For most people, a house is one of the biggest, most expensive investments that you’ll ever make. The journey to homeownership is often an exciting milestone, but you must be careful in order to ensure that it’s a positive experience. Whether you are a first time homebuyer or you’ve purchased several homes, avoiding these common mortgage mistakes will help prevent financial problems following the purchase.
Mistake #1: Making Yourself House Rich, Cash Poor
Home ownership can be more expensive than renting–especially when you add up all the taxes, insurance, and home maintenance costs over several years. In fact, many people fall into the trap of making themselves “house rich, cash poor”–that is, tying up all of their available income in the house. Suddenly, despite having a reasonable monthly income stream, you have no extra money, and you find yourself living in a tight paycheck to paycheck struggle.
How to avoid the trap: Find out how much house you can actually afford! The fact that a mortgage broker has offered you a mortgage loan in a particular amount doesn’t automatically mean you can afford to spend that much on your house each month. In fact, many mortgage brokers will offer you a mortgage that exceeds the amount you really should spend on a house. This is because mortgage brokers don’t know your regular expenses since they don’t appear on your credit report. Nor do they take into account the additional monthly savings necessary for you to reach your other short and long-term goals. Review all your expenses and required savings before committing to your mortgage.
Mistake #2: Ignoring the True Cost of Home Ownership
Home ownership expenses don’t just stop at your mortgage. You’ll also have to take into consideration homeowners insurance, property taxes, Home Owner’s Association (HOA) dues, and maintenance on your home. Once a home belongs to you, you no longer have the luxury of calling your landlord to fix something that breaks. You’ll need extra income or an emergency fund to cover those expenses instead! If you’re used to renting, you’re likely used to a fixed monthly housing expense in your budget. The cost of homeownership, on the other hand, fluctuates and can be difficult to predict month to month.
How to avoid the trap: Create a budget estimate that includes all of the costs associated with home ownership, not just your mortgage. Don’t forget to set aside an estimate for maintenance! This more detailed budget may give you a better idea of what you can afford when you’re setting up mortgage payments. One rule of thumb is to put away 1% of the home value in a separate home maintenance account. For example, if the value of your home is $600,000, save $6,000 per year (or $500 per month) toward future maintenance costs.
Mistake #3: Not Shopping Around for the Best Loan
All loans are not created equal! Some mortgage brokers will give you better terms on your loan than others. If you aren’t shopping around–looking for better interest rates or more favorable closing costs–you may end up paying more than you have to for your home.
How to avoid the trap: Take the time to get mortgage information from several lenders–and make sure you know what they’re really saying! Compare interest rates, down payments, fees associated with the mortgage, and private mortgage insurance requirements in order to be sure that you’re getting the best deal for your mortgage.
Mistake #4: Putting Little to Nothing Down
Although there are loan programs where you may not be required to make a 20% down payment, which seems appealing if you don’t already have a lot of money saved, there are some drawbacks to this option. Unfortunately, lower down payments don’t just lead to more money paid over the lifetime of the loan. It can also lead to higher interest rates, higher monthly payments that are more likely to put you in a financial pinch, and the need for mortgage insurance.
How to avoid the trap: Save for a little while longer before jumping into the home buying process. Putting down an additional 5-10% can make a big difference over the lifetime of your loan. Be willing to be patient and wait for it!
Mistake #5: Not Checking and Fixing Your Credit Reports
Your credit report has a significant impact on your mortgage: your monthly payment, your interest rate, and how much you have to put down on the loan, not to mention the need (or lack thereof) for mortgage insurance. If there’s something wrong with your credit report–and unfortunately, sometimes, there can be problems on your credit report that aren’t a result of your spending–it may send up red flags for potential lenders.
How to avoid the trap: Take the time to check your credit report before you start looking at mortgage rates. Make sure you don’t have any common red flags. If there are issues, take the time to fix them before you’re ready to buy a house.
Having a mortgage doesn’t have to be terrifying. By avoiding these common mistakes, however, you can save yourself and your family some money and ensure that you’re better prepared for the road to home ownership.
Are you thinking of buying a house? Give us a call or schedule a complimentary consultation to discuss how to avoid these mistakes with a CFP®.
