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5 Mistakes to Avoid When Choosing a Mortgage

For many people, a mortgage will be their largest monthly expense.  Most homebuyers fail to properly prepare or negotiate and end up paying much more for their loans than they need to. If you clicked on this article, you’re already on the right track. Here are 5 things to avoid when selecting a mortgage.

Believing the advertised rates

Unless you have nearly perfect credit, most advertised rates are out of your league (sorry!) To get a good rate, you have to pay part of a point (one percent of the loan amount) a point to get the best rates.

Be assured that your lender will sift through your credit to find anything that could raise your rate. That includes qualifying you at the start of the process, then running your credit again a day or two before your supposed to close on the home and loan. If there’s been any change in your debt-to-income ratio, wave goodbye to that low mortgage rate.

Not comparing lenders

To clarify: a loan officer works for a bank and can only offer you loan packages that the bank has put together; a mortgage broker prequalifies you just like a loan officer and then shops your deal around to various lenders.

No matter which you choose, you’ll have to share your personal financial information to make sure you’re getting the best and most realistic rate. If you’d rather do your own shopping, consider consulting with a local bank, national bank, credit union and a savings and loan. But keep in mind that without your personal information and credit check they can’t really give you a realistic estimate.

Skipping over the terms

To reiterate, advertised rates aren’t realistic! The true cost of the loan is the APR or annual percentage rate which includes fees from the lender.

Understanding loan terms can be tricky – there are numerous ways lenders can push up the fees. A loan origination fee is also called a processing fee. It pays the loan officer or mortgage broker so this fee can vary significantly. One lender might charge you more for pulling you credit than anther. It’s all in your good faith estimate which you don’t get until you’ve actually applied for the loans.

Terms are mostly negotiable so do your research and don’t be afraid to ask questions and negotiate!

Waiting for a better rate

It’s great to get a low rate, but you don’t want to loose your dream home over a quarter of a point in interest.

There’s a big picture you might be missing – no matter what your interest rate is, you’re going to pay thousands of dollars in interest up front before you make an substantial gains in equity. If you go all the way to the end of your loan’s term, you’ll pay so much interest that you could have bought three homes instead of one!

Instead of focusing on the percentage rate, work on how quickly you can build equity. Making an extra payment every year will help offset the rate that you’re paying.

Choosing the wrong loan

The type of loan you choose depends on the current market conditions and how long you plan to stay.

Current market conditions favor fixed rates because rates are rising from all-time lows.  They cost more than hybrid loan and or adjustable rate loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost more over the years. If you get an adjustable rate mortgage you’re at the mercy or the market conditions. If you plan to stay in your home for five years or more, get a fixed rate mortgage. If you plan on selling faster, you’re taking a risk. It takes most people five years just to earn back their original closing costs in equity.

Once you narrow down your choice of lenders, ask them to give you a quote. If you wait even a day rates can change and you’re no longer comparing apples to apples.

So good luck and happy mortgage hunting! For more help, click here