Shopping for a Mortgage? Avoid These Mistakes
by Maurie Backman | Dec. 3, 2020
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Save money on your mortgage with these tips.
If you’re looking to buy a home, you most likely aren’t going to purchase it outright. 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. Some mortgage interest rates are higher than others. And a higher interest rate means a more expensive loan.
If you’re a first-time homebuyer, 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 best mortgage rate. Even a small difference in interest rate could save you a lot of money over time.
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Imagine you're looking to take out a 30-year, $200,000 mortgage. You agree to a 4.25% interest rate. By the time you've paid off your house, interest alone will cost you $154,197.
Now, let's imagine you score a 4% interest rate instead (for the same loan). Just a 0.25% difference -- it doesn't sound like much. But that tiny difference will save you $10,458 over the life of your loan. You could go for a vacation and have money to spare with that kind of savings.
To get an idea of how different interest rates affect the cost of a loan, use our mortgage calculator.
2. Not taking steps to boost your credit before your search
Better credit means a better interest rate. It literally pays to work on boosting your credit score in the weeks or months leading up to your mortgage application.
To start, get quick boost by paying off debt. Even if you can only pay off some debt, this should help bring your score up rapidly.
Next, check your credit report for errors. Correct any mistakes, and you'll see your score rise. You're entitled to a free copy of your credit report annually from the major reporting bureaus, so take advantage of it.
Check our guide to increasing your credit score for more strategies to improve your score.
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 mortgage 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. It could be as high as 1% of your loan amount. This means you could be stuck paying a $2,000 fee on a $200,000 mortgage.
You may 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.
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.
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.
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.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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About the Author
Maurie Backman is a personal finance writer who covers everything from savings to retirement to healthcare. Her articles have appeared broadly on major outlets such as CNBC, MSN, and Yahoo.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
