If you’re looking to buy a home or investing in a single family residence, you most likely aren’t going to purchase it outright. Rather, you’ll need a mortgage to finance your home and pay it off over time. But finding the right mortgage is easier said than done.
Here are a few blunders to avoid in your search.
1. Not looking around for the best rate
Not all mortgages are created equal. The higher the interest rate attached to your mortgage, the more that loan will cost you over time.
If you’re new to mortgages, you may be inclined to accept the first loan you’re offered. But before you do, shop around to ensure that you’re getting the most competitive rate. Even a small difference in interest rate could save you a lot of money over time.
Imagine you're looking to take out a 30-year, $200,000 mortgage and you agree to a 4.25% interest rate. Over three decades, that loan will cost you $354,197. But, if you manage to score a 4% interest rate instead, that loan will cost you just $343,739, all other things being equal.
2. Not taking steps to boost your credit before your search
The better shape your credit is in when you apply for a mortgage, the more likely you are to not only get approved, but also to snag a better rate. That’s why it pays to work on boosting your credit score in the weeks or months leading up to that application.
You can get a boost quickly by paying off a large sum of your existing debt. This brings down your credit utilization, or the extent to which you’re using your available credit at one time.
Checking your credit reports for errors and correcting ones that work against you could also help boost your score. You're entitled to a free copy of your credit report annually from the major reporting bureaus. It pays to see what information these companies have on file.
Ironically, credit reports don't generally contain your actual credit score. You may need to buy yours from FICO, though sometimes you can get your score from your credit card company.
3. Not paying attention to fees
Most people in the market for a mortgage know to pay attention to interest rates -- but don’t forget about mortgage fees. For example, your lender might charge you a mortgage origination fee that negates its competitive interest rate.
An origination fee is an up-front fee charged by your mortgage company for processing your loan and it could be as high as 1% of your loan amount. This means you could be stuck paying $2,000 on a $200,000 mortgage.
You may, however, be able to negotiate this and other fees your lender wants to charge you, so don’t be afraid to try.
4. Switching jobs during your search
Though your credit score plays a big role in determining whether you qualify for a mortgage, you'll also need to prove to lenders that you have a steady income that lets you keep up with your monthly mortgage payments.
If you switch jobs during your search and wind up with a higher salary, it could actually help you. But taking a pay cut could hurt your chances of getting a mortgage. If you're looking at the latter scenario, try to hold off on making a move until your mortgage closes.
Similarly, if you're a salaried employee looking to go freelance, you're better off closing on your mortgage and then making that switch. Lenders don't always take kindly to non-guaranteed, variable income, so there's no sense in having to deal with extra hurdles if they’re not necessary.
Of course, if you expect your income to decline shortly after signing your mortgage, make sure it will still be enough to afford your home. The last thing you want to do is fall behind and risk foreclosure.
The mortgage you sign could be the same mortgage you hold onto for many years. Avoid these mistakes and, with any luck, you’ll score an affordable home loan that’s easy to manage.