9 Facts About Mortgages Every Baby Boomer Should Know
2017-01-10
If you were born between 1946 and 1964, you're a baby boomer.
Though homebuying is often associated with young couples, plenty of baby
boomers in their 50s and 60s are securing mortgages in order to buy homes --
and even more of them are currently carrying mortgages. Here are nine facts
about mortgages that every baby boomer should know.
No. 1: Your credit score has a big influence
First off, you should understand just how
much influence your credit score wields when it comes to the interest rates
that lenders will offer you. The higher your score, the lower the interest
rates will be. According to a calculator at MyFICO.com, here are recent
average rates you'll find if you're borrowing $200,000 via a 30-year fixed-rate
mortgage:
Someone with a very low credit score can pay almost $70,000 more
in interest over the life of the loan than someone with a very high score.
Interestingly, having no credit history can hurt you, too. You might think
you'll impress lenders by never having had to borrow money, but they're more
interested in how likely you'll be to repay your loan, and a strong credit
score reflects that.
No. 2: You can improve your credit score
If your score is lousy, you're not out of
luck. You can improve it. Some ways to improve your credit score include checking your credit report
for errors and having them fixed, and paying your bills on time. You might also
benefit by paying off a lot of debt in order to lower your
debt-to-available-credit ratio.
Lenders like to see you owing only about
10% to 30% of the sum of all your credit limits because it suggests that you
have your debt under control and can afford to take on some more debt via the
mortgage you're seeking. (You're entitled to a free copy of your credit report
annually from each of the three main credit agencies -- visit AnnualCreditReport.com to order them.)
No. 3: You don't need to pay 20% down
While making a down payment of
20% of the purchase price when buying a home is standard practice, many
people don't do so -- and you don't have to, either. You can pay as little as
3% down with most conventional loans -- though if you pay less than 20%, you'll
probably be required to buy private mortgage insurance (PMI).
Paying less than 20% can make sense
sometimes, such as when you find the perfect house, you don't have enough money
on hand for a 20% down payment, and you have sufficient income to make the
mortgage payments. But there are upsides to paying 20% down, too. If you're
cash or asset rich but income poor, for example, paying a lot down (such as
more than 20%) will leave you with lower monthly payments to make.
No. 4: Some surprising things won't impress lenders
As you apply for a mortgage, you might
reasonably assume that the lender will be impressed by certain things, such as
if you have lots of money in the bank, or you paid off a previous loan early.
Lots of money may be nice, but it doesn't ensure that you'll be making your
monthly payments. Meanwhile, if you paid off your last 30-year mortgage in 14
years, that's not music to a lender's ears -- because lenders make more money
when your loan lasts a long time and you pay a lot in interest.
No. 5: It's tougher for self-employed folks to get approved
If you're self-employed, be prepared to
jump through more hoops when applying for a mortgage. It's often easier for
someone with a standard, salaried job to secure a loan. A salaried person might
simply provide W-2 forms as evidence of income. A self-employed person will
need to supply several years' worth of tax returns. Even then, many
self-employed people write off various costs against their income, often
resulting in relatively low net income.
Another issue is that self-employed
people can have unpredictable income, which can make a lender nervous about
their ability to make mortgage payments. If you're self-employed, be prepared
to work harder to get a mortgage -- or possibly make a larger down payment.
No. 6: Some kinds of mortgages will serve you better than others
When shopping for a loan, weigh the pros
and cons between fixed-rate and adjustable-rate mortgages (ARMs), and choose
carefully. A fixed-rate loan is great when interest rates are low (as they are
now), especially if you may be in the home for a long time. An ARM can make
sense if interest rates are likely to fall, or if you expect to only own the
home for a few years.
Weigh the pros and cons of 30-year loans
vs. 15-year loans, too. A shorter loan will give you higher monthly payments,
but you'll pay far less in interest over the life of the loan. A longer loan
will give you lower monthly payments -- letting you buy more house if you want
to. (It can be a good strategy to get a 30-year loan with no penalties for
making prepayments. That way, you can pay more than your monthly obligation
whenever possible, shortening the life of the loan and avoiding paying a lot in
interest.)
No. 7: Using a mortgage broker can be well worth it
You've probably heard of mortgage
brokers, but you may not understand just what they do. In exchange for a
percent of your loan (often 1%), they will do much of the mortgage-related work
for you -- collecting required documents, getting your credit score, and
applying for your loan at a bunch of banks in order to get you a good deal. Once
you choose a lender, they'll often stay in the picture, helping the
loan-securing process work smoothly.
Some brokers don't charge you anything,
and are, instead, paid by the bank, but that often results in your getting a
higher interest rate. The upfront fee is generally preferable. Choose a
mortgage broker carefully, getting recommendations from folks who've used them,
and checking to make sure they're licensed and in good standing.
No. 8:
Sudden moves can hurt you
A little-appreciated rule regarding mortgages
is that you shouldn't make any big changes while your loan is being processed
and before you close on your home. For example, that's not a good time during
which to take on a new car loan, or to change jobs. Before your closing, the
lender will be making sure that you still seem just as creditworthy as you did
a little while ago, and new debt, or a different income situation, can change
everything. A new loan, for example, can change your debt-to-income ratio
enough to matter to an underwriter.
No. 9: It's good to enter retirement mortgage free
Finally, it's a good idea to try to pay
off your mortgage before entering retirement -- if you can. Baby boomers are
likely to be very close to retirement or already in it, so this is especially
relevant for them.
During retirement, you'll likely be
living on less income than you're used to, and mortgage payments can be more of
a burden. Having your home paid off can help you feel more financially secure,
with mainly property taxes, home insurance, and home maintenance to worry
about. It can even be worth taking on a part-time job for a while just to get
that mortgage monkey off your back.
Whether you're a baby boomer looking to
take on a new mortgage, or one already paying off a home loan, the tips above
can help you make smarter financial decisions, and perhaps save a lot of money.
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