Understanding Your Position In The Market
Buying a home is the single biggest expense most people make in their lifetimes. In the majority of cases, the purchase is made using someone else’s money in the form of a mortgage. That is a point that most of us can agree on. However, you need to understand the costs involved with a mortgage and your position in the market place.
The cost of a mortgage over 30 years can be equal to the purchase price. Buy a home for $400,000 and there is a good chance that over 30 years you will pay another $400,000 in interest on the loan. There are several factors that can affect this including:
- The buy price of the home
- The deposit you lay down
- Your credit score and the interest rate
- The time period over which you borrow
- Additional payments you make along the way
Obviously, the cheaper the buy price, the larger the deposit; the lower the interest rate and the faster you repay the mortgage, the less you will pay. Understanding these factors and your current situation provides you with enough information to understand your position in the market.
For example, you can easily afford x dollars per month on a small home with y deposit. That will place you into the marketplace looking at homes for a specific value. Now think longer term. Do you plan on increasing your housing needs (children), or perhaps decreasing (children leaving the nest). Should you look ahead and plan for these circumstances now?
It’s a buyers market and interest rates are relatively low. If you can upscale now and either increase your deposit, or increase you repayments (over and above the minimum required), you could find yourself much better off in the long term. If you buy small now, there is a good chance that over the next five years property prices will rebound to equal prices of three or four years ago – perhaps even higher. At the same time, interest rates will eventually start to climb again, it’s just a matter of time.
Understand your position in the market, what you can afford today, what your future needs may be and what a change in circumstances could do to your borrowing power. For a couple where both are working, your ability to repay is quite high. Later in life, with only one working and one either staying at home, or working reduced hours, your ability to repay the same size loan could be questioned.
Think carefully and act for what is in your best interest in the short, medium and long term. Buying small and paying quickly or buying larger and paying less for longer – they are both viable options depending on your situation.
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