January 26th, 2016 7:27 AM by Jackie A. Graves, President
mortgage is the biggest debt most of us will ever carry, and a home is the most
expensive purchase we will ever
why it's so important to avoid mistakes that cause you to pay more than you
Don't let the unfamiliarity and enormity of taking out a home
loan scare you.
People make smart choices every day. They make a budget to see
what they can afford, then get home loans with great interest rates, low fees
and predictable, fixed monthly payments.
Avoiding these mortgage mistakes will be a big step toward
making home ownership a joy, not a burden, and put you on the path to long-term
Mistake 1. Making yourself house poor.
Committing too much of your monthly income to housing-related
costs means that you have little or no money left over for anything else.
Replacing a worn-out car. Saving for retirement. Building a
college fund for the kids. Even buying furniture for your home is beyond your
All in all, it's a pretty crummy way to live that turns
home-buying into a mistake you regret almost every day.
Spending less than 28% of your pretax income on housing is the
first, most fundamental, rule for determining how much you can truly afford to
If you earn $75,000 a year, that means you shouldn't devote more
than $1,750 a month to mortgage payments, insurance premiums and association
Where you live, how much you make and other unique circumstances
can make a big difference in how much of your income you can — and must —
commit to housing.
This story on how
much house you can afford provides
a more detailed look at how much you should spend.
Mistake 2. Ignoring the true cost of home
Owning your own home comes with new expenses that surprise many
Each year, budget 1% to 2% of your home's purchase price for
routine maintenance. If your home costs $250,000, expect to spend $2,500 to
$5,000 annually on unglamorous purchases like a new water heater or having your
Some years you'll spend less. When that happens, set the money
aside for pricier items like a new roof.
The older your home and the larger it is, the more you'll spend.
Property taxes also add to the cost of home ownership each year.
Learn about the property tax system in your community to see what current rates
are, when taxes can increase and by how much.
If your home is in a special flood hazard area, your lender will
require flood insurance. Prices vary by location.
Mistake 3. Not shopping around for the
Do you check prices with several airlines before buying a plane
ticket? Read the grocery store circulars to see who has the lowest prices?
Devoting a little time to finding the best possible mortgage can
save tens of thousands of dollars in fees and interest over the life of the
Yet a recent report from the Consumer Financial Protection
Bureau says nearly half of Americans seriously consider only one lender or
broker before applying for a mortgage. And about 75% fill out an application
with only one lender.
Why are so many of us failing to comparison shop?
"It is a surprising finding, and it suggests that they're
still fairly intimidated by the mortgage transaction," Richard Cordray,
head of the government bureau, told NPR. "Or they're a little distracted
because, at the same time, they're picking out a house."
Our extensive database of current mortgage rates is a good place to start your search.
It lets you quickly compare the lowest available rates and fees from dozens of
Mistake 4. Ignoring APR.
Some lenders advertise low interest rates but make up for them
with high fees.
You need to compare annual percentage rates from lenders'
Truth-in-Lending disclosure forms to see which mortgage really costs the least.
APR includes lender fees and shows the loan's true cost.
A $100,000 30-year fixed-rate loan with an interest rate of
3.85% where the lender charges two points, a 1% origination fee and $1,500 in
other closing costs has a 4.215% APR.
The same loan at 4.05% with no points, a 1% origination fee and
$800 in other closing costs has a 4.199% APR.
The first loan looks cheaper because of its lower interest rate,
but it costs more in the long run and requires you to bring more cash to closing.
Mistake 5. Putting little to nothing down.
Most lenders require 20% down to get their best rates and avoid
paying mortgage insurance — an extra cost that typically adds $100 or more to
your monthly payments.
Although borrowers must pay the premiums, mortgage insurance
protects the lender, not you. If you fail to make the payments and must be
foreclosed on, the mortgage insurer will cover a percentage of the lender's
mortgage insurance on
conventional financing costs 0.20% to 1.50% of the outstanding loan balance
FHA mortgage insurance charges an up-front premium of 1.75% that
can be rolled into the amount being borrowed and an annual premium of 0.85% of
the loan balance.
Once you agree to a loan with mortgage insurance, you're stuck
with paying the premiums for years to come.
It typically takes two to seven years to build enough equity, or
sufficiently lower the outstanding balance, to cancel private mortgage
FHA loans require mortgage insurance until the loan is paid in
Mistake 6. Not checking and fixing your
Checking your credit report
with all three major credit bureaus — Equifax, Experian and TransUnion — is
free through annualcreditreport.com.
Free credit-monitoring services like those offered by Credit
Karma and Quizzle also give customers access to one bureau's report.
It's important to examine your credit reports carefully, because
any mistakes — and they are depressingly common — could lead to a higher
mortgage rate or even loan rejection.
If possible, check your credit six months to a year before you
apply for a mortgage to give yourself plenty of time to fix errors and make
changes that will improve your score.
Using less than 20% of your available credit card limit each
billing cycle (yes, even if you pay your balances in full and on time), paying
down loans with large balances and making all your loan payments on time are
easy ways to improve your credit score.
With below-average credit, the only loan you might qualify for
is an FHA loan, which has expensive mortgage insurance premiums for the life of
Mistake 7. Not going with a VA loan if you
We think VA
loans are the best mortgages for
pretty much anyone who can qualify for one.
Millions of veterans, along with those on active duty, including
the National Guard and reserve units, are eligible.
Among the advantages:
The VA makes sure buyers don't
overpay for a home and that it's move-in ready, without any costly, unexpected
It requires no down payment on
purchases up to $417,000 in most areas and yet charges no mortgage insurance.
The VA tightly restricts the type and
amount of closing costs.
Interest rates are very competitive,
even if you have relatively poor credit and lots of debt.
How competitive? In most cases, you'll pay the same interest rate
as borrowers with a 760 credit score and a 20% down payment.
The only financial drawback to a VA loan is what's called the
funding fee, which can range from 1.5% to 3.3% of the amount you're borrowing.
The fee can be added to the loan so you won't have to pay for it
up front. If you have a service-connected disability, the funding fee is
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