It’s unfortunate, but most homebuyers probably spend more time researching what home to buy than shopping for a mortgage. In fact, a survey by Zillow Mortgage Marketplace found that close to half of the homebuyers they interviewed didn’t understand the basics of mortgages.
And when there’s a lack of knowledge about these loans, you can bet there are going to be mistakes, some of them costly. If you need a mortgage and don’t want to waste your hard-earned money, be sure to avoid the following mortgage mistakes.
Saddling Yourself with Too Much Debt
Committing too much of your monthly income to mortgage payments and housing-related expenses leaves you with little or no money left over for your other living expenses. You won’t be able to save for retirement, make emergency repairs to your car, build a college fund for your children, or pay for the occasional splurge.
The rule of thumb is to commit no more than 28 percent of your monthly gross income on the mortgage. This means that if you have an annual income of $90,000, you should only spend $2,100 on mortgage payments and mortgage-related fees.
Not Understanding Mortgage Rates
Don’t make the mistake of thinking that mortgage rates are fixed once a day. Like stock prices, mortgage rates can and will fluctuate several times throughout the day. So, it’s important to keep an eye on mortgage rates and shop for lenders, comparing quotes for the same exact loan.
This might seem like common sense, but nearly half of home loan borrowers don’t even bother to shop for the best mortgage they can find.
Ignoring the Annual Percentage Rate (APR)
Most lenders like to advertise how low their mortgage interest rates are but conveniently leave out the fact that these rates don’t reflect the true cost of the loan. The mortgage rate might be low, but lenders make up for it with fees and insurance premiums.
This is what the annual percentage rate (APR) is for. While the mortgage interest rate determines how much you will pay on the mortgage every month, the APR will tell you the total amount cost of the loan inn the long run, plus how much cash you will need to pay at closing.
Not Checking Your Credit Report
Before applying for a mortgage, or any other loan for that matter, it’s important to check if your credit score isn’t being affected by mistakes in your credit report, which, unfortunately, are common. And anything that dings your credit score could lead to a higher mortgage rate, or worse, a loan rejection.
Be sure to check your credit report with the three credit bureaus, Equifax, Experian, and TransUnion, at least six months to a year before applying for a home loan. This should give you enough time to correct discrepancies and improve your score.
Not Making an Effort to Understand Basic Mortgage Terms
As you begin your search for a mortgage lender, you can expect to hear terms like FHA loans, APR, pre-qualification, and ordination being thrown around. Yes, these words sound intimidating, but they are not exactly difficult to understand either. If you’re not one to do your own research, you can talk to a mortgage advisor, who will be more than willing to walk you through the entire mortgage process and explain what certain terms mean.
If you want to learn more about home loans and the mortgage process, get in touch with mortgage advisor Chris Lamm for a consultation.