Five common, yet avoidable, mistakes made when shopping for a mortgage.
Not exploring all your financing options.
There are several things to consider before selecting a mortgage, depending on your situation. For instance, first time buyers may qualify for special financing programs from local or federal government agencies. Many mortgage companies participate in the programs so be sure to ask. Others may benefit from an asset-backed loan, which would allow them to pledge assets as collateral and hence, finance 100% of the mortgage at a preferred interest rate.
Not looking at the true cost.
Even though you may get a quoted interest rate, it is to your advantage to obtain a good faith estimate from each company who is bidding for your mortgage. You can then compare all the different components of what the mortgage fees will add up to. For example, origination costs, attorney's fees and private mortgage insurance pricing varies. By looking at the APR (annual percentage rate) you can get a clearer picture of your true out-of-pocket costs.
Not seriously considering how long you will be in the home.
If you only plan on being in your home five years before selling it, you may want to consider a shorter-term mortgage and possibly a variable interest rate to take advantage of the lower rates. On the other hand if you envision spending the rest of your days living in the house, you might consider a longer-term mortgage and possibly a fixed interest rate so that you have an expense that will not fluctuate during the life of the mortgage.
Not evaluating the difference in payment options.
The difference in out-of-pocket costs between a 15-year, 20, or even 30-year mortgage can be substantial. Be sure that you consider the different payment scenarios because if you can afford a shorter-term mortgage it can be worth it to make a higher monthly payment, especially if it cuts the life of your loan in half.
Not shopping around for mortgages.
The fierce competition among mortgage companies can work to your benefit if you take the time to shop around. Everyone from your local bank and investment firm to online firms should be happy to bid for your business. Just remember that not all mortgage companies offer the same types of mortgages and the costs associated with each company can vary by thousands of dollars. Again, make sure to get your good faith estimate. If a company is not willing to provide one, move on to another company.