Over the course of your lifetime, you'll make a number of critical financial decisions. Examples will include deciding where you'll invest your nest egg, as well as making up your mind as to whether or not you'll go to college -- and if you go, figuring out how to pay the growing cost of a post-secondary education. However, the largest financial decision Americans may deal with during their lifetimes is deciding whether or not to become a homeowner.
Buying a home is a big decision
According to data from the National Multifamily Housing Council from 2014, which was updated in September 2015, there are nearly 117.3 million households in the United States, and 65% of them own the homes that they live in. The remainder are renters. Of those households living in an owner-occupied home, most tend to be headed by people aged 45 or older (75.4%).
Because homes are such a large expense, it's rare that a buyer can simply swoop in and pay off the entire cost of the home upfront. Adding up owner-occupied homes that were paid for upfront, as well as homeowners who've paid off the entirety of their home loans, covers only 20% of all owner-occupied households, as per the American Community Survey. In other words, about 36% of owner-occupied homes currently have a mortgage attached to them.
A mortgage can be a bit of a double-edged sword for an American consumer. On one hand, it's viewed as "good debt" because it allows you to use leverage to invest in a valuable asset -- although depending on where you live, you'll likely be faring no better than the rate of inflation in terms of housing-price growth over the long term -- and it can help you establish good credit. On the other hand, mortgage debt can wreck your credit score if you don't understand the responsibility attached to what's likely to be a six-digit loan.
Here's how much the average American household owes on its mortgage
What's particularly interesting about mortgage debt is just how widely it can vary across the country. Based on data provided by Experian's Decision Analytics Group via Business Insider from 2014, we can discern which areas of the country are hot spots for high mortgages, which portions of the country sport relatively low household mortgage debt, and of course, the average household mortgage debt across the country.
If you're curious which side of the fence you lie on, the average mortgage balance per household across the United States is $157,154. The highest mortgage balances typically hail from the Northeast or West Coast, with the District of Columbia, Hawaii, and California holding the top spots with average household mortgage balances well above $250,000. By comparison, Maryland's average household mortgage balance, which ranks as fourth-highest behind California, is nearly a $50,000 drop-off from California.
On the other end of the spectrum, the Ohio River Valley has some of the lowest household mortgage debt balances. West Virginia leads the nation, so to speak, with an average mortgage debt balance of "only" $93,195 per household. Others below $100,000 include Mississippi ($98,230), Indiana ($99,493), and Arkansas ($99,759).
Ways to make a mortgage work in your favor
These six-figure loan amounts for a home might seem downright terrifying for prospective homebuyers, or they could feel like back-breakers for existing homeowners. However, there are ways to potentially save money when buying a home or refinancing an existing mortgage.
One of the most important aspects of seeking out a loan is having as high a credit score as possible. The higher your credit score, the better chance you have of negotiating a lower rate. You may not think fighting for a better rate is possible, but when you have an excellent credit score (usually 740+ out of a possible FICO score of 850), lenders are willing to fight for your business because you've proven your responsibility with other institutions' money.
How do you boost your credit score? According to FICO, there are five main components to your score: payment history (35%), credit utilization (30%), length of credit history (15%), new credit accounts (10%), and credit mix (10%). Without getting too technical, if you pay your bills on time, keep from getting anywhere near your credit limits (try to stay under 30% of your combined account limits), and aren't frivolously opening credit accounts, you should have a pretty decent credit score.
Second, understand the dynamics of what you can afford -- both in a home and with a mortgage. If, for example, 60% of your income is going to pay for your mortgage every month, then you've probably bought more home than you can afford. It's important to meet the needs of you and your family, but you'll also want to keep financial feasibility in mind. Plus, most lenders will cap monthly mortgage payments at 28% of your gross monthly income.
Along those same lines, you'll want to understand your options when it comes to making payments. Many Americans opt for a 30-year mortgage because the monthly payments are lower, but opting for a 15-year mortgage with higher monthly payments -- if you can reasonably afford it -- could save you tens of thousands of dollars in lifetime interest.
Ultimately, a mortgage is a big responsibility. It doesn't have to be a burdensome responsibility, however, if you understand these mortgage basics.
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