Establishing and carrying a mortgage is one of the biggest financial steps you take in a lifetime. Whether it’s the first time or seventh time you establish a mortgage, uncover some of the biggest mistakes people make, so you can avoid making them with your mortgage.
1. Focusing Solely on the Interest Rate
What’s the interest rate? What’s the interest rate? But, what’s the interest rate? It’s the never-ending question (and one I heard all the time when I was a mortgage and credit specialist for Merrill Lynch).
Sure, the interest rate is how the mortgage company or lender calculates your monthly mortgage payment, but it is not the true cost of obtaining a mortgage. The true cost of obtaining a mortgage requires you to look beyond the interest rate and take a look at the annual percentage rate (aka APR).
The APR takes the mortgage interest rate into consideration, but it also factors in the other costs you have in obtaining the mortgage – closing costs. When you’re comparing the same type of mortgage (like a 30-year fixed rate mortgage) from one lender to another, compare the APRs, which reveals which lender is truly offering you a better deal.
(HINT: It’s the one with the lower APR, even if the interest rate itself is higher.)
2. Choosing the Wrong Type of Loan
Maybe you grew up with a parent or grandparent constantly telling you that when you buy a house, you have to get a 30-year mortgage or a 15-year mortgage (doesn’t really matter which one they said).
One size does not fit all when it comes to a mortgage. What is right for you and your personal financial situation may not be right for your neighbor, friend, cousin, or whomever.
While Grandma and Grandpa lived in their home for 30 years (or maybe longer), we’re not a society that stays put anymore. If you’re not going to live (and die) in the home for the rest of your life, then a 15- or 30-year fixed rate mortgage might not be the best option for you.
It might be the right option for you, but the point is, that you have to assess your own situation and then determine (with the help of a mortgage pro) the best option for you.