Common Mortgage Mistakes and How to Avoid Them

A mortgage is likely the most significant financial transaction you’ll face in your lifetime, so it’s important to educate yourself thoroughly before applying for a mortgage. There are some common mistakes that many people make, and those mistakes can cost money.

Choosing a Mortgage Lender

Selecting a mortgage lender is the most important choice you’ll make at the start of the application process. Choose a lender you can trust, rather than the lending institution that offers the lowest rates—the application and lending process will go much more smoothly if you choose a lender you feel comfortable with. The rates and terms of your mortgage are important, but if you choose an unscrupulous lender, your chances of getting the rates they advertise aren’t good.

Deciding between a Fixed and Adjustable-rate Mortgage

Many people think that a fixed-rate mortgage is always the better option. This isn’t always true, however. When deciding between a fixed-rate mortgage and an adjustable-rate mortgage, the most important point to consider is how long you plan to live in the home you’re buying. The average home-owner lives in their first home for only four years, and in general the shorter your ownership period, the more beneficial an adjustable-rate mortgage is likely to be. On the other hand, if you’re sure that you’ll own the home for many years, a fixed-rate mortgage is certain to suit you better in the long run.

Waiting too Long to Lock in an Interest Rate

If you’re waiting till the market bottoms out before you lock in an interest rate, chances are you might miss out, and that can mean ending up with a much higher rate than you can realistically afford. Once the waiting period expires, you may be stuck with a higher interest rate than you were counting on. There’s nothing wrong with waiting, but it’s important to pay close attention to market interest rates to make sure you lock in your interest rate before it starts climbing.

Negotiating Problems at Closing

Issues often arise before closing time. The home inspection may turn up small or large home repairs that are required, and usually you’ll want to negotiate with the seller to either pay for the repairs or lower their asking price to compensate you. Waiting until closing to discuss these types of issues is rarely a good idea—it’s must better to negotiate ahead of time both to prevent delays at closing and to give you time to decide which solutions will suit you the best.

Closing Costs and Hidden Fees

Closing costs are usually three to five percent of the value of the property, and the money is payable in cash at closing time. Forgetting about closing costs is a sure-fire way to insert a spanner firmly in the works of the mortgage process. Your lender is required by law to give you a “Good Faith Estimate” which itemizes your closing costs within three days of your mortgage application process. Check this estimate carefully for “hidden” fees which can add several hundred dollars to your closing costs. Hidden fees typically include document delivery fees and document processing fees and you can often negotiate to reduce these fees—for example, ask your lender to mail documents by regular mail rather than overnight delivery to save some money.

Closing at the Wrong Time

At closing time you’ll have to front up the cash for pre-paid interest on your first mortgage payment. This covers interest accrued from the date of closing up until the end of the month in which closing occurs. If your cash-flow is tight, then closing at the end of the month is a good way of slightly reducing the amount of cash you need at closing.