If you’re a small business owner who works out of your house then you’re well-acquainted with the unique challenges that face a home-based company. Whether it’s shutting out distractions from family, pets or roommates, going the extra mile to maintain a professional image, or finding ways to combat cabin fever, there are a number of obstacles you deal with on a daily basis that business owners with separate home and work spaces don’t have to worry about. Nonetheless, there are also benefits of operating a home-based business, such as having lower start-up and operating costs. Speaking of costs, it’s important not to let management of your business expenses get too mixed up with your personal expenses. Blurring the lines between personal and business finances is one problem you don’t want to mess with when tax season arrives. That’s why in this week’s blog post, we’re going to provide some advice on navigating one of those financial areas where it can be easy to think like a business owner instead of as a home owner – how to get a mortgage of your own.
Whether you’re a home-based business owner looking to buy a bigger house to carve out some office space, or just looking to refinance your current mortgage, these tips will help point you in the right direction.
Today’s Mortgage Landscape: No, The Sky Is NOT Falling
First things first, let’s take a look at how the mortgage landscape is expected to perform in 2017. If you’ve been following projections from industry analysts and associations then you’ve heard that rates are expected to rise gradually over the coming year. The Mortgage Bankers Association predicts that the 30-year fixed-rate will average about 4.7 percent in the fourth quarter of 2017, while the National Association of Realtors expects it to be around 4.6 percent. If you’re ready to panic because rates are expected to rise, please take a step back and breathe. Yes, rates are projected to rise this year, but not to historic highs.
Like many markets, the mortgage space experiences cycles where rates either increase, decrease or remain level over an extended period of time. We’ve just experienced a few years of historic lows, so these projections for rate increases are not entirely unexpected. What this means is that a mortgage advisor will tell you that rates are likely heading back to a more “normal” level; not rocketing to record highs unseen in the financial world. If rates do rise to around 4.5 or 4.6 percent this year, we’ll be at the same place we were in January 2014, when 30-year rates were around 4.5 percent – certainly no cause for alarm.
So, now that we’ve established the sky is NOT falling, you can rest assured that you have the time you need to research your options and make the best financial decision for your unique situation.
Alternative Options to a 30-Year Fixed-Rate Mortgage
Many homeowners and house-hunters walk into one of our branches convinced that they need to get a 30-year fixed-rate mortgage. This arrangement is the perfect fit for certain homeowners; however, depending on your financial standing and preferences, but if you consult one of our mortgage advisors you’ll find there may be other options better tailored to your needs. For example, rather than locking yourself into a fixed rate for the next three decades, you might be better going off with a shorter, 15-year term loan or selecting an adjustable interest rate. After all, one size doesn’t fit all, so there might be an option out there that could help you eliminate your debt faster if you’re so inclined.
Our approach is to establish a thought-provoking conversation with our customers to identify the best options that fit their situation. Here are the three questions we start with:
•What are your plans for your house? – The first question you should ask yourself is what your plans are for the future, starting with how long you plan to stay in your new home. If you know your current move is only temporary, say 5 or 7 years before your company ships you off to a new location, then you may want to consider a term shorter than 30 years. A common misconception is that agreeing to a shorter term means you’re getting a more expensive loan. However, just because your loan has a 15-year term does not mean it will be twice as expensive in the long run as a 30-year term. Your payments will be more expensive, but the increase is dependent on the rate you receive. For example, your 15-year fixed-rate might be 30% higher than your 30-year fixed-rate. In this situation, your monthly payments will be 30% higher, but you won’t have to pay as much in the long run because you’ll have paid off your loan in a shorter period of time because the extra money is going towards your principle, thus reducing debt, which is another way of creating savings and wealth.
•What is your appetite for risk? – In addition to your plans for your house, when getting a mortgage you should also take into account your expectations for the near future. Are you going to need to set aside money to get kids through college? Do you have school loans to pay off? Starting a family? Figuring out these financial obligations can help you establish how much risk you may be able to handle. If you’re willing and able to handle some risk, then you may want to consider an adjustable rate instead of a fixed rate. An adjustable rate means your interest rate will change as the market rate increases or decreases. While it’s not as predictable as a fixed rate, an adjustable rate may save you money in the long run depending on how the market performs.
•How aggressive do you want to be in eliminating debt? – How soon do you want to be out of debt? If the answer is sooner rather than later, then you may want to consider both a shorter term and an adjustable rate. With an adjustable rate, you can take advantage of falling rates without needing to refinance, and with a shorter term you can pay off the loan faster. This allows you to eliminate your debt faster and start gaining equity sooner. If you don’t want to be aggressive because you’ll need to reserve some money for other expenditures, then a longer term and/or a fixed rate may be more appropriate.
There are many routes you could take to get a mortgage, and the one you should almost certainly avoid is the quick and easy one. Take the time to seek out a conversation with your local bank so you can make an educated decision built around your financial needs and preferences.
Our doors are always open if you’d like to start a conversation, so stop by one of our branches and speak to a mortgage advisor when you’re ready to explore your mortgage options. And don’t forget to stay tuned to our Business Blog for the latest tips on managing your expenses.
By Brian Skarda
SVP, Residential Mortgage & Consumer Lending, Union Savings Bank