Retirement & Financial Planning Report

If you’re in the market for a primary residence or a vacation house, do some preliminary homework:

  • Be reasonable in your borrowing expectations. Generally, lenders don’t want your monthly housing payments (which includes debt service, taxes and insurance) to exceed 36% of your gross income. In essence, this formula means you generally can borrow about three times your income: with family income of $75,000, for example, you normally can qualify for a $225,000 loan.

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  • Check the math on paying points. These fees are included in the amount you’ll borrow, in return for a lower interest rate. On a $200,000 loan, one point is $2,000, increasing your loan balance to $202,000. Two points would cost $4,000, bringing the total to $204,000. And so on. Each point you pay will reduce your mortgage interest rate by about 0.25%. Thus, it makes sense to pay points if you plan to stay in the house five years or longer, to get the benefit of the lower rate.

  • Ask for a “lock-in, float down” agreement. Some lenders will agree to charge you no more than the current interest rate but allow your rate to drop if mortgage rates move down by the time you close a sale. You might pay a few hundred dollars for this type of can-win, can’t-lose guarantee, but this protection can be worthwhile today, with the Federal Reserve seemingly determined to keep pushing rates higher.