For most people, buying a home is the largest financial decision they'll make in their lifetimes. It's not a deal easily undone once the final papers are signed, so it makes sense to understand the ins and outs of mortgages before taking the leap into homeownership. Here are six mortgage mistakes to avoid (and what to do instead).
Home buyers typically put down 20% of a home’s purchase price to eliminate mortgage insurance and keep monthly payments low. But draining every bit of cash from your savings is a big mistake, especially when there are additional home-buying costs, including:
Add all of the expected costs of buying a home, then calculate the down payment percentage you can afford. Don't forget to account for major purchases, such as furniture or appliances, you might need to make immediately. You can always make an extra mortgage payment or add to the principal each month, but starting out with no cash on hand is a major mortgage mistake.
Picture this: You find the home of your dreams, and it's within your budget. Turns out, it's also the home of someone else's dreams. In a tight market, making an offer loaded with contingencies, such as mortgage approval, isn't likely to make you successful.
Get pre-approved for a mortgage. This makes you more competitive when you're up against another buyer. If you're a veteran, look to the Veterans Affairs office for pre-approval too. Its rates may save you money in closing costs and help you get more home for your money.
In a rush to get pre-approved, you might decide to go with the first bank that says yes. But the rate could be higher than other banks or mortgage providers. Credit unions, smaller banks, and online mortgage lenders can have dramatically different rates and fees.
Shop around to get the best mortgage rate. It could save you hundreds of dollars a month and thousands in closing costs. Make sure you understand your mortgage, including the type of loan you're approved for, the length of the loan, and its rate.
It can be exciting to see how much you're approved for, but one of the biggest mortgage mistakes is shopping for a house that hits the top of your budget. Many new home buyers don't realize that what they pay toward principal and interest is just half of their monthly mortgage payment. They fail to recognize that property taxes, homeowners insurance, and, sometimes, mortgage insurance are also included. Unexpected expenses can be hard to meet when you borrow up to your limit.
Your total mortgage payment shouldn't be more than 28% of your monthly pre-tax income. If you make $100,000 a year before taxes — just over $8,000 a month — your mortgage payment should be roughly $2,300. Ask your mortgage lender about the best budget for you.
Another mortgage mistake is paying full-price commission to a real estate agent. The average commission rate is about 5.49% of the sale price, which can deduct thousands from your potential profits. But commission rates aren't standardized or set in stone. You can negotiate for lower rates.
Work with a low-commission real estate company that negotiates with agents to procure a full range of services for a fraction of the traditional price. You'll still get an opportunity to ask your Realtor questions and choose the one who's best for you. The only difference is you'll pay less for their services in the end.
If you look closely at the closing paperwork, you'll notice several additional costs. These might include:
Talk to your Realtor or mortgage lender to see if these fees are negotiable or truly necessary. Bottom line? Take a close look at the closing documents before you sign.