Benefit from the experiences of others by avoiding these 10 classic mistakes when choosing a property, deciding on a home loan, and comparing mortgage lenders.
Shopping for Home Loans and Properties: 10 Mistakes to Avoid
Home-buying should be one of the most exciting experiences of your life. At the same time, it is important not to let the excitement overcome your better judgement. If you just avoid some common mistakes, you can be as excited about your decision ten years from now as on the day you move in. Here are 10 mistakes to avoid when shopping for a property and a home loan:
- Failing to budget properly. You may think you have a rough idea of what you can spend, but you won't know for sure unless you take the time to document your past expenses. If possible, use a year's worth of expenses so you account for any seasonal items. Once you think you know what you could afford to put toward mortgage payments, try setting that amount aside for a few months. This will be a good dry run, as well as a way of raising money for a down payment.
- Accepting the real estate agent's definition of what you can afford. Real estate agents often do a rough estimate of how big a home loan you can afford, based on your household income. While you might qualify for that home loan on paper, that doesn't mean you'd be comfortable with the payments. Go with an estimate based on what your budget tells you.
- Keeping up with the Joneses. Some home buyers overreach in buying a home, trying to match what their friends purchased or impress their families. Once you move in though, you'll find the most enjoyable home is one you can readily afford.
- Not knowing the market. Houses, properties, and neighborhoods are far from uniform, so it can take a while to get a feel for what values are like in a particular area. Don't fall in love with a house too quickly--the more you shop around, the better you'll know which characteristics suit you best, and what prices represent a good value.
- Expecting your income will keep going up. Since people often buy a home early in their careers, they tend to assume that the mortgage may become easier to afford in the future because their incomes will naturally go up over time. More recently though, with unemployment rising and income growth slowing, this hasn't been such a sure thing. Be sure you can afford your home loan from the start.
- Neglecting to save enough up front. Closing on a house is expensive. Besides your down payment, there are a variety of fees and expenses for things such as mortgage processing, insurance, home inspection, and lawyers. Make sure you leave a cushion, rather than getting caught short at a crucial moment.
- Not bothering to shop around for mortgage lenders. Mortgage rates not only vary from day-to-day, but they can also be very different from one mortgage lender to the next. Shopping around gives you a better chance of finding the best rates, as well as giving you a wider choice for choosing a mortgage lender whose service makes you feel comfortable.
- Leaving points and fees out of mortgage comparisons. Mortgage lenders may quote mortgage rates in different ways--some with points paid up front, some without. Others may offer low rates but make up for it with higher fees. There are mortgage calculators that can help you make comparisons that include points and fees.
- Not looking into special programs like VA or FHA mortgages. These are mortgage insurance programs that give lenders confidence in making home loans to borrowers with limited or less-than-perfect credit histories. While FHA mortgages require that you pay a mortgage insurance premium, FHA mortgage rates may well be lower than you could get otherwise unless you are a saint with a large down payment. One of the first things you should discuss with a mortgage lender is whether you qualify for a VA or FHA mortgage.
- Not understanding the risk of adjustable-rate/flexible-payment mortgages. Adjustable-rate mortgages, as well as those with flexible payment options, give borrowers more latitude to take advantage of certain market conditions. However, they also involve the possibility of monthly payments going up in the future, and sometimes by a significant amount. Unless you have a thorough understanding of the risks involved, you may want to lock in your monthly payment with a fixed-rate mortgage.
Face it--you may only buy a home once or twice in your life, so you'll probably never get a chance to gain much experience with the process. However, you can learn from the experiences of others by avoiding the above mistakes.
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.