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Should you get a home loan or keep renting?

The state of the nation’s housing market is a frequent topic of discussion. Stories about mortgage rates, home prices, and foreclosures often lead the day’s headlines. If you are a renter you may be wondering if the time will ever be right to buy a home. Regardless of what happens with the broader economy, here are four questions to ask yourself when deciding whether or not to make the leap into homeownership.

  1. Have you paid down debt? Or do you still have a lot of debt from credit cards, student loans, auto loans and other types of financing? When you apply for a home loan your finances are scrutinized by mortgage lenders. One of the factors they are going to focus on is your current debt-to-income ratio. So if you seem to be struggling to pay all the bills with your current debt level, it’s unlikely you are going to get approved for a mortgage. Work on tackling that debt before getting serious about shopping for a mortgage loan.
  2. Do you have a hefty down payment? The more you have saved up for a down payment, the better off you are. When you make a down payment that decreases the amount of principal you have to finance with mortgage loan. Aim for a down payment of 20 percent of the purchase price to avoid mortgage insurance (MI) payments. While there are mortgage loan programs for buyers who don’t have a 20 percent down payment, do yourself a favor and take the time to save as much money as possible.
  3. Can you afford a home? Do you have enough income to cover all the expenses related to owning a home? In addition to monthly mortgage payments for principal and interest, you’ll pay for homeowners insurance and property taxes. Depending upon the community to live in there may be monthly dues. There also will be expenses for routine maintenance and repairs, yard care, snow removal, etc.
  4. Is it a smart move? Are you likely to move anytime soon because of a job change? If there is a good chance that you may have to move soon, buying a home at this time may not be the right move for you. If you’re refinancing, it’s important to look at how long it will take to recoup the closing costs involved with refinancing a home mortgage. Ideally, you would want to remain in the home for at least that amount of time.

Making the move to homeownership is a big step. While current mortgage rates may have you chomping at the bit to get a home loan, it’s important to make sure that your finances can really handle everything that is involved.

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