Let’s review the common mistakes made by mortgage borrowers, as if you’re looking to buy a home, chances are that you’ll need to take out one. A lot of people are intimidated by the process of taking out a mortgage. As a result, many people don’t take the time to research mortgages and they make mistakes that could be easily avoided. This can cost them time, money, and energy for many years to come. If you want to get the most out of your mortgage package, avoid the following mistakes.
Common Mistakes of Mortgage Borrowers
1. Not Shopping Around for a Better Deal
Shopping around for a mortgage deal might not be as fun as shopping around for your new home, but it’s still important!
Take time to shop around, speak to numerous lenders, and do your homework. Think of it as an investment – you could be saving yourself a great deal of money for years to come. This is a “must take” step for all mortgage borrowers prior to even start looking for a house.
This also applies if you are refinancing your house. You may want to do this to get extra cash for a wedding, a special trip or a new kitchen. If you don’t shop around and do you research, you may end up with less savings each month and less cash in your pocket.
2. Having a Bad Credit Score
It’s tempting to stick your head in the sand when it comes to your credit score, but unfortunately, that won’t help anyone.
For all potential mortgage borrowers out there, maintaining a healthy credit score is one of the best ways to get a great deal on your home loan. The better your credit score is, the more likely you are to get a good interest rate on your mortgage.
Check your reports frequently: you might have forgotten about a small, but growing debt that will badly affect your credit score. If your credit score isn’t looking great, take a look at what debts you can pay off to improve it. Ultimately, this will save you money in the future.
3. Overestimating the Amount Mortgage Borrowers Can Pay Off Each Month
Many mortgage borrowers overestimate how much they should spend paying off their mortgage. In part, this is because being a new homeowner comes with many hidden costs.
A good rule of thumb is to spend less than 28% of your pre-tax paycheck on your mortgage. Any more than that, and it’s unlikely that you’ll be able to pay it back without forgoing other necessities.
In addition to paying off your mortgage, you’ll need to budget for repairs for your new home, covering all the hidden costs most owners ignore. You might also want to renovate certain areas of your home. And that’s not counting other necessities, like a retirement fund, a healthcare plan, car maintenance and more.
4. Focusing on the Interest Rate Instead of the APR
When you’re shopping around for a good deal on your mortgage, you’ll probably compare one interest rate to another. The interest rate is important, but the annual purchase rate – or APR – is what you really need to focus on.
Some lenders might offer you a low interest rate but higher fees. Let’s consider two loans: loan A has an interest rate of 3.9% while loan B has an interest rate of 4.1%. Loan A looks more tempting, but it might have higher admin fees and lending fees. You might end up paying more on loan A than on loan B.
If you want an accurate idea of what you’ll actually end up paying, look at the APR, not the interest rate.
Tips for Mortgage Borrowers
By educating yourself about these common mistakes, you might manage to save yourself time and money in the future. Become one of the smart mortgage borrowers. This will not only mean you can finance your home: it also means you can enjoy it!