Top 5 Mortgage Mistakes

When you buy your first home, you're about to experience one of the biggest financial milestones of your life. But with such an exciting and complicated process, it's easy to see the parts in the mortgage process that could cause some serious setbacks. you'll learn the top five mortgage mistakes.

So that way you can avoid some of these stumbling blocks that could stand between you and your future home.

First, some home buyers only budget for the principal and interest on their loan, or P and I. While P and I makes up the bulk of your monthly payment, it's not all of it. The monthly payment also includes homeowners' insurance and taxes, which could add hundreds or thousands of dollars to your monthly obligation. So you want to leave plenty of room in your budget for those costs.

A second pitfall is when you choose an interest-only mortgage when you have plans for the long term. The best practice for these loans are for those thinking in shorter increments, like maybe five or 10 years. Maybe the home is an investment property and an interest-only loan helps with that shorter-term cash flow. Or perhaps you're nearing retirement so you may use it, an interest-only loan to buy a second home, then sell your first home to pay off that interest-only loan. Or maybe it works well for someone with a job with a large bonus that can be used to pay down the principal loan balance. Interest-only loans are best in the short term and it's important not to be lured by a slightly lower interest rate, especially if you think you found your forever home.

The third mortgage mistake to watch out for is not refinancing when rates drop considerably. If interest rates are plummeting, and you're wondering if you should refinance, first, it helps to check out what your current interest rate is. Then consider what could happen with a better interest rate. Increasing your long-term net worth, boosting your short-term cash flow, things like that. If you're spending less on interest, that's cash that you could put away for other financial goals like retirement. Maybe you're in a stronger position now than you were when you first took out your existing mortgage. Refinancing may provide an opportunity to get a better interest rate with both immediate and long-lasting impacts. Another big one,

The fourth common mortgage mistake is not saving up for a down payment. At one point, the gold standard was to save up 20% for a down payment. But many homeowners don't put down 20% these days. The idea here is that just because you can buy a home with a small down payment doesn't mean you should. A bigger down payment could help you qualify for a lower interest rate and avoid private mortgage insurance. You could also pay less interest over the long haul and bring longer-term benefits since the amount of principal you borrow will be lower with a higher down payment.

The fifth mortgage mistake to be aware of is not checking your credit score. A good credit score is an absolute must when it comes to applying for a mortgage. This can vary by lender, but you need at least a 620 credit score to qualify for a conventional mortgage loan. But this is still borderline and you could be slapped with sky-high interest rates that could pile up tens of thousands of dollars, if not more, over the life of year loan. So the more preparation, discovery, and homework you do before the mortgage application process, the better chance you have to clean up your credit score. It also helps to check your credit report for any errors and dispute any mistakes that you might find. The higher the credit score, the better the terms on the mortgage as you move forward. The hope is that being aware of the most common mistakes made in the mortgage process can make a complicated process easier. So that way it's smooth sailing from your down payment to getting your keys and opening up the door to your new home for the very first time.