If you as a borrower spent a little more time preparing, negotiating and shopping for the best mortgage deal, you can paying far less for your loan than if you just went with the first lender you call. Here are five mistakes many borrowers make that can cost you money.
1. Believing advertised rates are reality for the majority
We’ve all seen the ads boasting amazingly low interest rates that all home buyers want. But the reality is that unless you have perfect or near perfect credit, many of us will never see those low rates on our mortgage statements. You’d have to pay a point or at least a part of a point (one percent of the loan amount) to get close to rates that low.
As mentioned in an earlier blog, your credit score is very important in the mortgage process. Lenders will review your credit rating and credit report to assess how well you handle your debts. It gives them a general idea of how you may handle a loan with their company.
Having a low credit score may not automatically deny you a loan, but be prepared to get a much higher interest rate.
2. Not comparing lenders
It’s important to know the difference between a loan officer and a mortgage broker in order to help with making a comparison. A loan officer works for a specific bank or mortgage company and can and will only give you information and offer you loans offered by their company. A Broker can also prequalify you, but will shop your prequalified deal to other lenders.
A broker can get you information from several lenders in a short amount of time. Or you can go it on your own and talk to local and national banks, credit union and mortgage companies to get similar information.
It’s important to know is that whether you talk with lenders or brokers; you’ll have to provide some personal financial information to get as close to accurate rates. You may be told that to get the best information you’ll need to give them permission to pull your credit. There are different opinions as to whether having more than one company pulling your credit lowering your scores.
3. Not paying attention to terms
Even with perfect credit, commercially advertised rates are not what you will actually pay. The true cost of your loan will be your annual percentage rate (APR) which will include the lender fees.
It is very hard to truly understand loan terms, lenders can hike up fees at will and include fees you wouldn’t think about normally. For example, a loan origination fee which is also known as a processing fee. This fee pays the loan officer or broker and varies from company to company.
Another area where fess varies is credit reports, some lenders charge more for pulling your credit than others. Another may be appraisal cost. It’s all outlined in your good faith estimate, but of course you won’t get that until you officially apply for a loan.
You should Know that all terms are negotiable so don’t back away from asking if certain fees can be reduced,
4. Waiting for a better rate
Everyone wants to get the best rate possible, but don’t wait yourself out of your dream house. The reality is that no matter how low your rate, you will be paying thousands of dollars in interest before making a good amount of equity in the home. And if you stay in the home longer enough to pay off your mortgage that the amount of money you paid out in interest alone could have paid for the house three-fold.
Surprisingly, it is better to focus on how fast you can build equity rather than on the percentage rate. If you make one extra payment a year or pay extra each month, you can offset the rate you are paying by paying down the principle.
Later on if mortgage rates drop again, you can refinance. But bear in mind that you’ll have to pay loan origination, title search, appraisal and other fees all over again so it might not be as beneficial as you may think.
5. Choosing the wrong type of loan
The type of loan you choose should depend on a few things: current market conditions; how long you are planning on staying in the house and how much you are willing to spend on purchasing a house.
Right now, market conditions are in favor of fixed rates. It’s true that they cost more than the other types of loans such as hybrid or adjustable rate, but your mortgage payments will not change due to a fluctuation in the market. The only reason your payments may increase is if your property taxes and hazard insurance increases (and they do).
Adjustable rate mortgages were the craze for a while, but you are at the mercy of the current conditions. If rates go down, your payment goes down; if the rates go in the other direction your payment can double.
If you are planning on selling the home within five years, this may be a risk you can take. (Note: it takes an owner about five years to recoup closing costs). If you plan on staying longer, it may not be the best option for you.
Whichever you choose, make sure you ask for a quote that same day. Waiting even just one day could change the rates. Good luck.
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