Is Rent to Own right for you?

When you take out a mortgage loan, the lender will guarantee, for a certain amount of time, at a certain cost, a specified interest rate. Ensure that you let this lock-in period, the amount of time your interest rate is guaranteed, to work for you. Without knowing the ins and outs of your particular loan, it’s not possible to give personalized guidance. Let this serve as a guide to make sure you make the right financial moves.

Sit down with all of your mortgage information and do all of the relevant math. How much interest are you paying per payment, and how much of your money is going toward the actual amount of the loan? Now that you know this, consider the same questions with a higher interest rate. Is the difference worth the time and paperwork it would require to refinance prior to the lock-in period with a new lender?

Remember, chances are, if you’re making your monthly loan payments on time each month, they are likely benefiting your credit score. A higher credit score correlates with better interest rate offers. It may be self-sabotage to ignore potentially thousands of dollars you could be saving after your lock-in period is lifted.

If you resorted to creative funding, you may have less options for better loans, especially if the lock-in period for your mortgage was less than a couple of years. Even so, it’s worth looking into. Re-financing isn’t just for paying off debt, remodeling, or home repairs.

The most common mortgage plan, a 30 year contract, has been the industry standard. In the recent past, because of the minimal equity-building of the 30 year structure, lenders have been coming up with 15 year loan models, and the benefits are making this option more popular. Why would you want to take out a shorter mortgage plan?

If you’re looking to build equity in a shorter amount of time, the 15 year plan has the potential to facilitate this. Unless the real estate market is booming, the longer contracts don’t help much in this area. Read Part 1 and Part 2 of “Understanding the Structure of Your Home Loan,” to get an idea of the interest vs principal payments on these longer loans.

If you’re in a lower income bracket and looking at your home purchase as an investment, learning more about a 15 year mortgage contract might help you make a better decision. You might also want to know why the 15 year plan wasn’t so common.

Always make the most informed decision you can when it comes to home purchases. It’s your financial future at stake.

Most banks will closely look at the following:• Your income and your monthly expenses. Standard debt-to-income ratios are 28/36 for conventional loans. These ratios may be exceeded with compensation factors. 

• Your credit history! A FICO score of 620 or above is required in obtaining an approval.
• Your job history. Most banks want to see W-2’s for the previous two years.

To be eligible for a conventional mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (28% ratio). Your credit background will be fairly considered. At least a 620 FICO credit score is generally required to obtain a conventional approval. You must also have enough income to pay your housing costs plus all additional monthly debt (36% ratio).