal had nothing applied for the period of time until income increased again, and the full mortgage payment could be met. Another experience I have is with someone who purchased their home and 6 months later, they were laid off. Fortunately, that person diminished their risk as much as possible in the first months of their mortgage loan, and also had a sizeable down-payment to begin with.
Many times, a mortgage is supported by two working people. You can guess what happens when one can’t work . . maybe baby-to-be or medical problem. I personally believe that you never consider a mortgage loan on the basis of two incomes. Divorce can also be a disaster. Generally, unless there are children involved, the attorneys and court will suggest that the home is sold and the gain divided by the parties. In most cases, the parties walk away with very little, but the attorneys take a big chunk. If children are involved and income is sufficient, the home may be retained because, here we go again, housing is a basic need.
My life has taken some unexpected turns and curves that I could never even have predicted in my twenties. Plan your life to allow yourself the basic need of housing, and limit your risk. Then when life delivers a sharp turn, you will have prepared for the unknown to the best of your ability and, hopefully, it won’t be a total disaster causing you to lose your basic need, your home.