KNOXVILLE (WATE) – Is your house your castle or a monkey on your back? Your answer might depend on your mortgage. People who bought a house with a mortgage they couldn’t afford will likely tell you their house has brought them nothing but frustration.
A house may be the most important purchase of your life. So, the first thing you’ll need is your credit score to be in great shape if you want the best terms on a mortgage. At least six months before you go to your first open house, you need to go to AnnualCreditReport.com. That’s the official site to get free credit reports issued by the big three reporting agencies: Experian, Equifax and TransUnion. From that report you want to identify and correct any errors in those records before you apply for a mortgage.
The next mistake you can make when applying for a mortgage is failing to get pre-approved. Getting pre-approved for a given loan amount is one way to avoid the heartbreak that comes from falling in love with a house that is way out of your range. It may also give you an edge if yours is not the only offer for the same property. And, a seller will feel more confident selecting a bid from someone with a mortgage pre-approval rather than from a person who hasn’t begun the process.
The Consumer Financial Protection Bureau says nearly half of mortgage borrowers don’t shop around, and that’s a big mistake. You certainly check the best deals on soap, furniture and cars, so why fail to look for a better mortgage rate. For instance, on a 30-year fixed rate mortgage of $200,000, for every quarter percent you can reduce your interest rate, and save about $28 a month. Over a 30 year period that can add up to a lot of extra cash.
While you’re investigating rates, don’t forget the fees. Many mortgages come packed with fees of all kinds. Some, like your county recording fee, are likely fixed, but others are negotiable. Before your closing, you should be provided with a good faith estimate of the fees. Some with the most wiggle room include the loan origination fee, application fee, broker fee, and underwriting fee.
Not having a down payment stashed away can sink your prospects for getting a mortgage. After being bitten by the housing market crash nine years ago, lenders today shy away from giving mortgages to those bringing nothing to the table. You generally need to have a down payment of between 5 and 20 percent to qualify for a conventional loan.
Another problem is not understanding mortgage terms. During the Great Recession an untold number of people lost their houses simply because they signed on the dotted line without understanding what their mortgage entailed. People thought they had hit the jackpot with adjustable-rate mortgages, known as ARMs. Homeowners were fine for the first few years with a fixed and low rate, but when it reset to the current market rate, that affordable monthly payment suddenly wasn’t so affordable.
The moral of the story is to always understand what you’re signing up for. You need to ask if the interest rate can change and, if so, when and by how much it will increase.