For most homebuyers, buying a home goes hand in hand with getting a mortgage. However, what most homebuyers do not know is how to avoid some of the most common mortgage pitfalls that will wind up costing them a pretty penny in the end. When it comes to your mortgage, there are four things to keep in mind and avoid at all costs.
1. Paying PMI
Whether it’s an FHA or conventional loan, PMI is a costly added expense. PMI stands for Private Mortgage Insurance and it is a safeguard for lenders to pad accounts in the event of a borrower default. To date, the current upfront PMI on a mortgage is 1.75 percent due at closing and the approximately ½ of a percent added to a monthly payment. This will equate to thousands of dollars over time. The best way to avoid PMI is to have a down payment of at least 20 percent when buying a home. In the end, PMI is only a benefit to lenders and equates to doing little more than throwing your money away.
2. Not paying to lower the rate
After the economic bubble burst in 2007 for the real estate industry, many consumers wised up to the fact that adjustable rate mortgages should become a thing of the past. In their place, fixed rate mortgages have become the weapon of choice for most buyers in the market. However, what buyers don’t know or don’t understand is that for a few extra dollars, they can buy down an already low fixed interest rate. For example, spending $4,000 to take a 5 percent rate down to a 4 percent rate will help save thousands of dollars in the first few years, helping build equity much faster; putting them in a better position when selling and while owning. The added upfront expense pays for itself in as little as two years of owning a home in some cases.
3. Selecting a 30-year mortgage over a 15-year mortgage
The real estate settlement procedures act (RESPA) requires that homebuyers be presented with a full amortization schedule before closing and again at closing to demonstrate the total cost of the loan. No matter how low the rate, homebuyers selecting a 30-year note versus a 15-year note will often pay back over four times what the house is worth. Regardless of how many years a buyer actually lives in a property, there are many advantages to building equity quickly by paying a higher mortgage payment and saving thousands of dollars on interest and fees.
4. Buying as much house as you are approved for
Most lenders will loan up to four times the amount of a buyer’s annual gross income, and most buyers will jump at the chance to purchase as much house as possible. While it can be an attractive notion to live in the “nice house on the hill”, financially responsible buyers know that living beneath their means is the key to building long term financial wealth, and keeping payments much more affordable, freeing up extra money for investments and savings. It is never a wise move to tie up all of your money in your home by maxing out your buying power. When selecting a mortgage, consider only borrowing two or three times your annual gross income and select a sales price to create a platform for a financially rewarding and stable future.