Is a Personal Loan on a Mortgage a Good Decision?
Buying a home is a complex decision that depends on your current goals and the local market. There will come a time when you find yourself settling down to live in an area for several years, and thus have the freedom to make decisions designed to save you money over the long term.
One of the best ways to save money is to create a situation where the vast majority of the currency used in housing is recouped through the eventual sale of the home. While the value of a house rarely outpaces inflation, the amount spent in maintenance, insurance, and interest is often less than would have been spent in rent to a landlord. Additionally, the home’s equity can serve as a buffer, helping you when you decide to move to a new city or state.
The question becomes, what is the best way to get into a home? Since the 2008 fiscal collapse, people have less money than ever. Garnering the traditional twenty percent needed for a down payment is often too much of a challenge, especially for those dealing other debts.
In these situations, obtaining a secondary loan for the down payment is often the only recourse. It can be a good decision, as long as you take certain often overlooked steps to quickly retire that loan and transition to a traditional 80% or less value loan.
Fixed Interest Rate
Buying a home with no equity means you are completely dependent of the whims of the market for how much you are going to be spending. Loan companies know this, and try to steer people into loans that start out low, but then transition to a higher interest rate later on. This was one of the main triggers for the housing collapse in 2008, and while rarer now, still in practice.
The best way to avoid this is to obtain a fixed rate loan, and try to get as short a term as possible. It may be more difficult to afford a loan that is one percent higher than the introductory rate for an adjustable rate mortgage, but you will ultimately save money when the market finishes correcting in a couple of years.
The trick to getting debt free quickly is to pay as little interest as possible. In this instance, you do not want to keep that twenty percent personal loan for long. It not only cost you money in interest, but the fact that you do not have much equity in the home serves as a red flag for mortgage companies, forcing you to pay for expensive mortgage insurance policies.
By having a payment every two weeks, and a shorter (fifteen to twenty years, instead of thirty) term mortgage, you are putting more money into paying off the principal of the loan. This will enable you to refinance your mortgage in two or three years, getting rid of the personal loan and saving a great deal of money.
A personal loan is often the only choice available for a home buyer. By having an aggressive payment plan in place, you are able to mitigate that amount of money wasted on interest. This loan is your enemy; tackle it by paying it off swiftly.