For most buyers, the mortgage is the largest monthly expense they will have. Yet most borrowers will do little to no preparation, negotiation, or shopping to get the best deal. And they end up paying much more for their loans than they need to. You? You're smarter than that, or you wouldn't be reading this article. Here are five of the biggest mistakes that can cost you real money.
1. Believing advertised rates are what you'll pay
Unless you have perfect or credit most advertised rates are out of your league. To get boasting rights on a rate that good, you have to pay (one percent of the loan amount) a point, or more to get the best rates.
Your lender will go over your credit with a fine-tooth comb to find anything to raise the rate. That includes qualifying you at the beginning of the transaction, and then running your credit again a day or two before you're supposed to close on the home and loan. If there's been any change in your debt-to-income ratio, goodbye low mortgage rate.
2. Not comparing lenders
Just like everyone knows two or three real estate agents or more, everyone knows a loan officer or a mortgage broker. A loan officer works for a bank or savings and loan and can only offer you loan packages that the bank has put together. A mortgage broker prequalifies you just like a loan officer, and shops your deal around to various lenders.
3. Not paying attention to terms
Advertised rates even for those with perfect credit aren't what you will actually pay. The true cost of the loan is the APR or annual percentage rate, which includes fees from the lender.
4. Waiting for a better rate
It's great to have bragging rights on a low rate, but you don't want to lose the home of your dreams over a quarter of a point in interest.
There's a big picture here you could be missing. No matter what your interest rate is, you're going to pay thousands of dollars in interest up front before you make any serious gain in equity. If you go all the way to the end of your loan's term, you'll pay so much interest that you could have bought the same home two or three times.
5. Choosing the wrong type of loan
Many families were hurt post-9/11 when lenders opened the spigots and gave a loan to almost anyone who could sign the paperwork. Suckers bought homes that were too expensive using balloon loans with low teaser rates.
The type of loan you choose should depend on current market conditions and how long you plan to stay in your home, not how much home you want to buy.
Once you've narrowed your choice of lenders, ask them on the same day to give you a quote. If you wait even one day, rates may have changed, so you're no longer comparing apples to apples.