Mortgage rates have recently been falling. The combination of trade war and recession concerns have led to some of the most attractive mortgage rates in history. Not as attractive as the negative mortgage rate from a bank in Denmark. (Yes, they actually pay you to take out the mortgage.) According to the Freddie Mac Primary Mortgage Market Survey in the United States, 30- and 15-year mortgage rates are 3.55 and 3.03 percent respectively.
Since the purchase of a home is the single largest investment most Americans make during their life, this may be an opportunity to fix the rate of interest while possibly reducing overall interest expenses. Because Americans are carrying more than $9.5 trillion in mortgage debt cumulatively, homebuyers must be careful to make good choices when taking on such a significant financial commitment. Avoiding the mortgage mistakes noted below can help keep you on the right track when purchasing your next home or refinancing your mortgage.
Applying for new credit and a mortgage at the same time
Consider avoiding any financial changes that might adversely affect your credit rating when shopping for a new mortgage — especially additional credit cards or auto loans. Remember, every point counts and it may mean the difference between being approved or denied for your loan.
It is also a good idea to review your credit report prior to applying for a mortgage so that you are aware of your current FICO score. This will also give you the opportunity to address any inaccuracies on your report. Do your best to build your credit score in advance of searching for a new loan as this may help reduce your borrowing costs. Remember, the higher your credit rating is, the lower the interest rate you might pay.
Letting the lender determine what you can afford
Remember, just because the bank will lend you the money, doesn’t mean that you can afford to pay it back. Too often borrowers assume that a bank approval represents the green light to spend or finance as much as possible. Keep in mind that lenders focus a lot of attention on debt-to-income ratios without factoring in the importance of savings goals like retirement, education funding or maintaining cash reserves.
Consider reviewing your budget to ensure that you will still be able to afford the mortgage even if your income were to drop by 25 percent. Also, make sure you are able to save 10 to 15 percent of your income before making any mortgage payments. Remember, buying a home and saving for retirement should not be mutually exclusive goals.
Failing to shop around
When it comes to financing a home, being a good consumer is critical and comparison shopping can help improve your chances of getting a better deal. Many times, borrowers fail to review all their financing options. Instead, they often choose to finance their home purchase at the same institution where they have a checking or savings account. Remember, the banking industry is one where size and scale do not necessary equate to better rates for consumers. While it doesn’t hurt to speak to your local bank regarding their loan programs, failing to shop around could result in a rate that is over 0.75 percent higher. An interest rate differential of 0.75 percent on a $200,000 30-year mortgage could result in more than $30,000 in additional fees paid during the life of the loan.
Consider using online resources such as www.bankrate.com or www.Zillow.com to review a complete list of alternatives. Also remember to consider all closing costs and fees as they can really add up.
Using an exotic mortgage
From negative amortization loans and adjust rate mortgages to interest only financing and liar loans, exotic mortgages played a significant role in the 2008-2009 financial crisis. While it is true that there are fewer exotic mortgages available, it is still possible to get yourself into trouble by choosing a loan with terms that initially sound too good to be true.
Adjustable rate mortgages (ARM) or interest only mortgages are a good example. It is important for borrowers to avoid being tempted to select a loan simply because it offers a low rate. While non-traditional loans can be helpful for some borrowers, it may be wise to stick to a traditional fixed-rate mortgage. Since the Federal Reserve has quickly transitioned from raising rates to cutting rates, it is difficult to predict where rates will be in the next 5-10 years, making it difficult to “time” the mortgage market.
Educating yourself on the nuances of the mortgage selection process can help protect you from costly mortgage mistakes. Doing your homework, comparison shopping and maintaining a common-sense approach may help reduce your financing costs over the long term. Since everyone’s situation is unique, consider speaking to your adviser to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner & Wealth Advisor. He can be reached for questions at (732) 280-7550, kurt.rossi@Independentwm.com or www.Independentwm.com. LPL Financial Member FINRA/SIPC.