Armed with some critical knowledge, you can make smarter decisions regarding mortgages and you may be able to save thousands of dollars — increasing your income and your future financial security in the process.
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. Using the calculator at MyFICO.com, you may find recent average rates 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.