6 Mortgage Mistakes to Avoid

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).

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1. Draining Cash Reserves for a Down Payment

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:

  • A home inspection
  • Closing costs
  • Home insurance

What To Do Instead

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. 

2. Not Getting Pre-Approved

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. 

What To Do Instead

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.

3. Choosing the First Bank That Approves You

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. 

What To Do Instead

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. 

4. Buying Too Much House

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.

What To Do Instead

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. 

5. Paying Full Price for Commission

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. 

What To Do Instead

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.

6. Accepting Added Fees

If you look closely at the closing paperwork, you’ll notice several additional costs. These might include: 

  • Loan origination fee
  • Application fee
  • Broker fee
  • Underwriting fee
  • Sign-up fee
  • Document preparation fee
  • Messenger fee

What To Do Instead

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. 

About Thomas O'Shaughnessy

Comments

  1. Joel Martinchek says

    Wow! Realtors are earning every penny of every commission that they are asking for in this market. I’m offended that you would even say this in an article that you e-mailed to realtors.

  2. I don’t understand wby the the RRC would post an article on a site for Realtors that encourages sellers to negotiate with a low-fee real estate brokerage. I represented a buyer who purchased a home last year that was listed by a low fee broker because he did not have to face multiple offers. The agent used photos will took himself and they did not present the property in a positive light. In addition, the agent took 48 hours to return my call. In the end, my buyer saved thousands of dollars by not having to compete with multiple offers. The seller saved about $6k in commissions but the property sold for at least $20k less than it would have if the agent had done his job properly.

    • Nancy Rogers says

      Yes to all of this! I am so tired of seeing Realtors hit immediately to negotiate a low fee commission. That is insane, you get what you pay for! These low fee brokerages are a joke to those of us that have chosen this profession. If a mortgage broker can not fully support the Realtors in this industry then I would say find a lender that will. As I read thru this list it was funny that the lowering of the commission is not even important in obtaining a mortgage, or a buyer ….the seller pays the commission. Do you negotiate with Doctors, lawyers? No you pay for their expertise. Same with Real Estate. Rant over!

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