There is currently a rush to refinance home mortgages at the present time due to the general belief that mortgage interest rates are currently low and may likely increase in the near future. Some folks may be looking to reduce the term of their mortgage as part of the refinance plan.
For many households, itâs important to arrive at a monthly mortgage payment that is affordable without financial strain. According to the Financial Planning Association of Washington DCâ¦ when deciding how much of a mortgage you can afford, youâll likely want to review the same guidelines that lenders follow when evaluating mortgage applicants. These criteria, from the Mortgage Bankerâs Association, apply to traditional private mortgages only, and the criteria for special situations, such as obtaining a mortgage through the Federal Housing Administration, may differ. They are:
* A combined mortgage payment, insurance, and property taxes that do not exceed 28% of gross monthly income.
* A total debt-to-income ratio of 36% or less.
* A reliable source of income. If you are working, two years or more in your current job is favorable. Lenders may ask you to specify how much of your income comes from ongoing sources, such as wages, as compared with commissions or bonuses.
* A good credit score. Typically, 680 or higher will result in the lowest mortgage rates.
* An appraisal indicating the property is worth what you are paying for it.
The amount of your down payment has a direct bearing on how much you need to borrow and your eventual monthly payment. If you are not comfortable with payment terms that mortgage lenders have presented, consider whether you may benefit by delaying your purchase and saving toward a bigger down payment.
Long-Term Planning: Keep in mind that a mortgage is one element of total household expenses, such as taxes and heating costs, that are likely to increase over time, and itâs important to consider increases in household expenses in addition to your mortgage payment. Your ability to manage a mortgage payment over time may depend, in part, on the stability of your monthly payment. Although an adjustable rate, which typically offers a lower initial payment, may be tempting in the short term, your interest rate and monthly payment are likely to increase over time. An unexpected event such as unemployment could potentially jeopardize your ability to cope with increases. In contrast, a fixed rate is consistent throughout the life of the mortgage, which makes long-term planning easier.
Also, when evaluating your ability to carry a mortgage, consider the importance of pursuing additional financial goals, such as saving for retirement or a college education. A mortgage payment that leaves you with the flexibility to pursue additional goals may be in your long-term best interest. Your best bet may be to consider getting professional help from a Certified Financial Planner designee who can help put you accurately on the financial âmapâ so that you may view your best routes and options pursuing all your financial goals.
Al Benelli is a Certified Financial PlannerÂ® practitioner with Long Financial Group of Plymouth Meeting, PA. An engineering and business major from Penn State and St. Joseph's Universities, Al continues his education through the Wharton School of Business of the University of Pennsylvania. Securities and Investment advice offered through Cadaret-Grant & Co. member FINRA/SIPC.
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