Thinking of Taking On a Big Mortgage Loan? Do This First
by Christy Bieber | Updated July 19, 2021 - First published on May 1, 2021
Before you take out a big mortgage, you should give your loan payments a test run.
Are you thinking of taking out a new mortgage loan that will come with a higher monthly payment than you're currently making?
Many people make this decision when moving up from a starter home. And, in some cases, it's the right financial choice for their needs. In other situations, however, taking on a huge mortgage payment could lead to disaster, as it leaves too little room in your budget for other important financial goals.
So how can you tell if your large mortgage loan will work out well for you or turn into something you regret? Before you commit to borrow, there's one simple thing you should do first.
This simple trick could save you from making a huge financial mistake with your mortgage
Before you take out a mortgage loan that will raise your monthly payment, you should do a test run. You can do this by "paying" the larger mortgage loan before actually committing to borrow.
For example, say you're currently paying $1,000 per month for your home or apartment, and you're considering taking out a mortgage that would leave you with a $1,500 monthly payment. Keep paying your rent or housing costs as normal, but make sure to deposit that extra $500 that you'll have to spend on your future payment into a savings account.
By doing this for at least a few months before you commit to taking out a larger mortgage loan, you'll get a very realistic picture of what it will be like living with your new housing payment.
If you can do this without any problems, then you may be ready to move up to your costlier home loan.
But if you struggle to keep up financially, you at least figured this out before you commit to a loan that you'd be stuck paying for 30 years.
Of course, as a bonus, those extra payments you put into savings during your test run can help you to make a larger down payment. This could help to cover closing costs or to start your home maintenance account. Since closing costs alone can add up to 2% to 5% of the value of the home, that extra money could really come in handy.
Just remember that if you're upgrading to a bigger, more expensive home, then other costs of homeownership besides your mortgage may also be higher. This includes property taxes, maintenance, and repairs. So you'll have to take that into account when doing your budgeting math. If you want to be absolutely sure that your new monthly payments won't become a major financial burden, you can estimate all of these added expenses and factor those in when you do your payment trial run.
Giving your loan payments a test run before you buy a house can help you avoid an unpleasant surprise. It will also help ensure you're truly ready to commit to a home loan that requires you to pay more each month than your current home is costing you.
Ready for that home upgrade? Make sure to brush up on how to apply for a mortgage to guide you and help minimize costly mistakes.
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