Six mortgage mistakes that many first time buyers make
Threats of recession, war, and rising gas prices are causing people to panic. If you don’t know what tomorrow will bring, isn’t it better to have a house as a safety net?
Owning a house or even paying a mortgage isn’t necessarily a good or bad idea during a recession. The mortgage deal you make is what you should really pay attention to, because people who make these six big mistakes could end up paying for it later on.
1) Rushing into loans they can’t afford
If panic is your motivation you may enter into a loan commitment while still in debt. You might even choose a house you can’t afford in the long run.
It’s better to first analyze your budget and project your income, planning for a less-than-perfect scenario. Once you know your budget and how big of a house you can afford, that’s when you get the mortgage loan and then choose a house in your price range.
2) Mismanaging the down payment
Most new homeowners either put down too much down payment or not enough. If you’re reaching for the 20% standard, you may be emptying your savings account for no good reason.
According to a recent survey, more homeowners put down a 12% down payment rather than the standard 20%, and some quotes were as low as 3-6% with good credit.
On the flip side, you have homeowners that didn’t save enough to make a substantial payment. Even if they do qualify for a mortgage loan they may end up paying far more than the home is worth, because of higher interest rates and lower monthly payments.
3) No budgeting in other homeowner costs
Many first-timers make the mistake of only budgeting the best-case scenario. Not only do they forget to plan for home repairs and home damage, but they don’t even budget for hidden costs.
Hidden costs may include:
- Mortgage Insurance
- Property taxes
- Homeowners Association fees
This is why it’s important to anticipate your utility bills (especially by season), mortgage insurance, and even maintenance costs. Ideally, you should factor in hidden costs and leave enough for emergency savings, just in case the house needs repairs.
You can even ask the real estate agent for a projection of what property taxes and insurance costs will run you per year.
4) Letting the market decide your timeline
Some people make impulsive decisions, figuring the market will never be like this again. But the market fluctuates and much of it is unpredictable, just as the overall economy is hard to guess.
Don’t risk getting into debt or defaulting, just because you’re trying to avoid high-interest rates. If you can’t afford to pay for a house in a bad market, then it’s time to reconsider your budget.
Being in debt is more related to bad financial habits than bad luck. Take a look at this article explaining how the habits that lead to debt.
5) Choosing a 30-year loan without considering shorter terms
Lenders will often push new homeowners into less-than-ideal loan contracts, with 30 or even 40-year mortgages. But 15-year-mortgages are designed for a faster payoff, whereas the longer-year mortgages make money on higher interest rates – and thus, keeping you in debt.
You should also consider getting a mortgage loan with a fixed-rate contract, which will protect you from adjustable-rate mortgages, which could have fluctuating rates and payments.
6) Not looking for a better mortgage contract
We’re not only talking about comparing rates, but not researching what government assistance programs might be available to you. First-timer homeowners might be able to take advantage of loan assistance offered by the Federal Housing Administration, the Department of Veterans Affairs, or the U.S. Department of Agriculture.
Even if you don’t have a big down payment, or have less-than-perfect credit, by researching government programs, you could find loans with favorable terms for moderate or even low-income borrowers.
For more on the experiences of first-time homeowners, visit our other articles on moving to a new house.
Photo by Joshua Mayo