Buying a home is a daunting task, and first-time homebuyers know this better than anyone. As you go house-hunting, avoid these mortgage pitfalls.
When my husband and I began looking for a home almost eight years ago, we didn't have much of a clue. Armed with the 30% rule (which I think is bogus now), we began shopping around. In the end, we managed to get a home, even though — technically — I'm not sure that we should have gone through with it at the time.
But, here we are. And we're in the process of refinancing (finally).
I wanted some insight into how to avoid some of the pitfalls of getting a mortgage, so I asked Mark Mansouri, from the site MortgageBloom, to share his thoughts.
How to Avoid 4 Common Mortgage Pitfalls as First-Time Homebuyers
“After enduring the difficult process of securing a mortgage and realizing how consumers are so easily duped by lenders, a couple of colleagues and I decided to start MortgageBloom,” Mark says.
MortgageBloom has a great mortgage calculator, and Mark has some helpful advice for first-time homebuyers:
- Rates matter more than monthly payments: Too often, first-time homebuyers get caught up in the monthly payments. Instead, focus on the mortgage rate. “On a 30-year fixed loan for $200,000, you would pay $15,000 extra if you went with the best brand-name bank's standard rate,” Mark says. Instead, shop around for the best possible rate from a variety of sources, including those online.
- Know your credit: Often, first-time homebuyers fail to understand their credit situation before going in. Make sure you know where you stand, and fix any errors on your report that might be dragging your score down.
- Watch out for the ARM: It's tempting for first-time homebuyers to go for the ARM, since the rate and the payments are lower at first. “Many homebuyers don't take into account the periodic interest rate cap…which governs how high the payment can readjust over time,” Mark points out. If you are going to be in your home more than five years, an ARM can become cumbersome and expensive.
- Paying points can get expensive: The idea of paying points is to reduce the mortgage rate a little bit more. However, sometimes it's just not worth it, especially if you refinance or move within a few years. The points payment could be wasted if you aren't staying in your home for the majority of your mortgage.
As you plan to make your first home purchase, stop and think about whether or not you are falling into the above traps. Carefully think through the situation, and make a plan to avoid mortgage pitfalls.