Mortgage Blunders: 7 Common Mistakes to Avoid

 

Getting a mortgage can be a new and exciting experience, but there are multiple ways you could cost yourself a lot of money. You don’t just have to worry about the current mortgage rate; you also have to consider the time-frame, down payment amount, and the type of mortgage product you want. These 7 mortgage blunders are easily avoidable with a bit of research and expert help.

Blunder 1: Not Checking Current Mortgage Rates

Not checking current mortgage rates could mean you won’t get the best deal for your home. Although the coronavirus has made mortgage rates dip to lows never seen in recent history, that doesn’t mean the lender you’re borrowing from will honor that rate. The financial experts at Moneywise suggest that you shop for the lowest mortgage rates so you don’t lose a significant amount of money in interest over the course of your long-term home loan.

Blunder 2: Expecting a Low Mortgage Rate With Bad Credit

There are multiple factors that determine your loan's interest rate, including, but not limited to, your credit. Consumers with higher credit scores will always receive a lower interest rate than those with a low credit score. In fact, it’s possible that lenders will turn you away from a mortgage loan if your credit is below 650. Check your credit score with Equifax or other similar credit monitoring websites to ensure you qualify before making an appointment.

Blunder 3: Choosing an Adjustable-Rate Mortgage

An adjustable mortgage rate seems like a good idea at first because borrowers will start you at a low-interest rate for the first few years. However, you could price yourself out of your home's monthly payments when the interest rate resets to the higher market rate. If you don’t want to stay in your home for more than 5 years, adjustable could be a positive, but homeowners that want to stay put could witness minimum payments skyrocket to three times more.

Blunder 4: Small Down Payments/No Down Payment

Some lenders will let you purchase a home with a 3-5% down payment. While this sounds attractive at first, a small down payment could double the interest you have to pay over the length of your mortgage. No down payment could put you in a worse financial bind. It’s better to save a 10% down payment (more is better) to ensure you pay less interest and slash your monthly payments to a more manageable amount to prevent foreclosure.

Blunder 5: Long Amortization Periods

Lenders often won’t give out mortgages that are longer than 30-years, but others will extend the amortization period to 35, 40, or even 50 years. A young professional in their 20s could pay off a 50-year term, but almost every other demographic could compound so much interest that home equity will be non-existent. It’s optimal for homebuyers to seek a low amortization period (15-30 years) to pay off their mortgage faster and to pay less interest, making it easier to retire.

Blunder 6: Using Liar Loans

It’s a massive mortgage blunder to buy a home you can’t afford, but lenders will often stop you from making this mistake. In the case of liar loans, homebuyers often put themselves in a position of financial trouble. Liar loans require no verification or documentation, so borrowers could lie about their assets, income, and expenses. Once you have to pay with your actual income, you may miss payments and face foreclosure or bankruptcy as a result.

Blunder 7: Using Most Exotic Mortgage Products

Most exotic mortgage products spell bad news for the borrowers because they’re often scammy or put the homebuyer in a bad financial position. One famous mortgage product asked homebuyers only to make payments on their interest, making it impossible for them to move because they didn’t have equity. Lenders come up with multiple exotic products to help make homeownership a reality, but it often sends young Americans to the poor house.