Don’t assume you should borrow money just because you can.
- Mortgage lenders determine how much money to lend you for a home based on many financial factors.
- You will be pre-approved for a set amount of money by a lender.
- You may want to borrow less than your bank would allow you to when purchasing your home.
When you want to buy a home, you’ll probably apply for a mortgage from a lender such as a bank or credit union. Your lender will review financial details including your income, credit score, current debts, assets you own, and the amount of your down payment. After taking many financial details into account, the lender will decide the maximum amount you can borrow.
It can be tempting to take out the largest mortgage loan your bank allows. After all, borrowing up to the maximum means you can get a “better,” more expensive home. But there are actually four really big reasons why it often makes sense to take out a smaller mortgage than your bank would permit when buying a home. Here’s what they are.
1. The bank doesn’t know your personal goals
The bank wants to lend you as much as they think you can afford to pay back. But just because you can afford to devote a lot of money to a mortgage loan doesn’t necessarily mean doing that is the best plan. If you have other goals such as retiring early or purchasing a vacation home, you may want to keep your mortgage smaller than the bank would allow so you can free up spare cash for these other objectives.
2. Real estate may not be the best investment
Putting a lot of money into a mortgage means you’ll have less to invest. While real estate often goes up in value, it’s not always the best investment. You may be better off taking out a smaller mortgage to buy a cheaper home and opting to use the extra money saved for other assets that could provide a better return on investment and that could be more liquid.
3. A more expensive home comes with larger ongoing costs
If you buy an expensive house just because the bank says you can, you’ll face lots of extra costs compared with if you had opted for a smaller property. For example, your property taxes …….