Is your house your castle? Or an albatross around your neck?
Your answer might depend a lot on your mortgage. Getting an affordable property at a geat rate can make you feel as if life couldn’t be any sweeter.
But ask anyone who bought a house with a mortgage they didn’t understand and couldn’t afford, and they will likely tell you their house has brought them nothing but frustration and tears.
If you’ll be in the market for a new place soon, make sure you avoid the following six mortgage mistakes.
1. Not reviewing your credit first
At least six months before you go to your first open house, you need to go to AnnualCreditReport.com. That’s the official site to get free credit reports issued by the big three reporting agencies: Experian, Equifax and TransUnion. You’re entitled to one free credit report from each agency annually.
In addition to your credit reports, it’s also critical to see your credit score. Some banks and credit cards now offer the most widely used credit score, the FICO score, as a monthly perk for their customers. If you’re not lucky enough to have access to a free score, you’ll have to pay FICO $19.95 to see yours.
You can get free scores at sites like Credit.com and CreditKarma.com, but they won’t be FICO scores.
You’ll need your credit score to be in great shape if you want the best rates. A 2013 study from the Federal Trade Commission found 5 percent of consumers had errors on their report that could result in less favorable loan terms. If you’re among that 5 percent, you want to find any errors and correct them before applying.
And if your credit score simply stinks, you can try these tips for raising it fast.
2. Failing to get preapproved
The next mistake you can make when applying for a mortgage is failing to get preapproved.
Getting preapproved by a bank is one way to avoid the heartbreak that comes from falling in love with a house you can never buy. It may also give you an edge if there are multiple offers for the same property. A seller will feel more confident selecting a bid from someone with a mortgage preapproval rather than a person who hasn’t even begun the process.
However, don’t get carried away by whatever preapproval amount you receive from the bank. Remember, what the bank thinks you can afford and what you can actually afford may be two different things. A lot of people lost their homes in the Great Recession because they were given loans they couldn’t pay back. Don’t make the same mistake.
3. Not shopping around for the best rate
The Consumer Financial Protection Bureau says nearly half of mortgage borrowers don’t shop around, and that’s a big mistake. Seasoned shoppers search for the best deals on soap, furniture and cars, but some fail to look for a better mortgage rate.
It may be convenient to use your primary bank for a mortgage, but that could also be expensive if its rates aren’t competitive. According to Bank of America, for every 0.25 percent you can reduce your interest rate on a $200,000 mortgage, you’ll save $30.55 per month. Over a 30-year period that can add up to a lot of extra cash.
4. Ignoring mortgage fees
While you’re investigating rates, don’t forget the fees. Many mortgages come packed with fees of all kinds. Some — such as your county recording fee — are likely fixed, but others are negotiable.
Before your closing, you should be provided with a good faith estimate of the fees. Ask your lender to review what they are for and then see if you can negotiate a lower price. These are a few of the fees likely to have the most wiggle room:
- Loan origination fee
- Application fee
- Broker fee
- Underwriting fee
5. Not having cash for a down payment
Not having a down payment stashed away can sink your prospects of getting a mortgage. After being bitten by the housing market crash, traditional lenders shy away from giving mortgages to those bringing nothing to the table.
Zillow says you generally need to have a down payment of between 5 and 20 percent to qualify for a conventional loan. And if you put down less than 20 percent, be prepared to pay mortgage insurance.
6. Not understanding your mortgage terms
Underwater mortgages weren’t the only problem homeowners faced during the Great Recession. An untold number of people also lost their houses simply because they signed on the dotted line without understanding what the heck their mortgage entailed.
For example, people thought they’d hit the jackpot with adjustable-rate mortgages, known as ARMs. Homeowners were fine for the first few years while their mortgage rate was fixed and low. But when it reset to the current market rate, that affordable monthly payment suddenly wasn’t so affordable.
A 2008 report from the Federal Reserve Board found that more than 75 percent of the subprime loans issued from 2003-2007 before the housing market crash were “short-term hybrids” that worked like ARMs. By 2008, more than 21 percent of these subprime loans were seriously delinquent.
The moral of the story is to always understand what you’re signing up for. It’s not enough to know what your monthly payment is today. You also need to ask if the interest rate can change and if so, when and by how much will it increase.
If you’re not comfortable with the loan terms or don’t understand them, it’s better to walk away than to make an expensive and potentially life-altering mistake.