Aspiring home owners often give far too little thought to the mortgage they select. A mortgage may be perceived as a dull and necessary means to secure a dream home, and not enough importance is given to this major financial decision. Few people really understand the mortgage process and can easily make costly mistakes by failing to give enough consideration to the home loan in their eagerness to purchase a property.
One of the biggest mistakes home buyers make is not preparing in advance of applying for a mortgage. Ensuring that one’s credit score is in peak condition prior to approaching lenders is crucial, as preferential interest rates are available to those with excellent credit. Just a few points difference in the interest rate secured can literally mean the difference in tens of thousands of dollars thrown away on unnecessary interest payments over the term of the mortgage.
Another common mortgage mistake to avoid is borrowing too much. It is important to assess an affordable amount rather than overstretching the budget to buy too much house. Buyers often fail to take into account the other associated costs of home ownership, on top of the mortgage payment. When property taxes, maintenance, home insurance and utilities are factored into the monthly budget then the mortgage payment can be disproportionate to income, causing financial strain. An affordable mortgage is vital, yet too many borrow beyond their means.
The Federal Reserve has stated that far too many mortgage holders simply do not understand the nature of mortgage loans. Many are simply unaware that an increase in mortgage interest rates can result in a higher monthly payment. To avoid surprise increases in monthly mortgage payments it is imperative to understand the type of mortgage product undertaken and consider the worst case scenario of increased payments.
Assuming a mortgage is a costly expense which includes fees and closing costs. It is essential to comparison shop to find the best deals and avoid excessive fees. Failure to negotiate on fees is a costly mistake, and adding them to the balance of the mortgage is folly as the fees then attract interest over the full term. It is essential to budget in advance and pay all the associated costs of acquiring a property separately, rather than tagging them on to the mortgage debt.
A major mistake many make is not having a significant down payment. This results in mortgage protection insurance being levied by the lender, thus increasing the monthly mortgage payment. Without a sufficient down payment the home owner has little equity in the property, and equity is essential to cushion against interest rate fluctuations.
Failure to really consider the term of the mortgage loan, together with penalty clauses, is another common mistake. It is in the lender’s interest to advance a long term loan as it provides more interest payments. However, the longer the term the more expensive the mortgage will be, and the higher the risk of a change in circumstances. Taking a loan over a shorter period and ensuring there are no penalties applied for over payments, gives the borrower more control.
To avoid these types of mistakes, it is essential to spend some time researching mortgages and how they work, before signing on the dotted line. Purchasing a home is an exciting time, but the dull logistics of securing the right mortgage product which is affordable is vital. It deserves as much thought as finding the right home to avoid rueing the purchase.
Source: the Federal Reserve