Whether you’re buying your first home or your second, being approved for a larger mortgage can be exciting. However, qualifying for a big loan isn’t the same as being able to afford it.
Many Kenyans borrow more money than they can handle believing their homes would appreciate in value. When their homes lose value instead, these homeowners are stuck with loans that exceeded their home’s worth. Thus it’s impossible for them to refinance or sell their homes for a profit and leading to foreclosures.
Therefore, before you sign up for a mortgage, ask yourself how much you can afford. Many financial advisors and agents recommend that you borrow less than you qualify for. These are a few of the reasons why.
You’ll Lower Your Risk of Missing a Payment
If your housing costs are more than you can afford; making payments in the event of an economic emergency or a job loss is much too high. Additionally, missing a mortgage payment can have a bad effect on your finances.
Furthermore, missing a payment you’ll risk being in default, risk ruining your credit and risk foreclosure, which would wipe out your investment in the home.
Hence ensure that the home you’re considering is within your budget, take all housing costs into account, including your mortgage payments, property tax payments, insurance premiums and maintenance costs.
You’ll Be Prepared for Emergencies
Life can be rough. You might lose your job or face a medical emergency that drains thousands from your savings. You might have to move before you’re able to build significant equity in your home. Or the government can decide to build the railway on your land.
Many people are on the pan’s edge when it comes to being able to tolerate any kind of economic disruption in their life. Close to half of all Kenyans households don’t have enough savings to stay above the poverty line for three months if they lost their income.
Getting a smaller mortgage than you qualify for will allow you to store away extra money so you can handle hardships. Moreover, it’s advisable to keep enough money in your savings to cover six months of living expenses. You should also be saving for life after retirement.
Note if all of your money is going to your monthly housing costs, then you won’t invest in your retirement accounts or other savings.
You Can Focus on Other Costs
Remember part of the fun of owning a home is filling it with things you want and need. Moreover, if you have children, you might need to set aside money for college. Not forgetting other expenses such as minor repairs.
Hence, it’s in your best interest to opt for a smaller monthly mortgage payment and put your savings toward these expenses.
You’ll Be Prepared If Property Taxes Rise
You don’t know what will happen to property taxes in the future, which affect your mortgage payment. The Kenyan economy keeps shifting you need to be on your toes. Depending on where you live, property tax rates may increase monthly.
You Can Decrease Your Risk of Having an Underwater Mortgage
Importantly, don’t lie to yourself that your home’s value is guaranteed to increase over time. If it drops and you don’t have enough equity built up, you could end up owing more than the house’s market value, which is sometimes called having negative equity. Simply put your home value is less than the mortgage amount you were given.
However, if real estate values rise dramatically, it may work out well in the end. Although if it doesn’t work out, you could end up with no assets at all.
In conclusion: so how much should you borrow? Check your income and compare with the amount you have to pay monthly in taxes and others. Compare this with your mortgage payment. Moreover, you can use our mortgage calculator to see what you will be paying each month.
In some cases, it does make sense to borrow what you qualify for. If you have a high income, are buying in a competitive market or have high rent payments.
But if you can go lower than what you qualify for, you should. That way, you’ll be more likely to feel comfortable (financially) living in your home.