It’s a big mistake that can cost you tens of thousands of dollars over the lifetime of your loan. But with a little planning, prioritizing, and smart shopping, you can find a mortgage that fits your budget and leaves you enough cash to pursue all your other American dreams. Get Your Finances in Order
Months before you start browsing house listings, open a spreadsheet and analyze your finances. When you have a solid sense of your income, assets, and debt load, start talking to lenders. They can provide solid guidance on how to raise your credit score, and make a good financial impression on the loan underwriters. Although you might need some extra time for paying down debt, you’ll emerge with a better credit score, and qualify for a mortgage that can save you big bucks.
Do Some Smart Shopping
Congratulations. You found an incredibly low interest rate and you’re ready to leap!
But before you do, check out the annual percentage rate (APR) on the loan estimate provided by the lender. There you’ll find closing costs and other fees bundled with the interest rate. This helps you understand what you’ll actually pay each month on your mortgage. Plus, it gives a meaningful point of comparison for considering other loans. In some cases, you’ll find that a slightly higher interest rate works out better because it carries lower fees. Moral of the story: shop around!
Beware “Free Lunches”
Some lenders like to sweeten the deal with tempting offers to comp your closing costs or pay your mortgage insurance. But it’s all just a shell game. They fold those “freebies” into your loan and spike your interest rate by as much as a quarter point. That said, reputable lenders do occasionally run legitimate promotions where they discount their origination/application fees. You can verify the offer by checking to make sure those discounts are genuine and the fees are not simply rolled into your loan.
Know What You Can Afford (vs. what you can borrow)
The amount you are qualified to borrow is based your debt-to-income ratio. This crude calculation looks at total monthly income versus the dollars you pay servicing debts like car loans and other big-ticket items. It doesn’t account for your gym membership; music lessons for the kids; online-shopping sprees; and weekly trips to that boutique food market.
To get a realistic picture of what you can afford to pay every month, you need to track all those necessities and lifestyle expenses. Otherwise, you might find yourself feeling perfectly poor in your perfect new home.
Extract the Facts from Your Loan Estimate
Forests of trees are axed to assemble loan documents, but you don’t have to get buried in them. Here are the six facts you need to gather from the loan estimate:
- Interest rate
- Monthly payment
- Loan terms
- Total loan cost
- Cash required at closing
Lastly, be sure to carefully review the closing document you’ll receive just days before closing. If you notice any different fees or costs, contact your lender right away. Even a fraction of a difference in the interest rate can tack on thousands of dollars over the term of the loan.
To learn more about the art and science of mortgage shopping, check out Five Newbie Mortgage Mistakes that Are Soooo Easy to Avoid.