Photo credit: Jeff Djevdet
A mortgage is typically the largest monthly expense for the majority of consumers. Unfortunately, many borrowers don’t put in the time (or enough effort) to ensure that they will get the best mortgage rate before signing on the dotted closing line.
You should avoid making these nine mortgage mistakes if you want to preserve your good credit and lessen the chance of facing qualification problems or paying too much.
- Not comparison shopping lenders
Just as everyone knows several real estate agents, many knows a loan officer or mortgage broker. A loan officer works for a bank or credit union and can only offer you packages available through the financial institution. A mortgage broker prequalifies you just as a loan officer, plus they’ll shop your deal around to various lenders.
Regardless of who you decide to utilize, you’ll have to provide personal financial information in order to determine a realistic rate. A reputable broker will show you the quoted rates at several banks and credit unions and you can choose the loan you like best. You can also do your own shopping by contacting the financial institutions directly and getting their individual rates. Remember that you won’t know your actual rate for that loan product until you provide the bank or credit union your personal financial information and permission to run a credit check.
- Choosing the wrong type of loan
Market conditions should be the main influencer on which type of mortgage loan you should opt for. Depending on how long you want to remain in your home, you can choose either fixed-rate or adjustable rate mortgages (ARMs). ARMs feature low teaser interest rates which are tied to market rate changes and can balloon, making a previously affordable mortgage, highly unaffordable.
During the heady days leading up to the housing collapse in the last decade, lenders gave mortgage loans to anyone that could sign the paperwork. Many borrowers bought homes that were simply too expensive, but were enticed by the low ARM rates.
A 2008 Federal Reserve report found that more than 75 percent of the sub-prime loans issued between 2003 and 2007 were of the short-term hybrid variety, which worked similar to ARMs, and more than 21 percent of these loans became seriously delinquent in 2008.
Fixed-rate mortgages are best if you’re planning on staying put for five years or more, but you’re taking a risk if you’re planning on selling before five years as most borrowers don’t break even on their original closing costs until after five years.
You should always understand what you’re signing for and to go beyond what your monthly payment will be today. Know if and when the interest rate will change and how much it will.
- Believing that you’ll pay the advertised rates.
Most advertised rates are for those with perfect or near perfect credit. You’ll also need to pay one percent of the loan amount (a point) or more to rate as good as the advertised rate. Your lender will go over your credit to find anything to raise the rate. From the time you are qualified at the beginning of the transaction to running your credit again a couple of days before your closing day, if there’s been a change in your debt-to-income ratio, you’re less likely to get a low mortgage rate.
- Ignoring mortgage fee details
Even if your credit is perfect, you will not pay the advertised rate because items such as the annual percentage rate (APR), the processing or loan origination fee (which pays the loan or mortgage broker), broker, underwriting, application, and appraisal fees haven’t been added to the loan. You will see all fees in your good faith estimate after applying for the loan, but if you have any questions about what a particular fee is for or if it can be reduced or eliminated, don’t be shy about it.
- Waiting or haggling too long for a better rate
While it’s great to have a low mortgage rate, you don’t want to lose out on your dream home because of haggling over a quarter of a point in interest. The focus instead should be about building equity as quickly as possible. One of the ways to do this is by making an extra payment each year, or paying more every month. If you must have that low interest rate in the future and decide to refinance, keep in mind that this is not the best solution as you’ll have to pay title search, appraisal, and loan origination fees, which can equal the closing costs associated with getting the mortgage the first time. You’ll also find yourself back to the beginning of the amortization schedule where most of your payments are going to interest.
- Not seeking objective information
When researching information on mortgage loans, it’s best to consider the specifics of your individual case as not all mortgage experiences will apply across the board. For this reason, friends and family members (unless they are mortgage brokers or loan officers) are not the best sources of information on this topic. Housing counselors can provide great information and resources on the types of loans available, but they won’t be as helpful in referring the best lender for you. News sites and blogs can also provide good generalized information on mortgage loans, but it’s best to speak with a qualified loan officer about the best route to go for your specific situation.
- Not learning about the lending process
It’s a great idea to learn as much about the mortgage lending process as possible and a good mortgage broker should provide an outline of what to expect. Many homeowners would likely tell you that the mortgage application process is not something you can learn on the fly, that it’s very confusing and takes time to go through the process. This is not surprising as the Consumer Financial Protection Bureau (CFPB) found that half of all borrowers “aren’t very familiar with the process” and 14 percent were “not at all familiar.”
- Not focusing on what’s important
According to the CFPB, many borrowers search out a single lender, and one that’s usually found based on geographic proximity, reputation or a lender they’ve had a prior relationship with. Doing all of this may not be relevant to what should be important: the total cost of the loan. Staying ‘safe’ in your lender search may not yield you the best possible rates. Even loans with the lowest interest rates may not have the lowest overall cost to you in the end, this is why it’s best to research several lenders.
- Having no down payment cash
One of the main keys to having a smooth home buying process is making sure you have enough cash for a down payment. A typical down payment for a conventional loan is between 5 and 20 percent. In many cases, if you put down less than 20 percent, you may have to buy mortgage insurance. Having enough for a down payment is usually a barrier for many and if you find this an issue, it might be better to weigh your options.
Realty Times. The Five Biggest Mortgage Mistakes You Can Make
ClarkHoward.com. 9 mortgage mistakes to avoid
Daily Finance. The 6 Worst Mortgage Mistakes You Can Make