Money-Making Decisions for Homeowners: The Right Renovations, Mortgages, and More
By Guest blogger, Susan Doktor
Buying a home has always been a significant financial decision—and an expensive one at that. But it is also one of the soundest investments you can make. Consider this. The median price of a home in 1960 was just under $12,000. In 2022, that price skyrocketed to $384,000. Home prices jumped by some 16% during the early years of the pandemic and, according to experts, will continue to rise more modestly through 2023. Historically speaking, buying a home is a safe financial bet.
But buying and owning a home can be more or less costly, depending on the decisions you make along the way. Your choice of mortgage lender and mortgage type are two of the greatest influences on your home expenses. Understanding how mortgages work and familiarizing yourself with your many loan options should be among your top priorities if you’re considering buying a home. Once you own your home, the home improvement choices you make add value to your home and help you reap a healthy profit when you sell it.
Basic Mortgage Terminology
To understand how mortgages work, you have to understand the lingo. If you’re a first-time homebuyer, it’s worth reviewing some basic terms and definitions before you dive into the mortgage market.
Adown payment is the money you put into your home when you first purchase it. The rest of the money a seller gets comes from your mortgage lender. That amount of money is the principal portion of your home loan, which you will pay off over time.
Making a down payment is the first step in building homeequity: Your equity is the portion of your home’s cash value that belongs to you and not to your mortgage lender.
Interest is how mortgage lenders make money. It’s the fee you pay on top of your principal payments for borrowing money.
Your interest rate will remain the same for the life of your loan if you choose a fixed-rate mortgage.Your interest will periodically change if you choose an adjustable- or variable-rate loan.
Your mortgage term is the length of time you have to fulfill your mortgage obligation. Loan terms generally run between 10 and 40 years.
Four Ways to Secure a Low-Interest Loan
1. Credit Score
The single most influential factor in how low an interest rate you’ll be offered is your credit score. Maintaining a high credit score can save you tens of thousands of dollars over your lifetime. Whether you’re applying for a credit card, an auto loan, or life insurance, financial institutions consider your credit score before quoting you a price for their services. Ideally, you should track your credit score regularly. And the time to start working on boosting your credit is long before you ever apply for a mortgage.
The first step is to download a free credit report from all three major credit reporting bureaus. The next step is to comb through it carefully and find out what may be dragging your credit down. A history of late payments is a primary cause of a poor credit rating. Be sure that all of your accounts are paid up-to-date before even considering applying for a mortgage. Lenders also look at your debt-to-income ratio—how much you owe compared to how much you earn—as a sign of your financial stability. They’ll also look at your credit usage: that portion of the credit available to you that you are currently using. Having a short credit history can bring your score down. So take steps to establish some credit before applying for a home loan.
Finally, you should look study your credit report for outright mistakes, such as accounts you have closed or don’t recognize or misrecorded late payments. The process of correcting mistakes on your credit report can be frustrating and time-consuming. But it’s very important. A credit score bump of 50 to 100 points can make a significant difference in the interest rates you’re offered by mortgage lenders. Don’t believe me? Try using this interactive mortgage calculator. First, select your actual credit score, then boost it by 50 points to see how much money you could save by getting your credit profile in great shape.
2. Choose a Short Term Loan
A second proven way to lower your interest rate is by choosing a shorter-term home loan. When you take out a short-term mortgage, your monthly payments will be higher. But lenders get their money back more quickly, so they’re willing to offer you a lower rate. Choosing a short-term loan will also lower the amount of interest you pay over the life of your loan and lessen the lifetime cost of borrowing. Choosing a 15-year mortgage instead of a 30-year mortgage can save you as much as 30% on your interest payment.
3. Increase Your Down Payment
Remember that basic term down payment? The amount of money you put into your home at the start has a direct influence on the mortgage rates you’ll be offered and, in turn, will affect your total interest payments over the life of your loan. Why? The first, of course, is that the larger the down payment you make, the less you’ll have to borrow and the less interest you’ll pay. But there’s another reason, too. Lenders look for a high level of commitment in borrowers. They figure that the more you put into your home, the more you stand to lose—and the less likely you are to default on your mortgage. And the data bears that assumption out. Lenders are in the business of managing risk. They offer their best deals to borrowers they consider safe.
4. Government-Backed Mortgages Can Save You Money
Here’s where the concept of risk comes into play again. The federal government offers several types of guaranteed loans. When a loan is guaranteed by the government, the government agrees to pay it off in the case of default. That makes government-backed loans less risky for lenders and why they come with lower interest rates than private mortgages. If you’re a veteran or active-duty member of the military, you may be eligible for a VA loan. Depending on the location of your new home and your income, you may qualify for a USDA loan. FHA loans are a popular choice for first-time buyers, but are available to experienced homeowners, too. In addition to low interest rates, these government-backed loans have more lenient credit qualifications and, for qualified buyers offer low- or no-down-payment options.
Now That You Own it, Protect Your Home’s Value
Shopping around for a mortgage isn’t the fun part of homeownership. Living in it is! Over the years, you’ll take many steps to personalize the house you buy and transform it into a unique, comfortable space. How you choose to do that is up to you, your imagination, and your budget. But owning a home brings a whole new set of financial considerations to the forefront.
The money you invest in maintaining and upgrading your home can have a profound effect on its future value. The first rule of thumb is to keep up with routine maintenance. Some chores are relatively simple and inexpensive, like cleaning your gutters, having your furnace inspected, and keeping your shrubs handsomely manicured. But others are more costly to undertake and require more consideration. Exterior painting is one such endeavor. It’s essential: painting your home protects it from damage by the elements. Interior painting is equally important. Nothing detracts from a home-like dingey, dated walls and trim. In both cases, choosing colors that have wide appeal while also making the most of your home’s features will make it easier to sell your home when the time comes.
You may be surprised by some of the upgrades that increase or decrease your home’s value. The steps you take to make your home more energy-efficient, from installing new windows to insulating your home to buying new Energy Star-rated systems and appliances, will boost it. Hardwood floors are also a big hit with buyers. That swimming pool and spa you’ve always dreamed about? Not so much. Painting your house in wild crazy, mismatched colors isn’t the best idea, either. An experienced realtor can give you accurate statistics on which investments are likely to bring the highest return.
If you don’t have the cash on hand to take on these improvements, there’s a wide range of renovation loans that can help you manage your home improvement expenses. As you build equity in your home, your lending options increase. But some mortgage lenders will allow you to roll the cost of renovations into your primary home loan, too.
Balance Your Dreams and Your Budget
Living in a beautiful, comfortable home is a reward you can enjoy for years to come. But make home improvements judiciously, keeping in mind your income, debts, and unexpected expenses. Financial advisors recommend that you amass an emergency fund that can tide you over for three to six months. Homeowners would be wise to save up even more. Houses—and life, of course—are full of surprises. Be prepared both financially and emotionally, but the joy of coming home to a house you love makes is a gift matched by few others.
Susan Doktor is a journalist, business strategist, and historic homeowner. She covers a wide range of personal finance topics in her work, including the mortgage market and real estate trends. Her contribution comes to us courtesy of Money.com.