Homes in the San Dimas area aren’t exactly cheap compared to the rest of the country, but who wouldn’t love to live near LA in sunny SoCal, right?
With higher demand comes higher home prices, and higher prices mean bigger consequences if you make mortgage mistakes.
A mortgage is the biggest debt most of us will ever take on in our lives, which magnifies any consequences (or mistakes) that come along with it.
Despite the unfamiliarity and enormity of the mortgage process, don’t let it scare you. Home ownership should be a sound investment that’s a source of pride and joy, not a crippling financial and emotional burden.
By avoiding these mortgage mistakes, you’ll be on the right path towards feeling the love of home ownership and long-term financial security.
1.) Leaving Your Credit Score Unattended
Checking your credit score regularly is key to making sure you don’t needlessly pay thousands for your mortgage than you should. (See also: Top 5 Factors that Determine Your Interest Rate)
You’re entitled to a free annual credit report from each of the 3 major credit bureaus through annnualcreditreport.com, although it’s beneficial to check every month so as to be proactive about resolving any issues.
The problem is it’s disturbingly likely that your credit report is wrong.
A 2013 Federal Trade Commission study found 1 in 5 (20%) of consumers have errors on their reports, and for 1 in 20, those errors end up causing them to pay higher interest rates and premiums.
Signing up with Credit Karma, using personal finance apps like Mint, or using your credit card’s credit checking service are all excellent ways to make sure your credit score is trending in the right direction at the end of every month.
2.) Not Knowing the Mortgage Lender's APR
You’ll see it all the time. Lenders advertisements showing low interest rates everywhere from on the radio, on TV, and online. This is a great marketing tactic for them, but tends to be very misleading for you.
Most people see a lower interest rate and immediately believe “that must be the cheapest loan.”
Don’t be one of those people, because the true figure you should be concerned about is in the lenders’ truth-in-lending disclosure forms, called the Annual Percentage Rate (APR).
Many lenders do not advertise their APRs because this number INCLUDES lender fees and shows the loan’s TRUE cost.
For an easy example, say you need 30-Year $100,000 loan for a home. Mortgage #1 has an interest rate of 4% with a 1% origination fee and Mortgage #2 has an interest rate of 3.9% with 2 points and the same 1% origination fee.
The second looks cheaper on the surface, but Mortgage #1 has an APR of 4.104%, and Mortgage #2 is 4.174%.
In short, the real cost of Mortgage #2 is more than the other, even though its interest rate is lower.
Often times larger lending institutions charge way more fees than just a couple points I used in the example above, making the disparity in real cost even greater. Don’t let these advertised rates fool you.
3.) Dismissing the Real Cost of Ownership
Unlike renting a home or condo, when something breaks or gets damaged in the home, it’s all on your dime.
As a general rule of thumb, you should budget 1-2% of the home’s purchase price for routine maintenance, and continue to save any excess you get in a given year.
Property taxes are also another cost you’ll need to consider. For the San Dimas area, you’re looking at about 0.8% of the home’s assessed value.
Home insurance and natural disaster insurance are also costs that increase the real cost of ownership, so it’s importance to factor those into your assessment as well.
On the flip side, home ownership also means a lot of tax benefits at the end of the year (which we could write an entire other article on), so working with a financial professional to help you estimate those savings is crucial to your analysis.
Luckily at Better Home Financial, our loan originator, Mike Wallace, is also a licensed CPA that is perfectly qualified to help you do so.
4.) Becoming House-Broke.
If you are set on buying the most house you can possibly afford, you’ll likely be stretching your cash flow pretty thin at the end of every month.
Committing too much of your income to your home means you can’t replace your worn out car, build a college fund, save for retirement, go on vacations nor buy new furniture for your new home!
It’s definitely an unfulfilling way to live, and makes buying a new home a decision you regret day in and day out. That's not how it should be.
If you can, you should try to avoid this buy following the general rule of spending less than 30% of your pretax income on your monthly mortgage payment.
This only further highlights the importance of using an ethical mortgage broker with robust financial knowledge that can foresee potential problems before you can.
Use a profit-driven broker, and you may find yourself being pushed into a mortgage that is beneficial for him, but not for you.
5.) Ignoring the Value of a Local Mortgage Broker
This is a big one you probably won’t find on many other lists, and that’s because you’ll probably be reading mortgage advice from an online lender (i.e. lending tree, quicken loans) or retail lender (i.e. Bank of America, Chase, Wells Fargo).
Despite what any corporation (or ad) tells you, the mortgage process is hardly ever hassle free, and requires constant communication in order to close.
The amount of money being exchanged between the myriad of parties involved in a single transaction requires the completion of many stringent requirements, information gathering, disclosures and signatures, documentation, inspections, and more.
Going with a retail lender or online lender will leave most of the work up to you to coordinate, and when something goes wrong, you may be left on hold or in line waiting for help instead of getting your problem solved, questions answered, and loan closed fast so you can score the home of your dreams, not someone else.
When you work with Better Home Financial, we’re always just two rings away, and there’s never a line at the door if you want to stop by. (See Also: Retail vs Wholesale Lenders)
Also, if you want be sure you're getting top tier financial guidance, it's extremely unlikely that you'll be working with an accredited CPA financial professional anywhere else as you would with us.
Finally, comes mortgage interest rates. We don't have the massive overhead that the banks have to cover, nor do we astronomical marketing budgets and gargantuan call centers that online lenders have to pay for.
We keep our business local and our costs low so we can keep your rates low and our service top-notch, bottom line.
In these ways, we're able to provide a superior customer experience compared to other lenders. We have a knack for going above and beyond in ways that are frankly impossible for online lenders and retail lenders to match.
Our in-house network of agents, notaries, originators and processors are on your team to help you through the entire process so you’ll have support and never feel alone or out of the loop!
Click here to get pre-approved today and discover why we call ourselves better.