A home loan is the biggest debt, and most costly monthly bill, most of us ever have. That’s why the seven biggest mistakes borrowers make when shopping for a mortgage can result in so much money and aggravation.
If you’re about to apply for a loan for a home on prime Main Line real estate, the mortgage mistakes listed below will help you make a smart, informed decision when choosing a mortgage plan. A mortgage mistake can cost you big time, which is why we’re directing them head-on so you can avoid them making them in the future.
The 7 Biggest Mortgage Mistakes
Mistake Number One is to not aggressively look for the best deal. Check the interest rates and fees dozens of lenders are offering on our mortgage rate charts. Obtain bids from local banks, mortgage lenders or mortgage brokers. Getting the right loan, at the right interest rate with reasonable fees, can save hundreds of dollars a month and tens of thousands of dollars over the life of the mortgage.
Mistake Number Two is applying for a loan without checking your credit history for mistakes that make it more difficult to qualify for a loan, or require a higher mortgage interest rate. To get a free credit report from each of the three major credit reporting bureaus go to AnnualCreditReport.com. Each credit report shows how to correct mistakes or submit an explanation for legitimate black marks that appear on the report.
Mistake Number Three is spending too much and saddling yourself with payments you can’t afford. Avoid that by looking at all of your bills and deciding how much you can comfortably spend. Include a realistic estimate for taxes, insurance and condo or association fees. From that, calculate the amount that could be borrowed at prevailing mortgage interest rates. Add the size of the down payment and that should be the limit. Don’t let real estate agents keep showing you homes outside this price range. Don’t work with mortgage brokers who push you to borrow more than you can afford. Click here for a mortgage calculator to help decide how much to spend on a home.
Mistake Number Four is not getting preapproved for a loan. This is an important reality check and it’s free. A lender will look at your credit history, income, savings and debts, and decide on how much of a loan you can afford. The entire amount doesn’t have to be borrowed. But if you can’t get preapproved, or can’t get preapproved for as much as you want to borrow, that’s a big red flag.
Mistake Number Five is using a dangerous loan to buy a more expensive home than you can afford. Hundreds of thousands of buyers took out interest-only loans or option ARMs because they promised lower monthly payments than other types of mortgages. They were shocked when those payments began going up — sometimes only a month or two after they’d moved in. Now many of those buyers are facing foreclosure. If you can’t afford the payments on a 30-year fixed-rate loan, that’s a good sign you’re borrowing too much.
Mistake Number Six is agreeing to a prepayment penalty. More than seven out of every 10 subprime mortgages — those given to borrowers with poor credit — charge thousands of dollars if the loan is paid off in the first several years. That prevents many borrowers from refinancing or selling their homes when they can’t keep up with the ever-rising payments on their adjustable-rate loans. Congress and the Federal Reserve are considering whether prepayment penalties should be banned or restricted in some way. Until then, just tell lenders you don’t want a prepayment penalty in your mortgage.
Mistake Number Seven is failing to buy down your interest rate. Paying a point on your mortgage is like prepaying part of the interest on your loan — you pay 1% of the loan amount up front, and in return, your interest rates is lowered. In the past, paying one point on a loan might get about one-quarter of a percentage point knocked off your rate. Today, it might get one-half point, or even more. Paying points does not make financial sense for everyone, but the return on investment has never been better.