By avoiding these mistakes, you can put your home-buying butterflies to rest.
#1 Finding a home before finding a mortgage
How Much It Could Cost You: Enough to send your future kid to college. Seriously, over the life of the loan, you could end up paying tens of thousands of dollars more in interest and fees than you need to.
Why People Mess This Up: If you don’t have your financing buttoned up before you find your dream home, your desire to win the bid could influence you to offer a higher price and overpay on a mortgage because you had no time to shop around. Getting your financing all set before you feel the pressure to make an offer gives you time to qualify for a more attractive loan and gives you the confidence to make a fair offer because you’re a qualified buyer.
How to Avoid It: Start talking to lenders at least three months — maybe even a year — before you start house hunting. Time-consuming tweaks like paying down debt or improving your credit score can have a dramatic effect on overall mortgage costs.
#2 Not Comparing Loans Correctly
How Much It Could Cost You: Just like No. 1 above, you could overpay by tens of thousands over the life your loan.
Why People Mess This Up: First-time buyers often get seduced by a low interest rate and don’t take into account the cost of fees. A lower-interest loan could actually cost you more than one with a higher rate because those fees can be steep enough to outweigh the interest savings, says Matt Oliver, senior loan officer with Lund Mortgage Team in Glendale, Ariz.
How to Avoid It: Compare loans by the annual percentage rate, or APR, not just by interest rate. Each lender should give you a document aptly named “loan estimate.” The APR will be listed there (if it’s not, you don’t want that lender). The APR combines a home loan’s interest rate with closing costs and other fees like points (which is why it’s usually higher than the interest rate), then converts the overall costs to an annual percentage. This gives you an apples-to-apples comparison so you can understand what you’re paying over the life of the loan. You’re welcome!
#3 Not Knowing How to Eyeball the Paperwork
How Much It Could Cost You: Thousands of dollars in surprise closing costs.
Why People Mess This Up: Because the paperwork seems so freaking daunting. But good news: As of October 2015, new mortgage rules require lenders to send you paperwork that actually makes sense.
This new paperwork comes in two different documents. It’s much easier to scan and understand than the old paperwork, which used to be the model for everything bad about tiny legal print.
1. The loan estimate will come first. Here are some key things to look for:
The APR (see No. 2 above)
The interest rate
The monthly payment
The loan terms, such as a 30-year or 15-year mortgage, adjustable rate or fixed
The total cost of the loan
Cash amount you’ll need at closing
2. The closing document will come at least three days before you close. It should look just like the first document, but instead of estimates it will have final numbers. If you see any increases or additional fees you weren’t expecting, question the lender immediately. Because if it shows even a tenth of a percent interest-rate jump you weren’t expecting (say 4.1% instead of 4%) — and you don’t question it — that could mean a difference of almost $3,700 on a $176,000 mortgage.
How to Avoid It: Watch for those docs. Review and compare them. And, most importantly, don’t be afraid to speak up if you spot a surprise. Now, how easy was that?
#4 Not Talking to A Realtor
How Much It Could Cost You: Potentially weeks headaches in a complicated, slow, and expensive transaction. Why People Mess This Up: People don't often think to ask their Realtor for a referral for a lender. Realtors are often the best resources for all kinds of referrals. Realtors work with different vendors all the time, and can usually help you cut through the mess of who will provide good service, and what's a good rate (they seem every day, after all!) How to Avoid It: Even if you're early on in the process, having a quick chat with your Realtor can help you get on right path from the start. If you are thinking about buying or selling in the next couple years, I'm always available to help give advice.