While first-time homebuyers look for the best house for their lifestyle, they should also consider whether they're getting the best mortgage. A mortgage with a high interest rate or hard to understand terms could make owning a home difficult financially. To avoid this scenario, you should be careful how you choose and manage your mortgage.
Here are five mistakes first-time homebuyers make with their mortgages:
1. Not Shopping Around for the Best Rates
Although first-time homebuyers could be unsure whether they'll be approved for a mortgage, they shouldn't let this fear get in the way of shopping around for the best interest rate possible. Visit various lenders, both small and big banks and credit unions, to determine what's the lowest and affordable rate you can get. Researching online could allow you to see which lenders offer the lowest rate based on your credit score, down payment and location.
2. Applying to Too Many Lenders
However, before you go around applying to every lender you see, you should be aware that the number of hard inquiries you rack up from this process could reduce your credit score, according to Credit Karma. When you apply for a mortgage and authorize a lender to check your credit report to approve or deny your loan request, this will result in a hard inquiry, which could knock down your credit score.
Before you send your loan application, be sure you narrow down which lenders you want to apply for based on the research you've done and send the applications around the same time. The reason for this is that your credit score will not be significantly affected by several inquires when they're made between a 14 to 45-day period. Credit Karma also recommended you apply for one credit type at a time rather than apply for a mortgage on top of an auto loan or other new line of credit.
3. Waiting Until the Last Minute to Make Payments
Once you obtain ownership of your house, it's time to get straight to business with making payments. First-time mortgage borrowers often make the mistake of procrastinating with payments. By waiting until the last minute, borrowers are at risk for sending their payments late and mistimed payments could subject you to late fees and potentially damage your credit score. Consecutive late or missing payments can also increase the chance of foreclosure on your house, which will significantly hurt your creditworthiness. According to FICO, a foreclosure could stay on your credit report for seven years.
Instead of procrastinating, borrowers should account for the time it takes to send or process mortgage payments and give themselves enough time to submit their payments. To remind you of when your next payment is due, set up a calendar notification to alert you days or weeks in advance so you're never late.
4. Not Refinancing When There's Lower Rates
When first-time homebuyers are initially approved for a mortgage, they might think their rate will relatively stay the same. However, the market could change and interest rates could drop, giving borrowers the opportunity to save by refinancing their mortgage. Not only could interest rates be lower when homeowners refinance, their financial situations may have changed for the better, allowing them to upgrade to an even better rate than when they first applied. A lower rate could cut your monthly mortgage payments and reduce the amount of interest you pay over the life of the loan.
Check your most recent credit score and do some research to see whether you can refinance and save a chunk of money on interest.
5. Neglecting All Your Mortgage Options
Although first-time homebuyers have probably heard of a 30-year fixed-rate mortgage, it's not their only option for borrowing. Homebuyers should look into all of their choices for a mortgage, including adjustable fixed-rate mortgages. Compared to a fixed-rate mortgage, an adjustable-rate loan could be an attractive option for some borrowers depending on their financial situation and goals.
Since an adjustable-rate mortgage will stay fixed for a certain period of time before changing each year, some borrowers could choose this type of loan for a lower mortgage payment compared to a fixed-rate loan in some cases. For example, a consumer could choose to borrow $200,000 at an interest rate of 4.5 percent either for fixed-rate loan or an adjustable-rate mortgage. Both loans also have the same 30-year loan term during which the consumer will repay back this mortgage.
Within the first year, the consumer will pay $1,013 each month for the fixed-rate mortgage or $955 each month for the adjustable-rate mortgage, according to Bankrate's mortgage calculator. The adjustable-rate mortgage payments are lower for the first year, but could slightly increase later on. By the fourth year, the adjustable-rate mortgage monthly payment is $26 higher than the fixed-rate loan with $1,039.
You should talk to your lender about other adjustable-rate mortgage options, such as a 10/1 loan. This type of loan is fixed for 120 months before it adjusts each year for the rest of the term of the loan.
By evaluating all of your options and being diligent in your research, you could save money on your mortgage and be closer to paying off your loan.