5 NEWBIE MORTGAGE MISTAKES (AND HOW MUCH EACH COULD COST YOU)
Can’t wait to cozy up in that cute Colonial, but anxious about signing up for your first mortgage? We get it. Buying your first home is a big stinking deal. But with a little know-how, it’s easier than expected to make smart mortgage moves and save big bucks over the course of your loan.
By avoiding these mistakes, you can put your home-buying butterflies to rest.
1. Finding Your Home Before You Find Your Mortgage
How Much It Could Cost You: Enough to send your future kid to college. Seriously, over the life of the loan, you could end up paying tens of thousands of dollars more in interest and fees than you need to.
Why People Mess This Up: If you don’t have your financing buttoned up before you find your dream home, your desire to win the bid could influence you to offer a higher price and overpay on a mortgage because you had no time to shop around. Getting your financing all set before you feel the pressure to make an offer gives you time to qualify for a more attractive loan and gives you the confidence to make a fair offer because you’re a qualified buyer.
How to Avoid It: Start talking to lenders at least three months — maybe even a year — before you start house hunting. Time-consuming tweaks like paying down debt or improving your credit score can have a dramatic effect on overall mortgage costs.
2. Not Comparing Loans Correctly
How Much It Could Cost You: Just like No. 1 above, you could overpay by tens of thousands over the life your loan.
Why People Mess This Up: First-time buyers often get seduced by a low interest rate and don’t take into account the cost of fees. A lower-interest loan could actually cost you more than one with a higher rate because those fees can be steep enough to outweigh the interest savings.
How to Avoid It: Compare loans by the annual percentage rate, or APR, not just by interest rate. Each lender should give you a document aptly named “loan estimate.” The APR will be listed there (if it’s not, you don’t want that lender). The APR combines a home loan’s interest rate with closing costs and other fees like points (which is why it’s usually higher than the interest rate), then converts the overall costs to an annual percentage. This gives you an apples-to-apples comparison so you can understand what you’re paying over the life of the loan. You’re welcome!
3. Falling for Marketing Gimmicks
How Much It Could Cost You: More than enough to buy a good used car (or at least enough to cover Uber fees for a few years).
Why People Mess This Up: ”Lenders use advertising hooks like, ‘We pay your mortgage insurance,’ or ‘You don’t pay the closing costs,’” says Casey Fleming, mortgage adviser in Silicon Valley, Calif., and author of “The Loan Guide: How to Get the Best Possible Mortgage.” Don’t be fooled. “You still pay those costs,” he says. “If you’re not paying in cash, you’re paying it in the interest rate.” Fleming estimates those costs can add a quarter point to an interest rate, which as an example, translates to $9,203 (the difference between a 4% interest rate and one that is 4.25%) for a mortgage of $176,000.
How to Avoid It: Block out the noise. Shop for your mortgage according to trusted recommendations and reliable reviews, not slick deals that sound too good to be true.
4. Not Budgeting for Your Craft Beer and Yoga Pants
How Much It Could Cost You: Time and money for the things you love to do, like meeting friends over a pitcher of the newest session beer, then hitting the gym in the morning to work it off.
Why People Mess This Up: Lenders qualify you for what you technically can afford on a spreadsheet. They’re looking at your monthly debt-to-income ratio. They don’t look at what you spend your disposable income on: your passions and hobbies. So homebuyers often end up with a mortgage payment they can only afford by scaling back on the things they enjoy.
“One homebuyer may be a homebody, like to cook, and have no pets to pay for,” says Dave Jacobin, president of 1st Mariner Mortgage. “Meanwhile, a second buyer with the exact same income and debt situation might travel every weekend, enjoy fine dining, or shop a lot. Lenders can’t look at that.”
How to Avoid It: Track your spending monthly, so you really know how much you spend. Factor fun into your future when deciding which mortgage offer is the best fit. “Two years into your home purchase, you want to be happy you did it,” says Jacobin. “You don’t want to be mortgage poor.”
5. Not Knowing How to Eyeball the Paperwork
How Much It Could Cost You: Thousands of dollars in surprise closing costs.
Why People Mess This Up: Because the paperwork seems so freaking daunting. But good news: As of October 2015, new mortgage rules require lenders to send you paperwork that actually makes sense.
This new paperwork comes in two different documents. It’s much easier to scan and understand than the old paperwork, which used to be the model for everything bad about tiny legal print.
1. The loan estimate will come first. Here are some key things to look for:
The APR (see No. 2 above)
The interest rate
The monthly payment
The loan terms, such as a 30-year or 15-year mortgage, adjustable rate or fixed
The total cost of the loan
Cash amount you’ll need at closing
2. The closing document will come at least three days before you close. It should look just like the first document, but instead of estimates it will have final numbers. If you see any increases or additional fees you weren’t expecting, question the lender immediately. Because if it shows even a tenth of a percent interest-rate jump you weren’t expecting (say 4.1% instead of 4%) — and you don’t question it — that could mean a difference of almost $3,700 on a $176,000 mortgage.
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