Effective Mortgages

Owning a home has long been considered part of the American Dream. And most households need to borrow money to do that. Buying and financing a home can be a positive contribution to your financial situation.

Buy a home that’s appropriate to your situation. Some people want to buy one house and stay in it forever. That can work, but what works better for most people is to buy a home that fits their current financial situation, buy up as their careers take off, then downsize when getting ready for retirement. Generally a home that’s a good financial fit is one that’s one and a half to two and a half times your annual gross income. So if your household annual income before deductions is $130,000 a year, look for a home that costs $195,000 to $325,000. Also the ideal mortgage size is no more than 80% of the cost of the home. That makes a payment that won’t be a hardship to pay on your current income and generally avoids having mortgage insurance required by your lender. Some federal programs, like FHA for first time home buyers or VA for military members and former military members don’t require much of a down payment. That can be helpful in terms of getting into a first home, but it will take a bit longer to have the home be worth more than is owed on it. With a good credit score, you’ll qualify for a larger mortgage than this, but getting the biggest mortgage you can isn’t usually a good idea.

A fixed rate amortizing loan will have your mortgage paid in full over the amortization period. The most common amortization schedules are 30 year and 15 year loans, with 15 year loans usually charging slightly lower interest rates. Lori Sorrels with Caliber Home Loans recommends a 30 year loan, even if you want to have it paid off sooner than 30 years. You can pay more toward the loan to get it paid off early. And if you lose a job or have a financial emergency, you can always pay just the minimum payment – which will be smaller.

Studies indicate that the average age at which consumers have the mortgage paid in full is around 49. But there are also studies showing that some people who are financially sophisticated – those with investments, money in savings, and higher income – have mortgages well into retirement. This is part of a strategy of having money invested rather than tied up in their homes, accepting higher risk to get better long term investment returns, and the tax advantages of having a mortgage.

Do what’s comfortable for you in having your home and mortgage as part of your larger financial strategy. Don’t overcommit to your housing budget, but don’t be afraid to get a reasonable mortgage or feel you have to be aggressive about paying your mortgage off early.