Turkeys are delicious -- but you don't want a turkey for a mortgage. Avoid these five nmistakes and pay as little for your home loan as you can get away with.
1. Avoid Comparison Shopping
This is a biggie -- according to surveys by LendingTree and other analysts, about half of mortgage borrowers do not do any sort of price shopping at all. They go with the recommendation of their real estate agent (who doesn't necessarily care what the costs are), or their neighbor (whose son got into the mortgage business a couple of months ago) or the company that buys the most television advertising.
That can be very costly -- a Stanford University study, for example, found that people who don't get at least three-to-four quotes for a $200,000 mortgage pay a median of more than $2,300 extra for their home loans.
2. Choose the Wrong Loan
Suppose that you're shopping for a new car, and you can choose between two very similar autos which are priced almost identically. You are able to negotiate a $500 discount from one company, though, so you go with that car and pat yourself on the back. When you buy insurance, however, you discover that your car costs $1,200 more to insure than the other model. Ouch.
Mortgage shopping can be like that. Before you go looking for the best deal on a 30-year fixed FHA mortgage, make sure that's the best financing for your situation. An FHA loan might have a lower interest rate -- until you add the mortgage insurance premium, which unlike conventional mortgage insurance remains for the life of your loan. And 30-year fixed loans have interest rates running about one percent higher than those of 5/1 hybrid ARMs -- the hybrid might be cheaper if you keep your home for just a few years.
3. Only Consider the Mortgage Rate
Of course the mortgage interest rate is an import consideration when shopping for a home loan -- arguably the most important consideration. However, it's not the only one. Some mortgage lenders routinely offer interest rates that are substantially lower than their competitors. However, if their service isn't good and their systems aren't efficient, working with them can cost borrowers more than they save. Here's why:
A lender that doesn't close on time can cause you to lose the house you want. When housing markets heat up, it's not unusual for sellers to accept an offer only to have a higher one come in later. The sellers can't accept the higher offer unless the current buyers miss any of the deadlines or fail to complete any requirements set out in their purchase agreement (this is called being "out of contract). If your lender fails to close on time your house may be yanked away from you and sold to someone else.
Lenders can also cost you money by failing to close your loan before your lock-in period expires. If mortgage rates have risen, you could find yourself paying a higher rate or more fees, even if the delay was not your fault. This can also happen if the lender fails to lock in your loan when you request it, and this happens more often than you might think.
4. Misrepresent Yourself to Your Lender
People make mistakes all the time when they communicate with their mortgage lenders, and most of the time it's not intentional. Here's a partial list of misstatements commonly made to mortgage lenders:
- "My credit's great! Ok, not so great...." Mortgage pricing is driven by your credit rating, and even a few points can make a big difference in what you pay. Errors can throw off the whole calculation; for example, the lower your score, the more likely FHA is a better choice for you.
- "I'm self-employed and I make $10,000 a month. Um, no, that's not what my tax return says." If it's not shown as income on your tax return, mortgage underwriters won't count it as income (except for specific deductions like depreciation, which are added back in).
- "I didn't know it was a manufactured home." The property type matters. If you have a loan in process and the appraiser discovers the property is a manufactured house (sometimes it's hard to tell), a high-rise condo, a mixed-use development, or other "different" sort of dwelling, your loan might not go through or it might cost more or take longer. Big potential for problems.
- "No, the home's not listed for sale or rented out. As of tomorrow." If you want to finance your home as a primary residence or vacation home, it cannot be rented out or listed for rent. If you want to refinance it, you can't have it currently or recently listed for sale. The appraiser will almost certainly find out and note it on the report.
5. Ignore Your Credit
As previously mentioned, your credit rating is probably the biggest factor in determining your mortgage rate. But did you know that even a handful of points added to your FICO can save you thousands? For example, if you choose a $300,000 Fannie Mortgage at 80 percent and your FICO is 699, your risk-based surcharges are 1.75 percent. Get it up a single point to 700 and your charge drops to 1.00 percent, which is $2,100 less! How do you know how much improving your score by a few points can save you? ASK! Or check out this chart from Fannie Mae: Loan Level Pricing Adjustments
No one wants to pay more for their home loans than necessary. Take these five tips under consideration and you'll have a great mortgage to be thankful for on November 28th.