A mortgage is the most serious debt you can possibly owe. Because of their large amounts and long terms, something can go wrong at any time. And the potential losses might be catastrophic, even losing your home.
Therefore, and due to the stress during the process – we may get some unrealistic decisions.
In this article, I will be showing the main mistakes people make when choosing and managing a home loan. Also, you will find some advice on how you can maneuver through…
Keep in mind:
It’s extremely important to locate the best possible offer since this will be a loan you’ll be repaying for almost three decades. Having the best interest rate and low fees is crucial; this will determine the overall cost of the loan.
Mistake 1: Lack of Research
Before you even close the mortgage, you need to shop around. Many people don’t do research and compare different offers but rather pick up the first one on board.
When you buy a product, you always try to find the best deal – quality, price, brand, etc. This is exactly what you have to do before choosing a bank and accepting an offer.
In January 2015, the Consumer Financial Protection Bureau (CFPB) released some interesting data. According to a report, 50% of the whole population consider only one bank prior to their application. Approximately 75%, apply for a mortgage using only one bank.
First of all, what if there are offers that beat the one you have chosen? If you don’t compare, you never know. Let’s not forget, that mortgages are very, very long.
There are some online platforms which allow you to compare different rates and fees.
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Mistake 2: Buying a Home You Can’t Afford
This mistake is, in my opinion, the biggest one.
Don’t purchase a home you won’t be able to afford. In some cases, banks approved their borrowers for large amounts of money – for example, $500,000. Of course they will, after all, they will charge you handsomely for using their money.
Not only a larger loan will increase significantly the monthly payment but also will incur all sorts of nasty expenses. What about the taxes you have to pay for the property?
The higher its value, the more you need to pay.
If you push yourselves to your financial limit, you won’t be able to maneuver easily. And should an extra expense occur, you will be overburdened by your mortgage payment. Perhaps, you will have some health issues, or your income will decrease. You can use a maximum mortgage calculator to get an initial estimation – but my advice is not taking the maximum you can, but a bit smaller amount.
Maybe you are single and planning to start a family? These all some room for improvisation.
Mistake 3: Lack of Basic Knowledge
I know, I know. No one teaches us those things. No one cares how we actually cope with real life. Life, people say, is also the best teacher. And if you don’t know simple things and terms, then the problem is yours. Many people have no idea what an FHA loan is and how it actually works.
Zillow research has shown that 42% of potential home buyers don’t know that it’s not necessary to be a first-time buyer to take out an FHA loan.
If you have done some research and chose a specific lender, don’t hesitate to ask the right questions. Most probably a third-party will participate in the process. It could be an attorney or a real estate agent. They should also be well-versed in loans and mortgages.
Mistake 4: Focus Only The Interest Rate
This is closely related to the previous tremendous mistake. When people don’t have basic knowledge, they tend to focus only on one part of the problem.
Most borrowers are only fixated on the interest rate their mortgage will have. Well, that’s totally alright, but don’t waste your time waiting for rates to drop to 0%. This is not happening anytime soon. Most probably, in the meantime, you will miss on some good offers and deals.
Don’t be focused on the interest rate that much. Most probably 0.3% will not have such an impact on the monthly payment. Ask yourself a question.
If 0.3% bother you and you feel like it’s too costly, do you think you can handle a long-term loan such as a mortgage?
You can instead lock in your rate before closing. Follow the next paragraph and find out why.
Mistake 5: Forget to Lock in the Interest Rate
In the previous mistake, we mentioned locking the rate. What is this and why is it important?
Before you sign all the documents and the property is yours, you can choose whether to lock in your rate or no. This is entirely your decision! This is something you have to specifically agree on with your bank before closing.
My advice is: don’t forget to lock in the rate!
All in all, this is an agreement in which the lender agrees to keep interest rate unchanged for a specific period – from several days up to three months before the closing date. If you forget to do so, or deliberately skip this part, the chances are high rates will go up.
For instance, at the time you fill in your mortgage application, the rate is 5.5%, but you don’t lock it in. Then, a few weeks later, the rate rises to 6.5%. This means that your mortgage will have a 6.5% rate during the whole term.
Sometimes, borrowers have the option to extend the rate lock period should it end. Keep in mind that usually, banks charge buyers for that.
Mistake 6: Higher Costs Than Initially Expected
Take a deep breath and be ready for the next portion of warnings.
When you purchase a home, it means you become an owner. That being said, your property will generate expenses. First of all, you have to pay property taxes. The amount you owe depends on various factors: type of property, value, location, etc. In spite of you can enjoy significant tax breaks, taxes are something you simply cannot avoid.
Another cost which may surprise you is the maintenance cost. The biggest the house, the more you can expect. As time passes by, you will most probably need to make some repairs. This will also come from your pocket.
Mistake 7: Not Saving Enough For Down Payment
Down payment usually sends shivers down the spine. This is the so-called upfront fee and most lenders want at least 20%. This means that you are a reliable person. What’s more, larger down payment means better terms and vice versa.
One of the most annoying things is Private Mortgage Insurance. If you don’t have the desired 20%, the lender protects themselves by imposing a mandatory insurance on the property (But still there are some great ways to avoid the PMI). This amount will be part of the monthly payment.
However, you should know that this insurance protects the lender not you. If you stop paying or go bankrupt, this insurance will help your bank restore some of their money.
How much is PMI?
Well, it depends a lot, but the main factors are of course your credit score (See how your score is calculated) and the down payment. The lower the score and down payment, the riskier you are as a client. Therefore, you will have to pay higher insurance. On average, it’s approximately 1% of the loan.
Mistake 8: Not Check Credit Reports
What do they contain?
Credit reports contain lots of information you can use. Of course, you can find some personal details. There you will also see your employer’s details as well as information regarding revolving accounts, loans, account history. In there, you’ will also be able to see your recent applications and any public records (bankruptcy, etc.)
Occasionally people find mistakes in their reports. You have the right to contact your lender and dispute the errors. We recommend you check your reports before applying for a mortgage. Even small mistakes can lead to a lower credit score. This, on the other hand, might lead to a rejection of your application.
If you do that several months in advance, you will be able to fix those mistakes and also improve your credit score. The higher, the better for you.
These 8 mistakes are very common among first-time buyers due to their lack of experience.
They are not ordered from the most important to the least. Each and every one of them is crucial and avoiding them will do you good. In fact, this might decide whether your bank approves or declines your application.