EXCERPTED FROM AN ARTICLE BY REALTYTIMES STAFF
“For most buyers, the mortgage is the largest monthly expense they will have. Yet most borrowers will do little to no preparation, negotiation, or shopping to get the best deal. And they end up paying much more for their loans than they need to. Here are five of the biggest mistakes that can cost you real money.
- Believing advertised rates are what you’ll pay. Unless you have a perfect or near-perfect credit score, most advertised rates are out of your league. To get a rate that good, you have to pay part of a point (one percent of the loan amount), or more to get the best rates. Your lender will go over your credit with a fine-tooth comb to find anything to raise the rate. That includes qualifying you at the beginning of the transaction, and then running your credit again a day or two before you’re supposed to close on the home and loan. If there’s been any change in your debt-to-income ratio, good bye low mortgage rate.
- Not comparing lenders. Everyone knows a loan officer or a mortgage broker. A loan officer works for a bank or savings and loan and can only offer you loan packages that the bank has put together. A mortgage broker pre-qualifies you just like a loan officer and shops your deal around to various lenders. Either way, you’re going to have to share personal financial information in order to get a realistic rate. Reputable brokers will show you what certain banks and credit unions quoted and you can pick the loan you like best. If you prefer shopping on your own, consider talking to a local bank, a national bank, a credit union, and a savings and loan – but remember – unless you give them personal information and permission to run your credit, it’s just talk.
- Not pay attention to terms. Advertised rates, even for those with perfect credit, aren’t what you will actually pay. The true cost of the loan is the APR (annual percentage rate), which includes fees from the lender. Understanding loan terms is harder than shopping for a new mattress. There are so many ways lenders can inch up the fees. A loan origination fee is also called a processing fee, and pays the loan officer or mortgage broker, so this fee can vary widely. You may pay one lender more for an appraisal than another might charge you. Lenders will charge you for pulling your credit rating, too. It’s all in your good faith estimate, which you don’t get until you’ve applied for the loan. All terms are negotiable, so don’t be afraid to ask what a particular fee is for and can it be reduced or eliminated.
- Waiting for a better rate. You don’t want to lose the home of your dreams over a quarter of a point in interest. See the big picture – no matter what your interest rate, you’re going to pay thousands of dollars in interest up front before you make any serious gain in equity. If you go all the way to the end of your loan’s term, you’ll pay for so much interest that you could have bought the same home two or three times over. Down the road, if rates drop, you can refinance, but even that isn’t an ideal solution because you’ll pay loan origination fees, title search fees, appraisal fees and so on – enough to equal the closing costs you paid the first time around. And don’t forget – you’ll start the amortization all over again and be making most of your payment to interest.
- Choosing the wrong type of loan. Many families were hurt post-9/11 when lenders opened the spigots and gave a loan to almost anyone who could sign the paperwork. Many bought homes that were too expensive using balloon loans with low teaser rates. The type of loan you choose should depends on current market conditions and how long you plan to stay in your home, not how much home you want to buy. Current market conditions favor fixed rates, because rates are rising from all-time lows. Yes, they cost more than hybrid loans or adjustable rates loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost you more over the years. If you get an adjustable rate mortgage, you are at the mercy of market conditions. White there’s a cap on how high your interest rate can go, it’s still a risk. If you plan to stay in your home five years or more, get a fixed-rate mortgage. If you plan to sell your home sooner, you’re taking a risk. It takes most borrowers five years just to earn back their original closing costs in equity. Once you’ve narrowed your choice of lenders, ask them on the same day to give you a quote. If you wait even one day, rates may have changed, so you’re no longer comparing apples to apples.