When it comes to buying a house, most people focus on finding the perfect property. But truth be told, the perfect house is irrelevant if you don’t have the perfect mortgage. So perhaps it’s time to focus more on how to secure the right financing before proceeding.
5 Mortgage Mistakes to Avoid
The right mortgage matters. If you fail to get the best possible interest rates or loan structure, it could cost you tens of thousands of dollars over the life of the loan. And if you go with the wrong lender, they could make your life miserable. It’s all about choosing the right product and the right partner. In light of this, here are a few mistakes you’ll want to avoid:
1. Not Cleaning Up Your Finances
Your mortgage rate is highly dependent on your financial health. It’s smart to clean up your finances as much as possible before applying for a mortgage.
The first thing a lender considers is your credit. Thankfully, you can pull, monitor, and influence your own credit. Just make sure you start as soon as possible, as it can take several months to get everything in order.
As TransUnion explains, “There’s no better time for regular credit monitoring than when you’re trying to prove your creditworthiness to a lender so you can get the best possible rates. You want to make sure that your credit report is as accurate as possible, your scores are where you want them to be, and no one else is getting access to your credit, possibly harming your scores.”
This is also a good time to pay down debt and save up the cash. You should avoid taking out any new credit or acquiring new debt, regardless of how small the amount.
2. Failing to Secure a Rate Lock
There are multiple types of mortgages. And just because one mortgage offers a lower rate doesn’t mean it’s the best fit for you.
Adjustable-rate mortgages, for example, have floating rates that can move up over time. For this reason, they often start with lower-than-average rates. Unless you’re certain you’ll be selling the house before the rate increase, it’s generally better to secure a rate lock.
3. Not Shopping Around
There’s no excuse for going with the very first lender you run across. It’s so easy to compare home loan rates these days. Take advantage of the opportunity to shop around and find the best possible mortgage for your needs.
4. Not Understanding Closing Costs and Points
A failure to consider closing costs could leave you in a tight financial position. On average, closing costs for a buyer will land somewhere between two and five percent of the total loan amount. That means you can expect to pay $4,000 to $10,000 in closing costs on a $200,000 loan.
Closing costs aren’t always straightforward. Not only will you find different costs from lender to lender, but there are also unique ways to structure these expenses. You can pay them off as a one-time expense (recommended), or you can sometimes bundle them into the cost of your mortgage.
Then there’s the matter of discount points. In some situations, you can reduce the rate you pay by purchasing points. One point is equal to one percent of the loan amount. Do some homework on this topic to figure out if it makes sense for you. (It’s usually only worthwhile if you plan on staying in the property for a long time.)
5. Failing to Understand Different Loan Types
There are so many different mortgage types. If you automatically assume that they’re all the same, you could end up getting the wrong product.
All mortgages are going to fall into one of several basic categories: Conventional, FHA, VA, Renovation, Reverse, Non-QM, One-Time Close, and Refinance. When it comes to buying a house, you’ll generally use a Conventional, FHA, or VA.
Adding it All Up
It’s easy to feel rushed in the home purchase process. However, this is not a process that you want to skate through without taking time to make calculated decisions. By avoiding the mistakes outlined above, you can dramatically reduce the risk of making a bad decision. This will lead to a higher level of satisfaction in your home and in your finances.
