Homeownership is one of those life goals that everyone strives for as part of the American Dream. Some people buy homes as they get older, either for the benefits of owning one or as an investment that grows in value over time. But it seems like millennials(link:https://www.investopedia.com/news/real-reasons-millennials-arent-buying-homes/#5-the-lure-ofbright-lights)are having a hard time making this dream come true. There are numerous viewpoints on this topic; some believe that owning a home is simply a lifetime financial burden, while others believe that owning a home is, after all, emotionally fulfilling.
And there’s us, that believe it is both.
In reality, owning a home can be both a burden and a source of fulfillment. It requires great responsibility, which may exhaust both your time and resources. Most significantly, homeownership requires financial stability. If you dream of getting your own safe haven, which you can call your home, it is crucial to be ready for the costs first and foremost.
There are many factors other than having sufficient income to sustain monthly mortgages that can be stressful, including obtaining papers and permits, maintaining and repairing the property, and paying utility bills, which is quite different from renting a space. The adjustment would be enormous, and you would have to handle everything on your own. Apart from that, you would need to secure yourself from unexpected events that you may face along with having a home.
Affordability – Every Millennial’s Dilemma
One of the main reasons that hinder millennials from getting their own house is affordability. Based on research, nearly 70% of millennials say they could not afford a home due to rising prices. As a rule, mortgage payments should not account for more than 25% of a homeowner’s monthly gross income. Hence, if it happens to be more than the suggested above, you wouldn’t be able to afford or maintain a property.
More than your monthly income, there are vital factors in calculating what you can afford:
- Debts And Expenses
Before purchasing, it is necessary to be aware of your monthly commitments. You will likely have monthly mortgages and therefore need to think of ways to optimize the money spent every month before obtaining a property.
You can refer to the general rule of thumb, which is the 28/36 rule. This rule relates to how far your total debts and expenses can go. Ideally, you will have to spend no more than 36% of your gross monthly income on all your debts, including student loans, car payments, groceries, utilities, clothing, and a lot more. While 28% of housing expenses should be spent, and no more than that.
- Cash Reserves
It refers to the amount of money you have in cash available and designated to pay for a down payment and closing costs. For cash reserves, you can get from your savings, investments, and other resources. In making a down payment, you will have to reserve a 20% payment for a mortgage as a standard to avoid foreclosure.
Even if you have sufficient funds to meet your obligations, lenders will want to know that you will be financially secure in the event of a job loss or a reduction in your income, which will be referred to as “reserves.” Even cash or funds in savings or checking accounts count as having significant cash reserves. People who are saving for house purchases would typically require two months of cash reserves. Hence, you will have to reserve funds for at least the first two months of the mortgage payment before you actually get to pay the mortgage.
- Credit Profile
If you are not using your credit card to your advantage, you have to start building your credit profile now by paying on time. It influences whether or not you will receive mortgage approval. The credit score range generally goes as high as 850 points, depending on how quickly you can repay your debts. Therefore, the higher your credit score is, the better.
Perhaps if you’re a lender yourself, you probably wouldn’t want to lend money to someone who has a lot of debt and a bad credit history. So make sure to make use of it in the best way possible. If not, it will lower your credit score. Most typically, lenders rely on your credit profile, which will reflect on how capable you are when it comes to payment. Having an excellent credit score will also reduce the chance of getting high-interest rates.
Here is the guideline for credit scores:
740 or higher – Excellent credit
700 to 739 – Good credit
630 to 699 – Fair credit
620 and below – Poor credit
- Debt-To-Income Ratio
A debt-to-to-income ratio allows you to determine your overall financial condition by adding up all your monthly debt payments and dividing them by your gross monthly income. Moreover, the 28/36 rule applies to this one, as well. In general, lenders advise that the ideal front-end ratio should be no greater than 28%, and the total back-end ratio (in which all expenses are included) should be no higher than 36%.
Lenders may view a high debt-to-income ratio as a sign that you have far too much debt than your gross income, implying that you cannot take on any additional obligations. On the other hand, a low debt-to-income ratio indicates that you will afford to pay a mortgage once you have your own home.
Protect Your House
After closing a deal for mortgage payments, one thing to ensure is the security of it. You will never know what will happen in the future, god forbid, but you can lose it in one snap. In the worst-case scenario, you should devise a strategy for securing the payments even if you are involved in a car accident, suffer a medical condition, or die. If this happens, a family member may inherit a home, and lenders must allow them to take over the mortgage under federal law. However, if they cannot make the payments, they will be forced to sell the property.
