The 7 Most Expensive Mortgage Mistakes You Can Make
If you're like most people, buying a home is the single biggest purchase you'll ever make, so you want to make sure you get the financing part – the mortgage – lined up correctly.
If you do it well, you'll be happy for decades to come. But get it wrong, and you could find your household budget stretched to the limit, with your biggest asset on the line.
Here are the biggest mistakes consumers make, according to the experts:
Not Preparing a Mortgage Plan
Setting yourself up for success when it comes to buying a house is a lot like getting ready for a marathon. It can take a lot of time, especially if you're not financially fit just yet.
But all too often, people jump ahead to the start line without putting in the work needed to get there, lured in by an unexpected windfall of cash and seductive Zillow browsing.
"I really believe in mortgage planning, and it takes some time," said Marianne Nolte, certified financial planner and founder of Imagine Financial Services. "You want to do that mortgage planning with your financial advisor, would be my first choice – but at least do that with your lender."
By creating a mortgage plan – a description of everything you need to do to get a mortgage that fits with your long-term goals – you'll solve just about every other problem on this list.
More: Looking to buy soon? Set yourself up for having your offer accepted on a home by getting preapproved for a mortgage prior to your home search.
Not Getting Your Credit Ready
Your credit score is one of the most important factors in getting a mortgage. It affects your likelihood of being approved for a mortgage at all, and if you are, how much you'll have to pay to get financing. That, in turn, also impacts how much home you can afford and how much you have left for your other financial goals.
Consider this: if you're buying a median-priced home in 2022 with a 20% down payment, you can expect to pay around $312,000 in interest over the life of your 30-year loan if you have tip-top credit. But if your credit is marginal or close to the cutoff point, your lifetime interest charges shoot up to $402,000. That's a $90,000 penalty you're paying just because you didn't wait to fix your credit.
Buying More Than You Can Afford
When you get preapproved for a loan, lenders may tell you the maximum amount you're preapproved for. To many people, that's essentially a blank check to shop for homes with a price tag that high.
But that's a huge mistake, says Nolte. The lender wants the biggest commission they can get, "so they're happy to give you a higher loan amount than maybe what you really should have," she said. "Just because you've checked all the boxes and you qualified for a max loan of X, that doesn't necessarily mean that you should be spending X amount."
Buying too much home puts you at serious risk of becoming "house-poor," where you can technically afford your mortgage but not much else, including savings for retirement and emergencies, new hobbies to enjoy in your home, or even home repairs and upkeep itself.
Not Shopping Around for Your Mortgage
Many homebuyers end up going with the first and only lender they chat with in their rush to buy a home. That can come back to haunt your pocketbook in a couple of ways.
First, it means that you might not be getting the lowest rate out there, or you might be overpaying for your mortgage. But the rate itself also isn't the only thing you should be judging a lender on either, says Nolte.
"When you only shop for the best rate, that doesn't necessarily mean that you're going to get the best buyer service," he said.
Lots of online lenders may offer rock-bottom rates compared with a well-trusted local bank, for example. But your choice of lender can sometimes make or break your offer in a competitive market.
Choosing an Adjustable-Rate Mortgage Just Because It's Cheaper
Lenders generally give you the option of choosing a fixed-rate mortgage or an adjustable-rate mortgage, also known as an ARM.
An ARM can be a good choice for some situations, but some people choose them simply because an ARM generally offers cheaper initial rates than a fixed-rate mortgage.
This week, the average U.S. rate for a 5/1 ARM, meaning the rate is locked for five years before adjusting annually, is 4.43%, according to Freddie Mac. The average rate for a 30-year fixed home loan is 5.22%, the mortgage financier said.
Fast-forward to five years later, and your initial adjustment could be 2% higher, if you still own the property, which could add hundreds of dollars to your payment. After the initial adjustment, rates for ARMS typically are capped at 1% annually.
Though, if the economy is bad when the rates reset, it could mean your payment resets lower without having to go through the cost of a refi.
Not Knowing Your Loan Options in Advance
You can think of the home buying process as shopping for two separate products: the house itself, and the mortgage. You spend a lot of time thinking about what type of house you want to buy, and you should do just the same for the mortgage you want to buy too.
If you rely on your lender to tell you the best option, you may not get the best mortgage for you. That's especially true if you don't shop around.
"I see that all the time, and it's terrible," said Tina Pecoraro, producing branch manager with Nationwide Mortgage Bankers. For example, "some lenders might not be experienced in VA," she said, referring to loans backed by the Veterans Administration.
"So what happens is they automatically steer the client towards a different product," she said.
If you're a disabled veteran and your lender tries to sell you loan backed by the Federal Housing Administration, you'll end up spending far more than you would have if you had used your VA benefit, she said.
Not Making a Big Enough Down Payment
Saving up the down payment for a mortgage is one of the most challenging barriers to homeownership for many people. It's understandable why you might want to apply for a mortgage right now even if you don't have much saved up, especially when rates are heading upwards faster than a loose helium balloon.
That has big consequences down the line that you'll need to consider first, though.
Depending on the mortgage you're applying for, there may be extra fees associated with a lower down payment.
With a conventional mortgage, for example, you'll generally need to pay extra for private mortgage insurance (PMI) if you put down less than 20%, and this can be expensive.
You may be charged a higher interest rate for making a smaller down payment, according to Pecoraro.
In all cases, making a smaller down payment also means you're financing a larger amount, which means you'll pay more interest charges over the life of the loan.
While saving up a down payment can be extremely challenging, there are options to help, especially for first-time homebuyers, she said.
Don't Miss: Thinking about buying a home but want to secure a good rate? Use this tool to find a lender that gives you the power to lock an interest rate for an extended period so you can shop around for a home comfortably knowing that your rate is secure and won't go up.