Establishing and carrying a mortgage is one of the biggest financial steps you take in a lifetime. Whether it’s the first time or seventh time you establish a mortgage, uncover some of the biggest mistakes people make, so you can avoid making them with your mortgage.
1. Focusing Solely on the Interest Rate
What’s the interest rate? What’s the interest rate? But, what’s the interest rate? It’s the never-ending question (and one I heard all the time when I was a mortgage and credit specialist for Merrill Lynch).
Sure, the interest rate is how the mortgage company or lender calculates your monthly mortgage payment, but it is not the true cost of obtaining a mortgage. The true cost of obtaining a mortgage requires you to look beyond the interest rate and take a look at the annual percentage rate (aka APR).
The APR takes the mortgage interest rate into consideration, but it also factors in the other costs you have in obtaining the mortgage – closing costs. When you’re comparing the same type of mortgage (like a 30-year fixed rate mortgage) from one lender to another, compare the APRs, which reveals which lender is truly offering you a better deal.
(HINT: It’s the one with the lower APR, even if the interest rate itself is higher.)
2. Choosing the Wrong Type of Loan
Maybe you grew up with a parent or grandparent constantly telling you that when you buy a house, you have to get a 30-year mortgage or a 15-year mortgage (doesn’t really matter which one they said).
One size does not fit all when it comes to a mortgage. What is right for you and your personal financial situation may not be right for your neighbor, friend, cousin, or whomever.
While Grandma and Grandpa lived in their home for 30 years (or maybe longer), we’re not a society that stays put anymore. If you’re not going to live (and die) in the home for the rest of your life, then a 15- or 30-year fixed rate mortgage might not be the best option for you.
It might be the right option for you, but the point is, that you have to assess your own situation and then determine (with the help of a mortgage pro) the best option for you.
3. Forgetting about the Fees and Closing Costs
A mortgage is not just about the amount that you are going to finance. Other fees and costs come before setting up said mortgage.
Generally, you have to put some kind of a down payment on the home if you are buying. This is not usually the case if you are refinancing, but whether it is a refinance or you’re buying, most lenders charge closing costs and fees.
Since these are generally out-of-pocket expenses, it’s important to be aware that these fees and costs exist and find out what fees and how much the lender is charging.
4. Maxing Out the Amount You Mortgage
Have you heard the expression house poor? If you buy more of a house than you can afford, then you become house poor because all of your money is going toward your mortgage.
Keep in mind that the amount a mortgage lender approves you for and the amount you can actually afford are two different numbers. For qualifying purposes, a lender does not factor in your insurance payments and your utility bills. In other words, they are not basing your qualification on the total amount in bills you have to pay out each month.
You, on the other hand, should be thinking about all of your expenses and whether or not adding that mortgage payment, taxes, and insurance on the property is keeping you in the black or sending you into the red.
5. Not Reviewing Your Own Credit
Especially after the mortgage crisis in the not-so-distant past, mortgage lenders are taking a long hard look at credit history and credit scores. Before you even think about applying for a mortgage, review your own credit.
Look for any blemishes or inaccuracies on your credit. If anything pops up, work directly with the creditors to correct, fix or remove the blemishes or inaccuracies.
Remember, credit can make or break your ability to qualify for the mortgage and can even affect the interest rate you pay, so you want your credit to be in tip-top condition.
6. Thinking All Lenders are the Same
Just like all mortgages are not the same, all lenders are not the same either. Some lenders charge fees that other lenders do not charge, so shop around when you are trying to obtain a mortgage. Don’t stop after talking to one lender.
Shop and compare at least three lenders before deciding which one is the right one for you. Look at interest rates, fees, costs, and APRs to compare each lender very carefully before making a final decision.
Word to the wise, though, in order to make a true comparison, you have to compare the same type of loan at one lender with the same type of loan at another lender. (You have to compare a 5-year ARM to a 5-year ARM. You can’t compare a 5-year ARM at one lender to a 15-year fixed rate mortgage at another lender.)
7. Failing to Negotiate
Take a long hard look at the fees the lender is charging you and don’t be afraid to negotiate away what are known in the industry as “junk fees.” Junk fees can be anything from an application fee (that is not credited back to you at closing), sign-up fee, or document prep fee to messenger and faxing fees.
If you see a fee that seems out of the ordinary (especially ones that you aren’t seeing from lender to lender when comparison shopping) question it. If it seems like a junk fee, let the lender know that you aren’t going to pay it or that they need to reduce it (negotiate the fee).
What you see doesn’t necessarily have to be what you get (or in this case, what you pay).
Obtaining a mortgage is a big step. There are a lot of working parts to finding, qualifying for, and establishing a mortgage. Avoid making these seven mistakes and you’re at least starting out on the right path.
Mortgage holders, what mistakes have you learned from with your mortgage that you’d like to share with our other readers? Post them in the comments below!
Great information to know and keep.
Absolutely love the points!
Great points, another thing I now look at is the ability to pay any additional amount towards the principal (in the easiest possible manner). Some lenders have a program to break your mortgage payment in half, so you pay half of your mortgage biweekly – this can shave years off of your loan. The one disadvantage is that that normally means it MUST be an automated payment. My lender sold our mortgage to another provider who is testing the biweekly payments out but doesn’t have the program in place yet. Unfortunately, they only allow you to make extra payments online, but nothing is applied to the mortgage until you call in and tell them to apply it to the principal – any unapplied funds.
If you can swing making at least ONE extra mortgage payment per year it helps to shave off years as well. Don’t wait till the end of the year, just make an extra $100/per month payment if you can swing it (or whatever monthly adds up to one whole payment by the end of the year)!
Correction:
1) cleary = clearly
2) last = past
Truly Kristie is a knowledgeable financial entity; her observation that insurance, utilities and the like do not appear on the 1003 is almost brilliant. Although, lower credit purchasers who use alternative credit might have to furnish this info to the underwriter, Kristie is 99.9% correct – these budget items should be considered.
The only weakness in her article is a failure to cleary clarify the impact of ignoring APR in favor of lower interest rates – on the overall early loan termination; i.e. What cost adjustment/corrections occur on the financial end to a purchaser who finances 30 years and opts out at 5 years.
Kristie has inspired me to write a few articles about mortgages that I will provide for your program at a later date;this is based on last mortgage loan processor & officer training and past service as a loan underwriter & residential & commercial real estate broker.
I joined because I deem this program a consumer service