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Is your house your castle or an albatross?
Your answer might depend a lot on your mortgage. Getting an affordable property at a great rate can make you feel as if life couldn’t be any sweeter. But ask anyone who bought a house with a mortgage they didn’t understand and couldn’t afford, and they will likely tell you their house has brought them nothing but frustration and tears.
At least six months before you go to your first open house, you need to go to AnnualCreditReport.com. That’s the official site to get free credit reports issued by the big three reporting agencies: Experian, Equifax and TransUnion. You’re entitled to one free credit report from each agency each year.
In addition to your credit reports, it’s also critical to see your credit score. Some banks and credit cards, such as Discover and Barclaycard, now offer the most widely used credit score, the FICO score, as a monthly perk for their customers. If you’re not lucky enough to have access to a free score, you’ll have to pay FICO $19.95 to see yours.
You’ll need your credit score to be in tiptop shape if you want the best rates. A 2013 study from the Federal Trade Commission found 5% of consumers had errors on their report that could result in less favorable loan terms. If you’re among that 5%, you want to find errors and correct them before applying.
And if your credit score simply stinks, you can try these tips for raising it fast.
The next mistake you can make when applying for a mortgage is failing to get pre-approved.
Getting pre-approved by a bank is one way to avoid the heartbreak that comes from falling in love with a house you can never buy. It may also give you an edge if there are multiple offers for the same property. A seller will feel more confident selecting a bid from someone with a mortgage pre-approval rather than a person who hasn’t even begun the process.
However, don’t get carried away by whatever pre-approval amount you receive from the bank. Remember, what the bank thinks you can afford and what you can actually afford may be two different things. A lot of people lost their homes in the Great Recession because they were given loans they couldn’t pay back. Don’t make the same mistake.
The Consumer Financial Protection Bureau says nearly half of mortgage borrowers don’t shop around and that’s a big mistake. Seasoned shoppers search for the best deals on soap, furniture and cars, but some fail to look for a better mortgage rate.
It may be convenient to use your primary bank for a mortgage, but that could also be expensive if its rates aren’t competitive. According to Bank of America, for every 0.25% you can reduce your interest rate on a $200,000 mortgage, you’ll save $30.55 per month. Over 30 years, that can add up to a lot of extra cash.
While you’re investigating rates, don’t forget the fees. Many mortgages come packed with fees of all kinds, and while some, such as your county recording fee, are likely fixed, others are completely negotiable.
Before your closing, you should be provided with a good faith estimate of the fees. Ask your lender to review what they are for and then see if you can negotiate a lower price. These are a few of the fees likely to have the most wiggle room:
Not having a down payment can be a mistake for two reasons.
The first is that it can sink your prospects of getting a mortgage. After being bitten by the housing market crash, traditional lenders shy away from giving mortgages to those bringing nothing to the table. But even if you can find a program that will allow you to get a mortgage with little or no money down, you could still be making a mistake.
Remember how the housing market crashed from 2007-2009? Property values plunged and suddenly homeowners found themselves owing more than their homes were worth. When those owners then lost their jobs or otherwise couldn’t keep up on their payments, they often found themselves without a prayer of refinancing or selling their property As a result, many ended up on the receiving end of a foreclosure notice.
While nothing is guaranteed, putting 10% to 20% down on your house can reduce your chance of ending up in the same position.
Underwater mortgages weren’t the only problem homeowners faced during the Great Recession. An untold number of people also lost their houses simply because they signed on the dotted line without understanding what the heck their mortgage entailed.
For example, people thought they’d hit the jackpot with adjustable rate mortgages, known as ARMs. Homeowners were fine for the first few years when their mortgage rate was fixed and low. But when it reset to the current market rate that affordable monthly payment suddenly wasn’t so affordable. A 2008 report from the Federal Reserve Board found more than 75% of the subprime loans issued from 2003-2007 were “short-term hybrids” that work like ARMs. By 2008, more than 21% of these subprime loans were seriously delinquent.
The moral of the story is to always understand what you’re signing up for. It’s not enough to know what your monthly payment is today. You also need to ask if the interest rate can change and if so, when and by how much will it increase. If you’re not comfortable with the loan terms or don’t understand them, it’s better to walk away than make an expensive and potentially life-altering mistake.
This post originally appeared on Money Talks News.
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December 13, 2023
Mortgages