Getting ready to buy your first home? This is an exciting time, but it can also be an overwhelming one. Even though taking out a mortgage on a home is something that you probably grew up expecting to do, there are still a lot of complexities within the process, many of which are easy to overlook.
In fact, here are a few important facts you might not know about mortgages. Any of these could trip you up and make life more difficult if you are not aware of them in advance.
1. You really need to look at the APR
A lot of first-time home buyers look at the mortgage rate when considering how much house they can afford, but they do not realize this does not really provide them with a full picture.
You can get a much better feel for the real cost of purchasing a home by looking at the APR, which stands for “annual percentage rate.”
The APR includes not just the mortgage premiums and interest rate, but also accounts for origination and closing fees, mortgage points and other costs.
It is a common practice for lenders to advertise low mortgage rates, and then turn around and hit customers with high fees after they have committed. If you check the APR, you can avoid walking into this trap.
2. You have to shop around if you want the best rates and the lowest fees
If you find the whole process of searching for a home and applying for a mortgage stressful, you may feel tempted to go with the first affordable offer you see—but this is not a good move.
You need to check rates offered by different lenders in order to find the best possible deal. Remember, you are entering into a long contract, and this decision is going to have a massive impact on the rest of your life. Even though there are standardization programs in place to try and curb dodgy behavior by lenders, there is still a surprising amount of variance in both rates and fees.
3. The government offers programs which can help you reduce the cost of your down payment
Can’t afford to put a 20% down payment on a home? While this is the amount that you generally are expected to pay, there are situations where you might be able to get around it.
If for example you get a Federal Housing Administration (FHA) mortgage, you may be able to get away with as little as 3.5%. If you happen to be a military vet, look into VA loans. Sometimes these include no down payment at all.
4. You may need mortgage pre-approval to see all your options
Looking to buy a home in a posh neighborhood? If it is a competitive market, there is a good chance you will not even be able to look at all the homes available if you do not have mortgage pre-approval. Agents often reserve these tours exclusively for those who do.
To get pre-approval, you will need to have a solid credit report, employment history and income. Get your documents ready in advance—you are going to need a lot of them—and then get in touch with a mortgage officer to kickstart the process.
Note that if you are self-employed, this could be a bigger challenge. You are expected to have at least two years of business under your belt in most cases. Your AGI also will be used as your income figure—not your initial gross income.
5. If your down payment is less than 20% of the home’s purchase price, you will need insurance
It’s great if you can get away with a lower down payment, but you need to know that it comes with a cost in the form of mortgage insurance. Generally this is a monthly cost you will have to pay for at least several years. After that time elapses, you will no longer be considered such a high-risk borrower, and you may be permitted to drop the insurance.
6. If you use credit while a mortgage is pending, you could lose the opportunity
One thing a lot of people applying for a mortgage do not know is that they should avoid using credit while their application is pending. Doing so may result in a denial. There are a lot of reasons you might want to whip out your credit card at this juncture (maybe to purchase furniture or appliances), but resist the urge until the mortgage is approved.
7. Buying a home costs more than you think
Finally, one more thing that you may not realize is that buying a home is a lot more expensive than it looks at first glance.
Many people think only of the down payment and the monthly premium they will be paying, but you also need to tack on additional costs like:
Opening and closing costs
Interest on your home loan
Costs for repairs and renovations
The price of furnishings and appliances
Mortgage and homeowner’s insurance
There may be additional costs on top of those. And if your mortgage rate is adjustable, you really have no idea just how high those costs could skyrocket in future years.
Do your best to add everything together and come up with the most accurate estimate you can of what you will be paying now and over the future. Only move forward with a purchase if you really are sure you will be able to afford the home.
Many new home buyers are shocked at all the factors they need to consider when taking out a mortgage. Making one seemingly small mistake now could cost you a lot of money in the future, so it is worth taking the time to do as much research as you can in advance so you are prepared for all the complexities of the process.