7 Mortgage Misunderstandings That Could Cost You

There are many mortgage misunderstandings that could cost you a lot in the long run. Spending a little time learning more about mortgages might help you save hundreds, maybe thousands, of dollars.

Don't assume you know everything you need to know


1. Ignoring your credit score
Your credit score has a major impact on the interest rate that lenders may offer you. If you don't have a good score, consider spending some time improving it before getting into to buying a home. You may be able to improve your score by fixing errors on your credit record, by paying bills on time, and/or by reducing your total overall debt.

2. Getting a bigger mortgage than you can really afford
While house hunting, it might be tempting to look a bit beyond your price range. Big mistake, don't buy a home that will be expensive enough to have you stretched thin financially. It is said that you should spend no more than 25% - 30% of your gross monthly income on housing (including property taxes & insurance) - but try not to relying on a broad guideline like this, take the time to figure out what you can afford. Try and take as much as possible into consideration, for example your regular household expenses, such as food, utilities, transportation, travel, entertainment, maintenance, credit card payments, and contributions to savings. Other expenses to consider could be medical or automotive emergencies and the cost of setting up your old home for sale and setting up your new one. Buying less home than you can afford will give you a margin of safety, and help you be able to save.

3. Getting pre-approved (I've mentioned this quite a bit before)Once you know what loan you want and from which lender, don't wait until you find that perfect home to start the loan process. Get pre-approved for the loan before you go shopping. This has several advantages. First, through the process of working with your loan officer, you will find out just how much home you can afford to buy. Second and equally important, it will make you a more credible buyer, should you end up getting into a multiple bidding scenario which is very common these days.
 
4. Getting the wrong kind of mortgageDon't assume that a standard cookie cutter 30-year fixed-rate mortgage is always best. It just might be, but also consider your alternatives. You have many options on the table, you may need to decide between a 15-year or 30-year loan (other time frames also available), between a fixed-rate mortgage or adjustable (ARM). Longer terms will afford you lower payments, but you'll pay more in interest over the life of the loan.

If you're not comfortable with a 15-year's higher payments, consider getting a 30-year loan that allows prepayments, and then set out to pay more than you need to each month, in order to pay additional principal and shorten the life of the loan.

If you're not planning to be in the home very long, an ARM might be best in today's low interest rate environment, as it can lock in lower rates for a few years. If you think you'll be in the home for the long haul, it can be better to lock in a low rate for the expected life of the loan.

5. Making a small down paymentWhile it isn't always possible to put a larger down payment consider the following. Putting less than 20% down on a new home means you to take on an extra loan in the form of private mortgage insurance (PMI) or (MIP on an FHA loan), which will increase your monthly payment. A smaller down may also result in a higher rate. 20% just isn't possible sometimes and if that's the case you have many options there too. Contact us to help you determine what is your best scenario

6. Paying off your mortgage earlyIt can sometimes be good idea to pay off your mortgage early, and avoid having a big loan on your shoulders, especially if you may be entering retirement. However paying off your mortgage early isn't always the best thing to do. If you don't have an emergency fund or good retirment, for example, you might be better off establishing and/or funding one with the extra money you are using to pay down the mortgage. Keep in mind you will also be giving up mortgage interest deductions by paying off the loan early. If you have any high interest debt, such as credit card debt, paying that debt off early should be the priority.

7. Thinking it's not worth it to refinancingFinally, once you have a mortgage, don't just assume it isn't worth refinancing. If the rate you might get on a new loan is about a percentage point lower than your current rate, it could be well worth it to refinance. Also when you purchased your home, you may have got a 30 year fixed and lowering your term to say a 15 year fixed could make a lot of sense now.

Crunch all numbers though and consider your big picture. If you don't plan to stay in the home long, refinancing will make a little less sense.

Spending a little time learning more about mortgages could help save you a bunch money =)

*source The Motley Fool