This topic has become increasingly more relevant with the restrictions and intricacies of the mortgage world. There are lenders out there promising things that they have no control over. The average homebuyer is under the assumption that they way to find a good mortgage professional is by shopping around and comparing rates and fees. Although this may be a way to save money in the short term there are a lot of other factors that should be considered.
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Mistake #1 – Paying Your Mortgage Before Paying Off Higher-Interest Debt
Do you love the idea of owning your home free and clear? It’s a beautiful dream, isn’t it? But if you have other, higher-interest debt, you should hear what our experts have to say before you make paying down your mortgage a financial priority.
“Homeowners should pay their higher-interest rate debt first before they pay their house off,” says Sam Suliman, a mortgage expert with over 20 years experience in the business.
Alex Gonzalez, a mortgage loan originator with Vintage Mortgage Group, agrees.
“Your home is emotional – it’s your foundation – and people want to pay that off as quickly as possible. But credit cards typically have 18-25 percent interest rates,” Gonzales cautions. “Even if your home loan is at 5 percent, you should never put extra money into your mortgage until you’ve gotten rid of your credit card debt.”
Want another reason to get rid of credit card debt before paying down your mortgage? Here’s one: “The interest you pay on your credit card balance is not tax deductable like the interest you pay on your mortgage,” says Gonzales. “It’s wasted money.”
Mistake #2 – Getting a Loan for “Free”
In this life, you don’t often get something for nothing. So when someone offers you a “no cost” loan, you might get a little suspicious. That’s good instinct.
Why? According to Gonzalez, “no cost” loans typically come with a higher interest rate than normal loans. That’s because the bank pays the loan fee for you – knowing that the higher interest rate you’ll be paying on the “no cost” loan will more than make up for what they spent on the loan fee, he says.
Here’s an example to help illustrate the point a bitter: Let’s say you want to refinance your $200K mortgage, and you plan to stay in your home for 10 years or more. You could either get a “no cost” loan at a 4.25 percent interest rate, or you could pay $5K in closing costs for a standard loan with an interest rate of 3.25 percent.
|“No Cost” Loan||Standard Loan|
|Interest Rate:||4.25 percent||3.25 percent|
|Total Interest Paid:||$154,196.72||$113,348.55|
The difference between your monthly payments with a “no cost” loan and a loan where you pay $5K in closing costs is $113.47 a month. But since the loan cost you $5K, we need to figure out your “break even” point.
$5,000 divided by $113.47 a month comes out to 44 months, or just over three and a half years. So you’ll break even on the $5K after four years and you’ll start saving money by paying a lower interest rate for the remainder of the loan.
In fact, even after paying $5K for a lower rate loan, you’ll save $8,616 after 10 years.
Bottom line? “If you’re going to be in your home for longer than 10 years, the no cost loan is probably not the way to go,” says Gonzalez.
Mistake #3 – Getting a 15-Year Mortgage, But Having No Financial Security
There are huge benefits to getting a 15-year mortgage. First, you’ll be paying your loan off in half the time of a traditional 30-year mortgage. Second, you’ll pay less in interest over the life of the loan. However, due to the higher monthly payments that often come with a 15-year term, this option isn’t for everyone.
For example, let’s say you’ve got a $200K mortgage at 4 percent. If you have a 15-year mortgage, your monthly payment will be $1,479.38 and the total cost of the loan over 15 years will be $266,287.65. The same loan amortized over 30 years will only cost you $954.83 a month, but the total cost of the loan will be $343,739.01. So, while you’ll save approximately $77k in interest with a 15-year loan, your monthly payments will increase by more than $500.
The big question you need to ask yourself is, “Can I afford the larger monthly payment?” If you’re not sure, don’t panic – here’s some great advice for you.
“I think the best way to do it is to get the 30-year loan and make the higher payments. This way you make sure you’re in control of your finances in the future,” says Suliman. “You could take the money and invest it in something like stocks. But this way, it doesn’t strain your budget.”
Of course, this all depends on your income and financial security. If you could afford a 15-year loan, you could save a lot of money in interest. However, if you take on a 15-year loan without a clear understanding of your future finances, you could be in trouble. So, talk to your lender about what the best option for you is.
Mistake #4 – Not Thoroughly Researching Lenders
Gonzalez suggests that his clients think about this scenario for a moment: If you had a briefcase with $300K in it, and you were choosing who to hand it over to, you’d probably do some pretty thorough research, right? That’s essentially what you’re doing when you get a mortgage – so make sure you’re handing it over to someone trustworthy.
“When someone says ‘do you want a 1.9 percent interest rate?’ your first thought might be ‘yes!’,” says Gonzalez. But don’t fall prey to a lender simply because they told you something you want to hear.
If you’re unsure if you can trust your loan officer, it’s okay to ask questions and challenge them, Gonzalez says.
“Real professionals don’t get their feelings hurt if you have questions for them. People want to guard their savings and investments – so if someone gets upset if you challenge them on an opinion, you need to find someone new.”
Some questions you may want to ask a lender, says the Federal Reserve Bank of Boston, include whether or not your interest rate will be fixed or variable, and if the lender offers an introductory rate, when it will expire, and what the new rate will be.