Avoid These Common Pitfalls When Getting a Mortgage
Your mortgage is the most significant debt you will ever carry. Don’t make it more expensive than it has to be. Here are a couple of things to avoid while shopping for a mortgage that can save you time and money.
Mistake #1: Not Shopping Around for Mortgage Options
When buying a car, you probably visit several dealers before settling on one. The same applies to buying mortgages. If you do not shop around, you have fewer chances to get the best deal.
Still, the Consumer Financial Protection Bureau (CFPB) finds only 30 percent of consumers shop around for a mortgage. The application rate is even less inspiring. The CFPB reports that 75 percent of people apply with only one lender or broker.
It's unclear why so many prospective homeowners avoid comparison shopping. The CFPB cites a lack of knowledge and confidence among consumers when dealing with mortgage-related issues. These shortcomings can ultimately cost tens of thousands of dollars in principal and interest payments.
There are a couple of reasons you should comparison shop. First, you see product rates side-by-side. While the house’s purchase price is the marquee expense, you can also compare application fees, insurance, and the loan type.
Comparison shopping expands your choices, too. You’re more likely to find a mortgage that meets your specific needs when you have ten choices instead of two. It is also an opportunity to pit lenders against each other. You can use an offer from one lender to sweeten the interest rates or closing costs with another.
Mistake #2: Ignoring the True Cost of Homeownership
Many borrowers fixate on the price of the home. While it’s the most significant expense, it is not the only one. Closing costs increase your overall investment two to five percent. For example, if you want to buy a $350,000 home, you can expect $7,000 to $17,500 in closing costs.
Some of the items in closing costs include:
- Annual assessment
- Appraisal fee
- Home inspection
- Homeowners insurance premium
- Lender’s title insurance
- Loan-related fees, such as origination and application fees
- Mortgage insurance fees
- Owner’s title insurance
- Property tax
- Title search fees
You’ll want to factor in annual property maintenance, too. Typically, homeowners spend one to two percent of home’s purchase price on upgrades and renovations. These often cover the less glamorous purchases, like water heaters and roofing.
Here’s the bottom line: buying a home is more expensive than you think. Make sure to pad your expectations when shopping for a mortgage. Your budget will thank you later.
Mistake #3: Underestimating the Importance of Credit History
Your credit history matters every time you borrow money. It’s a tool that lenders use to decide how creditworthy you are. If you have good credit, that’s awesome. You’ll get favorable rates and terms on your mortgage. Otherwise, you are in for an uphill battle.
If you don’t know your credit score, get a copy today. Everyone is entitled to one free credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) each year. You can also get one from a credit scoring site or your financial institution.
Lenders consider credit scores from 661 to 850, either Good or Excellent. Anything less than that compromises your leverage when negotiating mortgage terms. One potential cause of a low score is misinformation.
If you see errors on your credit report, contact your credit reporting agency immediately. These inaccuracies can drag down your credit score and purchasing power. Some of the most common mistakes on credit reports include incorrect personal information, inaccurate debts, and mistaken accounts.
You should continually try to improve your credit score. The key takeaway is not underestimating its importance to lenders. Actively building your credit through on-time payments and credit mixture will pay dividends in the future. At the same time, limit potential hits, such as hard inquiries and closing credit card accounts.
Mistake #4: Skimping on the Down Payment
Putting no money down and receive a mortgage seems too good to be true. That’s because it is. There are a host of problems when you make a small or no down payment. That includes reducing your equity, increasing how much you owe, and limiting your skin in the game.
As a rule of thumb, you should pay 20 percent of the house's value on the down payment. For example, if you are buying a $350,000 home, that means putting down $70,000 as an initial deposit. This shows lenders you have a certain degree of financial stability and responsibility.
When you make the down payment, you reduce how much money you pay on interest. For this example, if you have a 30-year fixed mortgage at 3.315 percent, you'll pay $162,292 in interest. You’ll pay more if you do not make a down payment. That same mortgage will cost $255,365 in interest.
Want to see how a down payment affects your mortgage? Check out our mortgage calculators to see the difference that 10% 0r 20% down payment does to your mortgage.
The Bottom Line
When it comes to mortgage shopping, what you don’t know can hurt you. Taking the time to comparison shop and consider all the costs helps you avoid common pitfalls. In the meantime, addressing any credit problems ensures you find the mortgage you want at a price you love.