One of the biggest mistakes which new home buyers make is buying more house than they can afford. Many borrow up to the limit which is available without giving consideration to the other associated costs of home ownership, and the initial costs of the mortgage. Failing to factor in the consequences of interest rate rises or the change in payments from an introductory discounted offer can leave the borrow floundering to meet the costs.
It may well be that on paper you can afford the monthly payments of your dream home, but not comparison shopping for the best mortgage deal first is a common mistake. In order to identify the best rates available to you it pays to know your Fico credit score at least six months in advance of application, and work to improve it as much as possible.
Preferential interest rates are offered to those with excellent credit, when other factors are considered, and Fico state that “a 100 point difference in your Fico score could mean over $40,000 extra in interest payments over the life of a 30 year mortgage on a $300,000 loan.” That is a huge amount of money to simply throw away because not enough importance was attached to improving ones score.
When you comparison shop consider all the rates available and associated fees, then consider applying directly to the lender to avoid paying the broker’s commission fees. Mortgage applications generally cost and you should expect to pay an application fee which may be known as a processing fee; a credit check fee; and a property appraisal fee. Always ask the lender to provide a good faith estimate of the mortgage fee costs, and of the closing fees, so you can consider the level of payment required. There will be attorney fees to factor in too.
If you have less than a 20% down payment then the lender will require you to purchase mortgage insurance which is typically 0.5% of the value of the loan. Mortgage protection protects the lender against default and has no benefit to the home buyer, but those without a 20% down payment are deemed a greater risk.
It is very important that the buyer understands the different types of mortgage products and interest rates, and how mortgage interest payments can be affected by interest rate rises. Fixed rates provide better security to the borrower as you know that your payment is fixed and can thus budget appropriately.
If you don’t understand the mortgage product fully then take advice from someone who does, as research conducted on behalf of the Federal Reserve has shown that many borrowers really do not understand the complexities of mortgage loans. They have addressed this with a new law which will make the payments more transparent to borrowers.
It really does pay to take your time rather than rushing in, and researching well in advance. The savings you can make by researching can be substantial. Try to save up for the 20% down payment and thus avoid mortgage protection insurance, and know and improve your credit score before application.