Mortgage Pitfalls to Avoid When Buying or Refinancing
Mortgage rates are low, low, low right now - close to all-time minimums. But those low rates can still cost you an awful lot of money if you're not careful to avoid some of the serious mistakes people make on home loans when buying a home or refinancing.
Not shopping around
Surprisingly, one of the biggest mistakes people make is failing to shop around when getting a mortgage. Shopping around means more than just looking online or in the paper for the lender advertising the best rate - you have to get down to the nitty gritty and compare details. Mortgage lenders vary widely not only in the interest rates they offer, but also in the fees they charge. Sometimes, a low rate can be a teaser for a mortgage that comes larded down with fees that wipe out your savings. When getting pre-approved, ask for a breakdown of all fees that come with the loan - then doublecheck them against what's detailed in the Good Faith Estimate you receive before closing.
Not checking your credit report
Before getting a mortgage, you definitely want to order copies of your credit report from the three major credit reporting companies - Transunion, Equifax and Experion - you're entitled to a free report once a year from each. You may discover errors or something straightforward you can do to quickly boost your credit, like reducing the balance on a credit card. Small improvements in your credit score can mean big savings, since getting your score above a benchmark point - like 740 or 700 - can mean a significant reduction in your interest rate. For persons with less than perfect credit, the difference between a score of 655 and 660 can be huge.
Borrowing too much money
This can affect both home buyers and those refinancing a current mortgage - the first group buys too much home, the second takes too much cash out of their home equity. In both cases, you're borrowing money you'll have to pay back through your monthly mortgage payments. Too many people don't take a close look at their finances and determine what they can really afford. True, you might be able to figure out a way you can make the numbers work, but do you really want to be paying that much of your income every month? Are there other things you'll want or need to pay for as well? You need to determine that up front, because once the mortgage is closed, it's too late to go back and change it.
Trying to time the market
This is a problem that primarily affects those who are seeking to refinance, although it occurs with home buyers as well. It often occurs when interest rates have perked up slightly following a decline - potential borrowers hold off on committing, waiting for rates to edge back down again. The problem is, trying to time mortgage rates is like trying to time the stock market - it's incredibly difficult, even for professionals. Typically, the gain you're likely to realize is fairly small - a quarter or an eighth of a percent - and you could be worse off if rates rise instead. And given that rates are currently at near-record lows, they have a lot more room to rise than to fall, from a historical perspective.
Borrowing when you're planning to move again in a few years
For a mortgage to be worthwhile, the general rule of thumb is that you should plan on being in the home at least five years. Otherwise, you won't be there long enough to make up the closing costs compared to what you'd pay in rent (if buying a house) or in higher interest rates (if refinancing). On refinancing, you want to calculate the break-even point, the number of months it will take for the accumulated savings on your mortgage payments to equal the closing costs on the loan. On a home purchase, the process is similar, except that you're comparing the difference in renting a similar property with what you'd be paying on a monthly mortgage.
Not doing your research
There are many other, lesser mistakes you can make when seeking a mortgage, far more than can be detailed here, as well as numerous right decisions you can make as well. But you can't know what they are unless you dig in and educate yourself about mortgages and home purchasing in general. Don't rush in, take a couple of months to do some research online, read a few books and magazine articles, and put yourself in a position where you at least know what questions to ask. You could surprise yourself by how much you can save.
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