Making payments on a mortgage is one of the many responsibilities you can have and be passed. You can check this site to learn more about how you can protect your home. Not being able to keep up with your mortgage payments will, at times, result in an increase in your interest, foreclosure, the danger of losing your home, and possible default, which is a hassle for those people who might be responsible if you pass away.
Luckily, mortgage protection insurance (MPI) was created to address this issue.
What Is Mortgage Protection Insurance?
It refers to the protection tied to your mortgage, which provides security when you happen to prematurely die. This insurance will cover your debts in mortgage payments to finish the term of the policy. More like life insurance, it will help lessen the responsibility that will be passed on to your family member. Simply put, it is a death benefit that goes straight to pay off your debt to the lender or a company.
Your duration of the term with an insurance company may vary depending on these factors:
Insurance policies underwriting becomes more strict as you get older. Many MPI policies have minimum age requirements for their clients. In some cases, an insurance policy will only be issued to those over the age of 45 will exclude people who are older from obtaining it. But it all depends on the insurance policy you will acquire.
- Mortgage Value
MPI typically varies with the costs or amount you will have to pay your mortgage. The higher the amount, the higher the price you will have to pay for your insurance. Also, it lasts the same number of years as your mortgage. As a result, if you take out a 20-year mortgage, your mortgage protection insurance must be in place for the same amount of time.
You can calculate the amount of mortgage you will have to pay every month on online sites.
The risk of having poor health relates to the changes in the rate of insurance. Those who suffer from health conditions generally have to pay for premiums as well as for those people who have an underlying condition upon doing a medical exam, which you may or may not take depending on the policy you will be taking. But usually, it does not have health requirements.
- Smoker Or Not
While smoking has been proven to increase the risk of chronic diseases and shorter lifespan, it also causes higher premiums in insurance policies. So if you’re a smoker, the chance of paying for twice or even thrice the rate of a non-smoker in mortgage protection insurance is high. The only thing that will help you get it for a cheaper rate is to stop smoking as early as you can.
Since most insurance policies rely on life expectancy rates, having both poor health and habits may cause you to pay higher than usual of an average person. And you don’t have to be in terrible conditions to be subjected to higher life insurance premiums. Simply being a smoker will always result in higher rates.
Pros Of Mortgage Protection
- Peace Of Mind
Not only does insurance pay on its claims, but it also provides you with peace of mind when you may be required to use it. There have been numerous homeowners who have been grateful for these kinds of insurance because you will never know when you’re one of those unlucky people who will get to be in a situation that is financially challenging for you and your loved ones.
Furthermore, MPI death benefits are paid directly to the lender in the event that the homeowner passes away. As a result, even if your loved ones are unable to meet new financial obligations due to age, disability, other debt responsibilities, and so on, it will give you peace of mind. More than that, there are some policies in MPI that include optional benefits such as refunds when you get to actually pay off the mortgage when you are long-lived.
- Protection For Loss
If you are in poor health and cannot acquire a life insurance policy, MPI may be advantageous because there are usually no health requirements for purchasing a policy.
Moreover, if paying off your mortgage is your top priority, getting a policy that will also pay your mortgage if you become disabled or lose your job could be a wise decision. It can save your house from default, even if you do not have the fund to continue the mortgage payment. Moreover, it is insurance with guaranteed acceptance. Hence, even if you have a shaky health profile, you are less likely to be denied. In short, there’s no muss and fuss in obtaining one.
Cons Of Mortgage Protection
The scope of Mortgage Protection Insurance, or MPI, is limited. MPI pays the lender straightforwardly to pay off the mortgage — that’s all. Although mortgage insurance covers all or a portion of your mortgage debt (link: https://www.citizensinformation.ie/en/housing/owning_a_home/buying_a_home/mortgage_protection.html), it leaves no money for your family. Furthermore, your family’s financial needs may extend beyond a mortgage. They might also have other bills and expenses to pay. Also, MPI is often more expensive than term life insurance.
You may also lose the insurance coverage if you change mortgage lenders, which may require you to reapply. You can search about it first and ask for banks or mortgage lenders to negotiate with the premium rate; you can compare them all and go for the best deals that offer numerous benefits to minimize the risks or cons of getting one for your home’s protection.
Even if you die, MPI will help you pay off your remaining balance on a mortgage, which will help lessen the financial responsibilities passed on to your family members. Moreover, it is the best option if you are prone to getting certain health conditions or working in a high-risk job to get your mind free from worries of not being able to pay on the lenders. Mortgage protection insurance makes sense for some families and is an excellent benefit to the homeowner’s heirs. After all, it sounds like a good idea.