Personal Finance Ology

Now that you are working on improving your credit or keeping it in good standing, and you’ve figured out all of the determining factors that will lead you to financially responsible home ownership it’s time to decide on a purchase price that provides a monthly mortgage payment you are comfortable with and will allow for continued financial stability. Remember, the exciting part is finding a home we truly love and investing in it, but the important part is making sure we will be able to sustain our investment without putting a strain on our finances.

When you start the process of purchasing a home, before you ever go out to look at any homes, you should first choose a lender, often times your real estate agent will have a relationship with a trusted lender they can refer you to, and get preapproved for a loan. There are many factors that go into determining this amount, such as interest rates, the amount of your current debt, your credit rating, of course, and your income. It is recommended that you take into consideration this amount, but do note that if the amount of loan you are preapproved for seems too high, you do not have to borrow the full amount. The figure the lender provides you is the MAXIMUM amount you are qualified for this is not the amount you are required to spend.

There are many experts who say to pay anywhere from two and a half to three times your annual salary for a home, but it is smarter to look at the amount of mortgage you can get for the monthly payment you feel most comfortable with. Even though you know the total amount you qualify for that amount may call for a higher monthly payment than you were expecting. So always be sure to ask the lender to break the amount you qualify for into monthly payments.

If you feel uncomfortable in determining the affordability of a monthly mortgage payment on your own, you can always ask your lender to explain to you how much you can afford and why they chose that amount. Don’t just let someone tell you how much you can afford. Ask for an explanation. It is imperative for you to have full control of your finances and if you feel a little uncertain, your lenders are usually willing to explain to you all the details of a mortgage.

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There is a pride to home ownership, however there are some cases where you must look at the entire picture of your situation and decide if renting may be better than buying at the current time. While many people may feel renting is a waste of money sometimes buying can also prove to be a waste of your money if you cannot sustain the payments you acquired at the time of purchase and in turn face financial stress and the possibility of losing your home and the previous months payments you’ve already invested. With this in mind it’s a necessity to evaluate your finances, job stability and current situation in order to determine if the time is right to venture into such a huge investment. Start by asking yourself the following questions.

How Much More Debt Can I Afford?

Most experts agree that your total monthly debt payments shouldn’t exceed 36% of your gross monthly income. This is a good starting point, and over time if you can reduce that number you’ll be in pretty good shape. Therefore you should start by writing all of your debts and see exactly how much of your gross monthly income is being taken up by your current debt. If this proves to be less than 36% then you can add that to the pros of purchasing a home. This is considered calculating your debt to income ratio and is taken into consideration by lenders when deciding to approve you for a loan.

How Much Should I Have Saved?

You should definitely have an emergency fund. This is a fund used to cover expenses when there is a sudden loss of income or other financial emergency. Most suggest a household have between three and six months worth of expenses available in the event of an emergency. So, if your monthly obligations total $2,500, you should try and keep between $7,500 and $15,000 in your emergency fund.

How Much Will I Have To Put Down?

Putting something down on your home is very important, no matter what terms your lender offers. It should be noted, however that if you put less than 20% down, your lender will require you to have private mortgage insurance (PMI). This is required by banks to make certain that they are not left empty-handed should you default on your mortgage. PMI can add hundreds of dollars to your yearly payments. Therefore, if you are trying to save money by not putting at least 20% down you may really be costing yourself more in the long run due to the cost of the insurance.
In any case, after you have decided how much of a mortgage payment you can afford it is best to calculate at least a 20% down payment into the total purchase price of the home. This will assure that you will have the monthly payment you desire. Also when preparing for the total amount of expenses that will be required of you it is imperative to take into consideration closing costs. Sometimes the seller will pay all or a portion of your closing costs. However, if you are required to pay the closing cost it is usually in a range of 2%-3% of the sales price. This should also be remembered when deciding on the amount of your down payment and how much you can afford to come out of pocket with.

Once you have carefully examined all of these factors it is now time to present them to a lender so they can use those figures to determine your ideal homes price range.

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Debt not only causes stress and worry, but it could also harm your credit rating. If you miss a payment or, in most instances, are more than thirty days late your creditors report this to the credit bureaus. The negative report in turn has a huge impact on your credibility and your credit score.

When deciding whether or not to take on new debt it is important to consider your debt to income ratio. This is the percentage of your monthly gross income that goes toward paying your debts. The key is to keep this number as low as possible. A rule of thumb is to not have your personal debt exceed, an estimated, 36% of your total income. When working on creating wealth you don’t want any money to have to go towards unnecessary debt. If you want something that will not increase in value; pay cash for it. If you can’t pay cash for it then don’t buy it.

Credit cards should only be used in the case of an emergency. If you find yourself having to use your credit card a lot, slow down on your spending, allocate a plan to bring the balance to zero and discontinue the use of your credit card. Incessant spending is a form of mismanaging your money. This is what puts most of us in debt.

Sources:

http://www.thinkmoney.com/debt/debt-management/debt-management-faqs.asp

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There are many substantial ways to getting out of debt. However, there are some common ways of getting out of debt that are not as advantageous as we tend to think.

Bankruptcy
This seems like the easiest answer because once it’s done a lot of your debt is erased. However, this is where your wise decision skills should come into play. While considering bankruptcy, think about the long-term effect it will have. Now that have you have decided to create financial abundance there is going to be a time when you are able to pay off your debt and take part in many advantageous opportunities. If you file bankruptcy this will stay on your credit for years and that will hinder you from being able to take part in those opportunities.

Remember to always look at the long term effect of your decisions rather than choosing instant gratification and consult the advice of a well researched attorney if you feel the desire to learn more about your current financial situation as it relates to bankruptcy.

Debt Consolidating Companies
A lot of these companies put you on a program where they total up the sum of all your debt and arrange an “affordable” monthly payment. However, in most cases, that “affordable” monthly payment is only paying the interest and doesn’t even touch the principle balances you owe. It would be better to contact your creditors on your own and negotiate a repayment plan that lowers the remaining balance and also does away with the interest rate. It may take some time but anything is negotiable.

Credit Repair Companies
There are a lot of reputable companies to choose from but there are a lot of unreliable companies that perform illegal ways of removing negative items from your credit. When deciding on a credit repair company be sure to do your due diligence and get as many references as possible.

Transfer Funds
There’s the method of transferring the balance from a higher interest card to a lower interest card to save money. This is profitable only if it is done wisely. It is one thing to use the lower interest card to pay off the balance on your higher interest card, however it is not wise to make it a cycle. Once you have transferred the balance from the high interest credit card to the lower interest don’t go and run up the balance on the high interest card again. This only creates a pattern of instability and continuous bad debt.

More Loans
Just as with transferring funds, refinancing your home to consolidate your debt can yield great results. This can happen only if it is done right the first time. After you have paid down your debt and gotten control of it it’s not wise to go out creating more debt for yourself. When you do this you are not only putting yourself in the same position by doing the same things but you are also wasting the equity you worked so hard to build in your home. Therefore, if you are going to refinance your home to pay off your debt do just that and be responsible enough to not incur anymore.

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