9 Biggest Mistakes to Avoid When Getting a Mortgage

Home buying can be stressful and even small mistakes can lead to increased costs, fees and headaches. Here are 9 common mistakes to avoid when shopping for a mortgage.

1. Don’t Overpay on Points

Everyone wants a low-interest rate but there should be a limit on what you pay to get there. That limit is based on the amount of time it takes to recoup the cost of buying down the rate.

Consider a 30-year conventional fixed rate mortgage on a $180,000 loan. The monthly payment at 4.125% (APR 4.151%) would be $933.87 per month. The same loan at 4.00% (APR 4.08) would be $920.85 per month.

That’s a difference of $13.02 per month.

The cost to buy down the rate from 4.125% to 4.00% would be $1,153.80. At $13.02 per month it would take more than 88 months (7+ years) to make up the $1,153.80 it cost to buy down the rate.

If you plan to be in the home longer than 7 years buying down the rate might make sense. But if there’s a chance you aren’t in the home that long then buying down the rate could end up costing you more.

2. Overlooking the APR

Don’t get hung up on the interest rate. Yes, a low-interest rate is important but it doesn’t reflect the true long-term cost of the loan. To get that information you have to review the Annual Percentage Rate (APR) which includes all the lender charges and fees including points and origination.

When comparing loan estimates compare the APR, this will give you the best idea of which loan estimate is the best value for the life of the loan.

3. Buying More House than You can Afford

There used to be an old adage to buy as much house as you could afford. The thinking was that as you’re earning potential grew the payments would be easier to make. Meanwhile, the value of the home would increase and provide a solid long-term return on the initial investment.

Neither are certainties today.

Buying more house than you can afford can leave little money for:

1. 1. • saving and investing
      • paying bills and utilities
      • maintaining the home

Expect to pay around 2% of your home’s value every year to cover maintenance and other unexpected expenses. Roof’s need to be replaced, houses need to be painted, and appliances fail.  You need to have money to cover these expenses.

Try to keep mortgage payments under 25% of pre-tax income.

4. Ignoring Your Credit Report

When was the last time you looked at your credit report? Do you know your credit score? Do you know if there is anything negative in your credit report?

Your credit report says a lot about you as a borrower and will play a big role in the process of securing a mortgage loan. If there are any negative items on your credit report you have the ability to address those items before applying for a loan. Leaving issues unresolved could cost you money through higher rates and fees.

5. Making Big Purchases or Changes Before the Loan Closes

When you are in the process of securing a loan for a home the lender is going to look at every financial detail, right up until the loan is scheduled to close. If there are changes that affect your overall credit worthiness it can affect the loan, so…

1. 1. • Don’t quit your job
      • Don’t buy a new car
      • Don’t apply for new credit
      • Don’t make large purchases
      • Don’t do anything that could negatively affect your financial position

Exercise a little restraint and just wait for the loan to close before doing any of these.

6. Don’t Get Sucked in by Lenders Claiming to “Waive” Fees.

Some lenders and loan originators advertise or attempt to secure your business with claims they are “waiving” a fee. This sounds great on the surface but don’t fall for it. Lenders aren’t walking away from that money they are just changing how they will collect it.

It’s easy to cut a fee while increasing your rate or reducing the credit you’ll get at close. If you’re working with a lender who is “waiving” a fee ask for two quotes; one where you pay the fee and one where they are “waiving” the fee. Then compare the two quotes looking closely at the interest rate, including APR, and the associated cost/credit to secure that rate. I think you’ll find they aren’t really waiving the fee.

7. Putting Down too Little

If you’re putting down less than 20% of the purchase price you’ll be paying mortgage insurance. Mortgage insurance increases the cost of borrowing and is of no real benefit to the borrower. You may not have a choice but if you can avoid mortgage insurance it’ll save you a lot of money and increase your purchasing power.

8. Not Prioritizing the Lender’s Ability to Close on Time

Shop around long enough and you’ll find the lender with the lowest rate. But will that lender be able to close the loan on time? Are you willing to take that risk?

Some borrowers have a lot of flexibility so if their loan doesn’t close on time it’s no big deal. They can wait a few days.

But if you’ve already moved out of your home, all your worldly possessions are loaded on a truck and the move-in is scheduled then missing the close can create enormous headaches and cost you a lot of money. As a borrower, you need to have confidence that your lender can close the loan on time.

9. Choosing a Lender Who is Unfamiliar with Local Laws, Regulations, and Policies

In today’s’ world or online shopping and internet services there are a lot of lending options for borrowers. Access to online services can be positive by providing critical information for borrowers. But they can also be the source of inaccurate information that leads to mistakes and errors.

It might be tempting to go with an online lender or apply for a loan through a slick app but is that lender familiar with all the laws, regulations and policies that apply to you and your loan in the State where you live?

A licensed Loan Originator in your State can be the best source of relevant, accurate information.

For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.