When people think about buying a home or refinancing their current mortgage, interest rates are often top of mind. After all, the news has been full of speculation—for more than two years—on when the Federal Reserve Bank would taper its bond buying (which it has done) and raise its prime rate (which is still a question that remains to be answered). However, while a percentage point—or even fraction of one—will make a difference in the amount of interest you’ll pay on home loan, it isn’t the only factor you need to consider.
Determine how long you’ll stay in the home.
Every mortgage comes at a price (all those fees and closing costs) and you need to live in the home long enough to recoup what you’ve spent to secure the loan. While costs vary based on situation and locality, experts advise it generally takes four to seven years to break even. If you’re not going to stick around that long, renting (or maintaining your current mortgage) could be the better option.
Evaluate your job security.
Is there any chance your employer might downsize you, cut your hours, or ask you to move across the country for a new position? If so, it’s probably not the right time to buy. However, if you can refinance and lower your monthly payments (and are confident you can find a new job quickly and in the same area), it still may make sense to do so. Your mortgage advisor is the best one to help you evaluate the situation.
Take stock of your down payment.
While there are now loans available with down payments as low as 3 percent, putting less than 20 percent down will result in private mortgage insurance. This will increase your monthly mortgage payment and may even lead to a higher interest rate. Can you weather that financial burden? Would it be better to buy once you’ve amassed a larger down payment, or refinance once your home equity is at 20 percent? Again, your mortgage advisor can provide insight.
Closely examine your finances.
You can bet any mortgage lender is going to go through your financial affairs with a fine-toothed comb before giving you a new loan. Do this on your own ahead of time, and you’ll be better prepared to address whatever he or she might find. Things you’ll want to consider include your credit score, income, savings and debts.
Learn about the local market.
Housing affordability varies by city. In some, buying a home is decidedly cheaper than renting. In others, the opposite is true. You’ll also find cost variations among similar homes in different neighborhoods. The more you learn about the area and factors driving those costs, the better decision you can make on where (and where not) to buy. Most real estate agents will be happy to help you find this information.
