9 Mortgage Don’ts

According to a recent housing survey, nearly 73 million Americans are homeowners. Most Americans own homes with a mortgage, with only 60% owing less than $100,000 on their homes.  But no matter how much you owe, unless you’re a lottery winner, you’ve probably used a mortgage to buy your home. Here are some tips on what not to do when making one of the biggest purchases of your life.

1. Don’t find your dream home before you find your money
It’s easy to lose sight of your priorities when buying a home. Most people make the mistake of thinking that they should shop for a home and then shop for a mortgage. That couldn’t be more wrong. Putting the house before the mortgage makes you far more likely to fall into the trap of biting off more than you can chew. If you set your finances in order before you shop, your real estate agent won’t show you houses out of your price range, and you won’t spend sleepless nights wondering how you’re going to pay for it all.

2- Don’t buy without a written good faith estimate
When you shop around, you’re doing more than just comparing advertised rates. Those rates may exist, but they may not be available to you and they certainly don’t include fees. In order to compare apples with apples, you’ll want a written good faith estimate, which details, as best as possible, what your rate and fees will be.

3- Don’t pre-qualify for a mortgage, get pre-approved
Being pre-qualified for a mortgage is nothing more than an estimate. It means that the lender is saying, “We think you can afford this.” Newsflash — lenders are in business to make money, the more mortgages they pre-qualify, the more potential customers they have.

The real goal is to get pre-approved, which means that the lender will actually pull your credit report and run the numbers, not estimate. Getting pre-approved puts you as close as possible to getting the mortgage without actually signing the papers.

4- Don’t assume that a mortgage is the right one for you

Not all mortgages are created equal.

Fixed-rate mortgages let you lock in a rate no matter what happens. The upside is consistency; the downside is that you could pay a ton while everyone else saves a bundle.

Variable rates move with the prime lending rate; they’re often slightly less than the prevailing fixed rate (as compensation for diminished predictability) but there’s no telling where they can go.

Interest-only payments plan means that you’ll pay less at first because your monthly won’t cover the principal; over time your payments will begin to go to the principal. On the upside, it’s a cheaper option, however, the downside is that you don’t build equity right away.

Balloon payment mortgages allow you to defer payment until an agreed upon later date, but when that date comes, we’re talking about some serious cash.

The reason why there are so many packages is that all consumers are different. What might be right for you may be wrong for your neighbor. The key is to ask questions to find out exactly what kind of mortgage you’re getting, and to shop around.

5- Don’t buy a mortgage off the bat
Money is money, but not all money is the same. Most buyers use a lender recommended by their real estate agent. That often works out. But the lending business is competitive, which means that you shouldn’t just take what’s offered and assume that it’s the best deal out there. Ask your friends and co-workers for recommendations and then shop around from that list to find the best price.

An option would be to enlist the help of a mortgage broker. In essence, a mortgage broker is like an agent — he puts lenders together with buyers. If he’s doing his job, he’ll work hard to get you the best rate. But here’s the good part: you don’t have to use him.

While your broker shops for mortgages, you should keep shopping for brokers. The products that a lender makes available to one broker may not be offered to another. By working with a few brokers, who, in turn, work with a number of lenders, you’ll find the best deal.

6- Don’t borrow too much, or too little
First-time homebuyers make two common mistakes. Either they borrow too much money (buying a more expensive home than they can really afford), or they don’t borrow enough (buying a reasonably priced home for their budget but failing to account for the added expenses of home ownership).

The solution is simple. Sit down with a mortgage broker beforehand and take a hard look at your financials. Remember; they’re the pros when it comes to financing real estate, they’ve been there before and they can walk you through all of your costs.

7- Don’t assume a 30-year mortgage is right for you
If you’re the type of guy who invests all of his extra money, you’ll probably be better off with a 30-year mortgage. Why? A 30-year mortgage means lower payments, which means more money for you to invest.

Assuming your investments beat the appreciation of your property, you’ll make money. On the other hand, for guys who spend their disposable income, a 15-year mortgage will be a better option because paying off your home faster will be your investment.

While most people tend to choose the 30-year mortgage, nobody should make this decision without some serious reflection. A 30-year mortgage means more payments in smaller installments, but a 15-year mortgage means fewer payments in greater amounts. Only you know what’s best for you and you need to give it some serious thought.

8- Don’t make any other big purchases months before buying
The price you pay for your mortgage is a reflection of your credit score. A large outstanding loan will decrease your score, making the lender more likely to raise the price or require you to get a second loan. The best advice is to plan ahead by six months to a year so that you can maximize your credit score.

9- Don’t mistake home ownership for renting
Buying a home is a serious, life-changing commitment. The costs of defaulting on a home are far higher than missing a rent payment. The black marks that dot your credit report if you default have a way of adding up. Soon you’ll find yourself paying the highest credit card interest rates and unable to refinance your home. The ultimate risk of a failed home purchase can be as serious as bankruptcy, so it’s important to be certain that you’re ready to buy a home.

A MORTGAGE IS SERIOUS BUSINESS

If there’s one lesson to draw from buying a mortgage, it’s that shopping around equates savings. While it’s nice to save a few bucks on a stereo or a few hundred dollars on a new car, it’s imperative that you save all you can when you buy a home.

After all, the stakes are high. Your home isn’t just a place to hang your hat, it’s more than likely your biggest investment and your retirement all rolled into one.

The moral: it pays to do your homework.

The above article was writen by Michael Estrin and was found here.