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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Many people do not understand that there can be sever penalties for breaking a fixed rate contract early. Sometimes this can cost into the tens of thousands of dollars and it is important that you understand what you intend to do with the property in the future before entering a fixed rate contract.
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 soonafter your loan starts and you can quickly end up with a veryuncompetitive and expensive rate. In addition, there are other coststhat can make a loan significantly more expensive than it seems, basedon 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 theirlender, broker or real estate agent. While those are good sources, theCFPB found that many borrowers could benefit from seeking outadditional, 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 seniorloan 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, confusingand time-consuming the mortgage process can be. Knowing that, it’scertainly a good idea to arm yourself with as much knowledge aboutborrowing as possible. But amazingly, the CFPB found that about half ofborrowers “aren’t very familiar with the process” and 14% were “not atall familiar.”
“A good mortgage (specialist) will lay out theprocess for you in a very clear manner,” says Elan McMillin, a mortgagebanker with USA Mortgage in St. Louis. “The borrower should receive some sort of outline that details step by step what is expected of themduring the process and the details of what is required from applicationto close. If the lender can’t provide an outline like that immediately,then it may be time to shop for another lender.”
But the problemmay not be with the lender, according to Cook, who says it’s surprisingso many consumers don’t know more about the process, given the abundance of information out there.
“One reason is borrowers focus on thehome 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 comeinto play.”
You’re sticking with the same mortgage ‘til the end
Home 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 costsnothing (but some of your time) to check if there is a better deal. Andthat time can save you thousands of dollars a year.
Whenyou set up your mortgage, always assume that you will need to repayearly or refinance. If suitable given your overall needs, take out aloan that has low or negligible break costs. This is another reason youshould get advice from a broker who will consider the costs of exitingyour loan early – ideally a fee based broker who takes their paymentonly from you, and not the lender.
Trying to get a mortgagewithout documented 12-month housing history or your own verifiableassets that cover at least two months of your proposed mortgage payment, including taxes and insurance. Yes, lenders want to know that you paidyour rent on time previously and have enough in your bank account tocover future payments.
Credit Score Facts
Applying for a mortgagewith charge offs and collections, especially medical collections, onyour credit report (many consumers have these, often in error, and theycan easily be removed via credit bureau disputes. They crush your FICOscore!). Regularly review your credit report to ensure there are nosurprises long before you begin the mortgage process.
Put simply, a low credit score will lead to a much higher mortgage rate, and evendisqualification if it drives your monthly mortgage payment high enough. Also steer clear of credit counseling. (Even if it doesn’t lower yourcredit score, many banks won’t lend to borrowers who have used theseservices in the recent past.)
Not going with a VA loan if you qualify
We 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.
How competitive? In most cases, you’ll pay the same interest rate as borrowers with a 760 credit score and a 20% down payment.
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 5years.
The lower interest rate means the borrower would pay offan additional $1,421 in principal in the first 5 years, even whilemaking lower payments.
Not getting a fixed-rate loan
Fixed-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 alower 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 getout of the ARM at the right time,” says Phillip Christenson, a chartered financial analyst and owner of Phillip James Financial, a financialplanning and investment management company in Plymouth, Minnesota.
You might not be able to refinance or afford the new payment once ratesrise. 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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