10 Costly Mortgage Mistakes To Avoid11:46 AM
When structured properly, a home mortgage can be a tool to help you build net worth. However, when n...
When structured properly, a home mortgage can be a tool to help you build net worth. However, when not properly managed, a mortgage can cause excess burden and be a financial and emotional drain. In the current environment of distressed home values and inevitable interest rate increases, now is the time to ensure that you have a mortgage strategy that is in line with your long-term goals.
The first thing that most people look for in a home loan is the head line interest rate. Although this is an important consideration it is a common mistake people make when choosing a home loan.
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Avoiding mortgage mistakes is important because you don't want to end up with a mortgage that you cannot afford. Lets learn the basic information before jumping into the mortgage.
Top 10 mortgage mistakes to avoid
You focused too much on interest rate
Interest rate is only one factor that influences the total cost of your loan. Going with the lender that offers the best initial interest rate doesn’t mean you have the cheapest loan.
Interest rates can change soon after your loan starts and you can quickly end up with a very uncompetitive and expensive rate. In addition, there are other costs that can make a loan significantly more expensive than it seems, based on the interest rate alone.
Fees might include:
- Application fees
- Valuation fees
- Establishment fees
- Legal and settlement fees
- Rate lock fees
- Lenders mortgage insurance
- Early payout fees (deferred establishment fees)
- Discharge fees
Failing to seek objective info
When questions about mortgages come up, borrowers typically turn to their lender, broker or real estate agent. While those are good sources, the CFPB found that many borrowers could benefit from seeking out additional, objective sources of information, such as housing counselors and news sites.
"Borrowers should seek a range of information, but each source should be vetted thoroughly," says Greg Cook, a senior loan officer with Platinum Home Mortgage in Temecula, California. "Borrowers should remember that the right answers to their questions are often determined by the specifics of their individual situation."
Not learning about the process
Talk to homeowners and they'll likely tell you about how complex, confusing and time-consuming the mortgage process can be. Knowing that, it's certainly a good idea to arm yourself with as much knowledge about borrowing as possible. But amazingly, the CFPB found that about half of borrowers "aren't very familiar with the process" and 14% were "not at all familiar."
"A good mortgage (specialist) will lay out the process for you in a very clear manner," says Elan McMillin, a mortgage banker with USA Mortgage in St. Louis. "The borrower should receive some sort of outline that details step by step what is expected of them during the process and the details of what is required from application to close. If the lender can't provide an outline like that immediately, then it may be time to shop for another lender."
But the problem may not be with the lender, according to Cook, who says it's surprising so many consumers don't know more about the process, given the abundance of information out there.
"One reason is borrowers focus on the home they want and the best rate," he says. "But once you understand the process better, you see that there are a lot more factors that come into play."
You’re sticking with the same mortgage ‘til the endHome loans can become noncompetitive in only a few years, or less.
For starters, it pays to check your lender hasn’t jacked up the rate of your loan and is no longer competitive.
Competition improves loan features and you might be missing out on benefits if you stick with the same loan to too long.
You should check your loan remains the best option every 2 years. It costs nothing (but some of your time) to check if there is a better deal. And that time can save you thousands of dollars a year.
When you set up your mortgage, always assume that you will need to repay early or refinance. If suitable given your overall needs, take out a loan that has low or negligible break costs. This is another reason you should get advice from a broker who will consider the costs of exiting your loan early – ideally a fee based broker who takes their payment only from you, and not the lender.
Documentation LackingTrying to get a mortgage without documented 12-month housing history or your own verifiable assets that cover at least two months of your proposed mortgage payment, including taxes and insurance. Yes, lenders want to know that you paid your rent on time previously and have enough in your bank account to cover future payments.
Credit Score FactsApplying for a mortgage with charge offs and collections, especially medical collections, on your credit report (many consumers have these, often in error, and they can easily be removed via credit bureau disputes. They crush your FICO score!). Regularly review your credit report to ensure there are no surprises long before you begin the mortgage process.
Put simply, a low credit score will lead to a much higher mortgage rate, and even disqualification if it drives your monthly mortgage payment high enough. Also steer clear of credit counseling. (Even if it doesn’t lower your credit score, many banks won’t lend to borrowers who have used these services in the recent past.)
Not going with a VA loan if you qualifyWe think VA loans are the best mortgages for pretty much anyone who can qualify for one.
Millions of veterans, along with those on active duty, including the National Guard and reserve units, are eligible.
Among the advantages:
- The VA makes sure buyers don't overpay for a home and that it's move-in ready, without any costly, unexpected problems.
- It requires no down payment on purchases up to $417,000 in most areas and yet charges no mortgage insurance.
- The VA tightly restricts the type and amount of closing costs.
- Interest rates are very competitive, even if you have relatively poor credit and lots of debt.
The only financial drawback to a VA loan is what's called the funding fee, which can range from 1.5% to 3.3% of the amount you're borrowing.
The fee can be added to the loan so you won't have to pay for it up front. If you have a service-connected disability, the funding fee is waived.
Cost of half a percentage point
A small difference in the interest rate can make a big impact on cost. On a $200,000 fixed-rate, 30-year mortgage, an interest rate of 4.5% costs $59 a month more than a 4% rate. That adds up to $3,512 in the first 5 years.
The lower interest rate means the borrower would pay off an additional $1,421 in principal in the first 5 years, even while making lower payments.
Not getting a fixed-rate loanFixed-rate loans are no longer priced at record lows, so you might be tempted to grab an adjustable-rate mortgage.
But unless you're planning to move within five to seven years, you'll be better off sticking with a fixed-rate loan.
Mortgages remain historically cheap, so if you take out a fixed-rate loan now, you may never have to worry about refinancing. An ARM might offer you a lower payment now, but it will eventually reset, most likely at a higher rate.
"There is a lot of risk if rates rise and you cannot get out of the ARM at the right time," says Phillip Christenson, a chartered financial analyst and owner of Phillip James Financial, a financial planning and investment management company in Plymouth, Minnesota.
You might not be able to refinance or afford the new payment once rates rise. Or the housing market could make it difficult to sell.
Shopping just 1 lender
Whether it's a new car or the latest gadget, consumers know it pays to shop around for the best deal. But half of mortgage borrowers consider just one lender or broker in their shopping process, according to the CFPB study.
"It is a good idea to shop around for mortgages in order to get better rates," Sian says. "Sometimes large banks and lenders don't offer the best rates that can be had. Additionally, some lenders add in fees. While the final fees do show up at the end, many borrowers don't understand the fees and accept them as the cost of getting the loan, even though they could've avoided those fees by shopping around."
If you fail to (or forget to) lock the interest rate on your mortgage, it could go up. A lot. Try to understand all this properly, if need take help from professionals. Once you know how much you can afford based on your salary and assets, you can properly assess the situation. Otherwise you could just be wasting your time and setting yourself up for disappointment.
In a rising housing market, however, you can come out ahead by paying PMI on a conventional loan until you have enough equity.
The PMI premiums may cost less than the higher home price you’ll pay if you wait until you’ve saved up a larger down payment.
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