One of the biggest financial decisions you’ll ever make is buying a home. To many Americans, buying a home is a scary prospect. This is largely due to the complexities involved in the mortgage process. Basically, there are two ways for you to buy a home in America: Obtain home financing through a mortgage or purchase the home with cash. As there is no interest or debt involved in the latter, most people prefer to go that way but if you’re short on cash, the only way to buy your dream house is through a mortgage.
In simple terms, a mortgage is a loan to buy a home. Also known as a mortgage loan, a mortgage is the only way people without sufficient funds can buy a home. The mortgage process involves approval from lender based on your credit rating, income and a few other factors. If you to make your mortgage process smooth and avoid future stress, keep a few basic mortgage rules in mind. Basically, you need to avoid the common mortgage mistakes people make. What are the common mortgage mistakes people make and how to avoid them? Let’s take a look.
1. Not determining your fixed costs
Discern your fixed costs prior to obtaining a mortgage loan: this is the first mortgage rule to follow. Be honest in the assortment of your household expenses: count your car payments and your daily Starbucks coffee as a fixed cost if you’re going to be miserable without them.
2. Not getting your paperwork in order
This may surprise you but many people visit loan-officers for pre-approval without the required paperwork. This is a mortgage mistake that you must avoid. Getting the required paperwork in order is the second and probably the most important mortgage rule to follow. When looking to secure a mortgage, the very least you’ll need is your bank statement and your last W2. Additionally, if you’re getting a refinancing loan, you’ll need to add your homeowner’s insurance declarations and mortgage statement to the aforementioned paperwork. Also, you’ll need to provide proof of identity.
3. Not staying within your limits
No offence but you need to stay within your limits when getting a mortgage. Basically, this means that you need to get a mortgage you can afford. The rule of the thumb is that your monthly cost of mortgage should not be more than 30% of your gross monthly income. Also, you’re total monthly debt including the mortgage, credit card debt, student loan, and car payments should not consume more than forty percent of gross monthly income. Speak to a credit counselor to find out how you can secure a mortgage while staying within your limits.
4. Picking the wrong interest rate
A mortgage mistake that costs people in the long-term is picking the wrong interest rate. When looking to secure a mortgage, you can either choose a fixed interest rate which is a bit high but remains stable over the term of the mortgage or a variable interest rate which is lower than the fixed interest rate but fluctuates based on the state of the market. Talk to a credit counselor to make sure you pick an interest rate that is right for you.
5. Not thinking about your mortgage payments
When getting a mortgage, most people do not think about the payments they’ll have to make for it. This is a mortgage mistake that you must avoid. Once you’re approved for the loan and buy the home, you’ll need to start making mortgage payments. The mortgage payments include the principle amount and the interest. Create an amortization table to work out exactly how much you’ll be paying over the course of the mortgage loan once you know your interest rate and the mortgage tenure. This will help you to find out whether you can afford the mortgage in the long term.
To make your mortgage process smooth and avoid future stress, avoid the aforementioned common mortgage mistakes. If you have any further queries related to mortgage financing, you can get in touch with a credit counselor to know everything you want.