Top 5 Costly Mistakes to Avoid When Purchasing a Home
Top 5 Costly Mistakes to Avoid When Purchasing a Home
Mistake 1 – Putting Little or No Money Down
Many people are under the mistaken impression that if they put little or no money down, it is saving them money in the long run. They are mistaken for the simple fact that a lender can now charge them more in the form of mortgage insurance.
Private Mortgage Insurance (PMI) is an additional loan you’ll have to take out on top of your mortgage loan, and this means that your monthly payments will increase. You take this out to protect the lender in case you stop making your payments or you default on your mortgage.
You’re also at risk for higher interest rates, which means you’ll be paying out more throughout the life of your mortgage. There is also the unfortunate chance that your home’s value could decrease while you own it, and you’ll end up paying more than your home is worth. This will make it very hard if you want to resell your home and make a profit from the sale.
Mistake 2 – Shopping Before You’re Pre-Approved
House shopping can be an exciting time, but if you start shopping around before you get approved for a mortgage loan, you’ll have no idea what you can comfortably afford. This is where people get in trouble because they fall in love with a home they can’t afford.
While you’re shopping for a home, you’re looking at such a large range of numbers that you don’t think anything of adding on another $11,000 or $16,000 to your budget. However, this is a fast way to get yourself stuck into payments you just can’t afford.
It is a good idea to think about possible job changes or loss when you’re trying to figure out how much home you can afford. If something happens, you want to be able to continue to afford your mortgage payments.
Julia Hebb from Juro Services says, “If you’re not sure how much home you can afford, try looking at your finances with the 50/20/30 Rule. This will give you a good idea of a range of prices you can reasonably afford for your mortgage. If you shop smart, you can give yourself a buffer in case anything happens and you’ll be able to build up savings as you go along as well”.
Mistake 3 – Forgetting to Budget for Additional Costs and Fees
A common, costly mistake you want to avoid is forgetting to budget for the additional costs and fees that come with purchasing a home. There are so many more additional costs to think of besides your mortgage payment and property taxes. Many people forget to budget for these, and it leaves them scrambling to cover the additional costs.
Pre-Purchase home inspection expert Robert Woodward says, “You’ll want to get your home inspected before you buy it to ensure that there are no hidden defects and that the house is structurally sound, the inspector will make sure the surrounding grounds are in good shape. This is a critical step because it’ll make sure you don’t run into larger problems once the purchase is complete”.
Many lenders will require you to purchase mortgage insurance when you apply, especially if you don’t plan to pay at least 20% for a down payment. Also, if you live in a hazard-prone area, insurance against fires or floods may be required as well.
An origination fee is a percentage of the loan’s total amount. This is charged by a broker or a loan officer for completing your loan for things like processing the costs to buy your home and underwriting. This fee is usually right around 1% of your loan’s total value.
Most people forget about property taxes when they purchase a house. However, you can end up paying six month’s or more of the property taxes depending on the time of year your move into the home.
Mistake 4 – Not Knowing Your Credit Score or Credit History
When you apply for a mortgage loan, one of the first things your lender will do is pull your credit report and look at your credit score. They want to know how financially responsible you are, and your credit score along with your credit history are good indicators. Many people don’t know how this score will help or hurt them with a lender, and you don’t want to be in for an unpleasant surprise later.
This can work in your favour if you have a lower credit score because your debt-to-income ratio will go up. This, in turn, will raise your credit score. However, the lower your credit score is, and the more missed payments you have on your credit history will negatively impact how much you pay each month. A lender will see you as a high-risk for not repaying the loan, and they will take steps to protect themselves by charging more.
Mistake 5 – Not Thinking About Mortgage Options
You may be tempted to take the first mortgage you see, but you could be setting yourself up for financial disaster. Each mortgage offers different terms, interest rates, and repayment time. Your job is to find the mortgage type that suits your lifestyle the best. You can do this by either shopping around independently, or you can contact your lender and see which options they offer.
Most people go with a 30-year fixed mortgage because they want the lower payments. However, they’ll end up paying thousands more in interest before they have the mortgage loan completely paid off. You should look at the differences between a 30-year mortgage and a 15-year mortgage. Also, don’t forget to look at the differences between a fixed-rate mortgage and an adjustable-rate mortgage.
It is a good idea to also look for a 30-year mortgage that allows prepayments if you can’t afford a traditional 15-year mortgage. This way, you can pay more than you need to each month and pay the loan off quicker.
