While buying a home has long been considered a crucial part of the American Dream, becoming a homeowner is not as easy as it used to be. The G.I. Bill, signed by Franklin Roosevelt in 1944 to help out soldiers returning from the Second World War, significantly lowered mortgage interest rates for veterans, creating a housing boom that lasted until the Great Recession of 2007.
When the real estate market shut down that year, so did the construction of new houses. In the following decade, the number of new homes built in the United States dropped from 14.5 to 6.9 million — a historic low. The subsequent housing shortage, which continues to this day, has especially restricted the availability of small, entry-level homes. As asking prices continue to rise, more young Americans are likely wondering if they will ever be able to become homeowners themselves.
Homeownership may seem unattainable in today’s economy, but that’s not necessarily the case. You can still become a homeowner if you’re determined — it might just require borrowing more money than people did in previous decades. In this article, you’ll not only learn why buying a home is a worthwhile investment despite rising costs but also how you can get the most out of your mortgage loan.
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First, what’s a mortgage?
There are three main ways to buy a home: pay out of pocket, borrow money, or a combination of the two. You can borrow from friends and family, or you can apply for a mortgage loan at a financial institution. A mortgage — from the Old French word “morgage,” meaning “dead pledge” — is a loan that helps finance the purchase of a residence, paid back over a specific period of time with interest.
If you have never shopped for a house before, you would think that prospective homeowners should apply for a mortgage after they have selected the property they want to buy. While this is certainly possible, it’s not advised.
By getting your mortgage loan pre-approved before you start house-hunting, you show sellers that you have your finances in order and are actively looking to make a purchase. In competitive housing markets, like New York City or the San Francisco Bay Area, most real estate agents will only consider offers backed up by a loan. Pre-approved mortgages can also help you find the right home.
As New York real estate agent McKenzie Ryan puts it: “If you don’t know how much you can afford to spend, then we don’t know the price of the houses we should be looking at.”
To get pre-approved for a mortgage loan, you will need to submit a number of documents to the lender, including your tax returns, credit reports, and W-2 forms. The lender, usually a bank or mortgage company, uses all this information to get a sense of how likely you are to pay them back. From this, they determine the amount of money they will let you borrow, the time you have to pay it back to them, and how much interest they’ll charge you until your debt is settled.
How to score the best mortgage rate
Lenders do not just look at the amount of money you make, but also at how responsible you are with that money. The better the state of your personal finances, the more generous the conditions of the mortgage loan will be. If you are in debt or have poor credit, lenders will likely give you a small loan with a high interest rate. These interest rates – also referred to as mortgage rates – represent the actual cost of the loan, so you want to make sure they stay low. You can do this by building a steady employment history, saving up for a down payment, and improving your credit score.
It’s important to note that you probably have multiple credit scores. As the U.S. Consumer Financial Protection Bureau notes, most mortgage lenders will “look at scores from all three major credit reporting agencies – Equifax, Experian, and TransUnion – and use the middle score for deciding what rate to offer you.”
Equally important is your employment history, which shows lenders you have a reliable source of income. Often, they will review your past two years of employment history and earnings. Finally, there are down payments. A down payment is an initial payment made by the borrower when they buy something on credit. A large down payment not only means a smaller mortgage loan, but also a lower mortgage rate.
The benefits of homeowning
While low mortgage rates decrease the cost of borrowing and help you pay off your debt sooner, there is no denying that owning a home in today’s economy has become an expensive enterprise – so expensive, in fact, that an increasing number of young people are choosing to rent homes instead. An understandable decision, to be sure, but not a very smart one if you take a moment to think about it.
Contrary to popular belief, there is more to buying a home than simply chasing the American Dream; it is also a worthwhile and relatively safe investment. After all, every time you make a mortgage payment, you aren’t decreasing your debt so much as you are increasing your ownership of the property you live in. This is in stark contrast to the renter, who — though they don’t have to borrow any money to afford their home — also never gets to own said home. Additionally, though housing costs rise over time, mortgage loans – once pre-approved – work with fixed interest rates. This means the cost of homeownership stays relatively constant during financial crises, unlike the cost of renting, which skyrockets in periods of high inflation.In conclusion, while renting may be cheaper in the short term, it actually costs you money in the long run. How much money? According to a 2022 study from the National Association of Realtors, the median net worth of a homeowner in the United States was $300,000 compared to $8,000 for renters. It is for precisely this reason that Ryan refers to homeowning as “an incredible opportunity for young people to take ownership over their financial futures.”