7 ways you can pay too much for your mortgage
By Allie Johnson
June 30, 2016
As a homebuyer, you may care more about shopping for your dream house than the right loan. But making costly mortgage mistakes now could mean less money to buy furniture, plant flowers or replace the roof down the road.
“This may be the most money you’ll ever spend in your life,” says Denise Winston, a financial expert and founder of Money Starts Here, a financial education company. “This is serious business and you need to be an educated consumer.”
If you give mortgage shopping short shrift, you could end up spending hundreds, thousands or even tens of thousands of dollars too much.
Here are seven mortgage mistakes to avoid:
1. Not checking your credit in advance.
Many homebuyers don’t think about their credit score until they’re applying for a mortgage, says Brent Rasmussen, a mortgage broker and president of Mortgage Specialists, in Omaha, Nebraska. “A lot of people are very scared to get their credit pulled,” he says. But if you fail to check your credit early on, you may not have time to get your credit in shape to get the lowest interest rate.
“This may be the most money you’ll ever spend in your life. This is serious business.”
— Denise Winston,
Money Starts Here
Pull your credit six months to a year before you plan to buy a house, Rasmussen says. You may find ways to boost your score, such as paying down balances on your credit cards. On average, just an eighth of a percent bump in interest due to a slightly lower credit score can cost you $3,500 to $7,500 more over the life of a home loan, he says.
2. Picking out a house you can barely afford.
Many people go shopping for homes out of their price range. Some shoppers rely on online mortgage payment calculators, which may inaccurately assess property taxes or fail to factor in the cost of mortgage insurance, which homebuyers must pay if they make a down payment of less than 20 percent, Rasmussen says.
Other homebuyers assume that if the bank approves them for a certain loan amount, they should be able to afford a home at that price, Winston says.
“Five years later, you’re house poor, you start maxing out credit cards, everything snowballs, and you end up in a bad financial position,” Rasmussen says.
That can lead homeowners to put emergency expenses on credit and pay hundreds or thousands of dollars in interest, says Nick Demeester, manager of housing programs for GreenPath Financial Wellness.
Before you look at houses, consider making an appointment with a housing counselor at a reputable nonprofit credit counseling agency to go over your budget and decide how much house you can realistically afford.
3. Getting a quote from only one lender.
Some homebuyers simply go to a lender recommended by a friend or relative, Demeester says. Comparison shopping does take time and effort, but skipping that step can cost you, he adds. The fees lenders charge might be different, and the interest rates also can vary.
“A lot of people are very scared to get their credit pulled.”
— Brent Rasmussen,
For example, one lender might offer you an interest rate of 4.25 percent, while another might offer 4.5 and another 4.75, he says. Plug those number into a mortgage calculator, and you’ll see that you could end up spending more than $15,000 extra on a 30-year mortgage on a $150,000 home just by picking a pricier loan.
“Make sure you’re shopping around to get the best deal,” Demeester says.
4. Giving your card a workout while you’re buying a home.
Chasing rewards by charging up your card and paying it off each month could prove penny wise and pound foolish while you’re about to buy a home. This bad habit can affect your credit utilization ratio, the amount of available credit you’re using, Rasmussen says.
Depending on when your balance gets reported to the credit bureaus, it can look like you’re maxing out your card and carrying debt, he adds, which will knock down your credit score.
In general, it’s smart to avoid spending a lot on plastic when applying for a mortgage. A decrease of even a point or two can kick your credit score down to the next tier, which will increase your interest rate, Winston says.
For example, if you’re buying a $200,000 home with a 30-year mortgage and your credit score drops from 760 to 759, you could pay $8,830 more over the life of the loan, this chart from myFICO.com shows.
5. Pay too much in fees.
It’s easy to get confused when comparing loan costs at different banks. “The fees are different at different lenders,” Winston says. If you don’t compare costs carefully, you could end up paying too much.
“Look at what are the total fees being assessed by lender A, B and C, and what is the total cost over the life of the loan.” — Nick Demeester,
“Look at what are the total fees being assessed by lender A, B and C, and what is the total cost over the life of the loan,” Demeester says.
Each lender must give you a loan estimate that spells out the details of the loan. This sample home loan estimate from the Consumer Financial Protection Bureau can give you an idea of what yours should look like. “Look at the loan estimates side by side,” Winston says.
6. Assuming a longer loan is your best bet.
Some homebuyers decide on a 30-year mortgage without considering a 15-year mortgage, Winston says. The longer loan can result in lower monthly payments, but force you to shell out tens of thousands of dollars more in interest costs over the life of the loan, and to stay in mortgage debt twice as long.
When Winston bought her first house, she found that by going with a 15-year mortgage she’d pay a little more each month, but would save $35,000 in interest costs and be free of the loan many years earlier. “It was one of the smartest decisions I ever made,” she says.
7. Choose an adjustable rate over a fixed rate mortgage.
Some homebuyers choose an adjustable rate mortgage (ARM), which typically comes with a much lower interest rate in the first couple of years, figuring they’ll either sell the home or refinance in the future, Demeester says. The ARM might be lower initially and set at that interest rate for a certain period of time, such as the first five years, he adds.
Down the road, a job loss or a credit mistake can mean you get stuck in your loan as the interest rate rises. “All kinds of factors can affect your ability to refinance,” he says.