Mortgage 101 - Rational Decision Making

A big part of getting approved or rejected in the mortgage process lies in your ability to make rational, unemotional decisions. It's essential that you separate yourself from the emotional issue of getting a house and approach the whole process like a business.

People get a bit goofy when it comes to money… especially when it comes to their money and in the case of the getting a mortgage you're talking about the most money anyone will ever spend. As a result, if you can take the emotion out of the equation your chance of making the right decision will increase dramatically. If not, you could be in for a tough road because people who make mortgage decisions based on emotion - make mistakes.

Mistakes = Emotion + Money
Those who take their time and make decisions based on the reality of their individual situations enjoy much greater success when you look at their overall financial situations.

The following questions are designed to help you determine how long you expect to be in a prospective new house or hold a mortgage. They should also help you to do the necessary soul searching "before" you make such a huge decision. In fact, the length of time you keep a mortgage may be the most important financial question you need to answer because how you answer it will determine the strategies you need to follow when selecting and paying off a mortgage.

The bottom line is that only you can make the decision because only you know your position in life now and only you can make the decision on what direction to take your life in the future.

Personal Questions
1. How long did you live in your last house? Why did you move and is that a recurring factor in your life?
2. Are you expecting any major life-style changes?
3. Any major health concerns in your life?
4. Is this going to be your last house before retirement?

Family Questions
1. Are you expecting any new family members (i.e. children, elderly parents, etc.)?
2. When will your children be moving out?
3. How stable is your marriage?

Financial Questions
1. Am I expecting a promotion or job transfer? Am I transferred at regular intervals?
2. How is my overall job stability?
3. Are you planning on retiring soon or are you just entering the work force?
4. Is this an investment property with long term rental potential?
5. Instead of selling this house when we move, could we rent it out?

Economic / Geographical
1. Are property values going up or down in the neighborhood?
2. Is the local school system acceptable?
3. What are the property taxes?
4. What is the overall economic condition of the area - city, county?
5. Are there any long term changes expected such as roads, schools, malls, etc.?

Location / Neighborhood
1. How long will this house meet our needs?
2. What is the condition of the house? Any major repairs needed?
3. If this is a starter home will it be too small in a few years?
4. How are the neighbors?
5. Does the overall condition of the neighborhood appear to be improving or deteriorating?
6. Are you buying this house only because it's all you can afford?

Of course, there's many more questions that could be asked but for purpose of this article let's take a look at some examples that will demonstrate how answering particular questions will help you in determine what type of mortgage to pursue - 30 year fixed, interest only, 2/28 ARM, 15 year fixed and so on.

Example 1 - If you lived in your last house for about 10 years and the house before that for about the same amount of time, odds are you'll live in the next one for lengthy period of time also. Therefore, you should accordingly and thus you may want to look at either a 15 or 30 year fixed mortgage.

Example 2 - If this is your first house and you plan on moving out as soon as you can afford it then plan on the best mortgage for being in a house for a short period of time. An interest-only or 2/28 ARM mortgage may be the route to go. The 2/28 ARM is fixed for two years and then the rate goes up (it's adjustable) but if you plan on moving quickly anyway the first two years is will be lower than a fixed rate mortgage and thus it will save you money. Interest-Only mortgages are usually amortized over 30 years, just like a 30-year fixed but since you are only paying the interest the payments will be lower. Therefore, if you would like to lower your payments and possibly use the extra money to save for a down payment on your new home then an interest only mortgage may be a good option.

Logical Decisions + Effective Planning + Money = Success
Although it's difficult, if you remember to approach the purchase of a new home as a business decision and not as an emotional one the odds that you'll make the right decision will be greatly enhanced.