Mistakes to Avoid During the Mortgage Application Process

Buying a home can be an exciting experience, especially once you think you’ve finally found the house of your dreams. At times, the relief felt in finally locating such a home can be so overwhelming that it’s tempting to rush into the purchase process—a tendency that can lead to a number of missteps. When applying for a mortgage, it’s important to be cautious, so you can avoid some of the following most common mortgage mistakes made by novice homebuyers.

Spending Too Much

The desire to complete a purchase as quickly as possible can often lead prospective buyers to borrow too much money from a lender. Typically, buyers will not even realize this is happening. This is because lenders calculate mortgages based on an applicant’s income and level of debt, so when they explain these calculations to buyers, the numbers make sense. However, lenders often fail to consider the numerous other expenses in an applicant’s life, which may ultimately make it quite difficult to make the mortgage payments.

Neglecting Credit Scores and Prequalification

Another one of the major mortgage mistakes that homebuyers make is applying for a loan before they’ve been able to repair a bad credit score.  Ideally, individuals should have scores of 720 or higher, in order to receive the best interest rates.  In fact, a score below 680 can end up costing homeowners thousands of dollars in added interest costs. Thus, before diving into the mortgage application process with a lower credit score, consider whether it would be worth the added cost to buy so soon.  To get the best sense of what your interest rates will be with your current score, be sure to go through an official prequalification.

Choosing the Wrong Loan Term

Those who rush into the mortgage application process also tend to take the first loan term suggested, which is typically a 30 year mortgage. Though these are the most popular options available, they are not necessarily the best for everyone. If there is a chance that you might relocate before 30 years are up, consider a 5-1 ARM loan, which is an adjustable interest rate loan in which you pay the lowest interest rates for the first 5 years, at which point rates typically go up. This way, you can end up saving some money if you need to sell. On the other hand, those who are closer to retirement should consider a shorter loan term (either 10-15 years), so they can get the most out of their investment.

The best ways to avoid making these mortgage mistakes is to plan your budget carefully prior to house hunting or meeting with a lender. Set limits for how much you’ll be able to spend on a mortgage so you don’t get roped into borrowing too much, make sure your credit is in order before applying, and take the time to go through the prequalification process. All of these steps will help ensure that you make a sound decision about a serious investment.
 

What Rising Interest Rates Mean For You

Mortgage interest rates have been steadily increasing over the past few months, and in recent weeks have experienced significant gains. Currently, interests rates hover close to 4%, and analysts predict that they will continue to climb. As a potential homebuyer, you may wonder what this means for you. Is it still a good time to buy? Is the housing market in distress? Though there has been some debate on this point, the ultimate answer to both of these questions is no

The Skeptic’s Concerns

Though market prices in every sector always fluctuate, the rising mortgage interest rates have sparked more debate than usual. This is largely due to the real estate market’s role in the financial crisis of 2008; that economic crash is still fresh in everyone’s mind, so any small change in market price or value is closely scrutinized. Some sellers feel that an interest increase will reduce their sales, thus sending the demand for homes back down. Other individuals worry that these rate changes are a sign of too much stress on the market in general.

Signs of Recovery

It is natural to view any sort of rise in home prices with some skepticism. After all, no one wants to end up paying more for his or her home, particularly when prices have been at record lows for the past few years.  Yet rather than viewing the rate increase as detrimental to the market or to your wallet, however, try to look at the bigger picture. That is, the steady rate increase signals an increased confidence in real estate—prices are going up because demand is increasing and supply is decreasing. This is a far cry from several years ago, when thousands of empty and foreclosed homes—with low interest rates—stood waiting to be sold.

The Final Verdict

While the increase in mortgage interest rates is not a bad thing, it is important to keep an eye on prices, as these are connected directly to a property’s value—if they go too high, appreciation will slow down. Still, on the whole, now is still a smart time to apply for a home loan. In fact, the success of the market relies on the confidence and buying power of the consumer; if everyone panics in the face of mortgage rate increases and opts not to buy a home, then the market will indeed suffer. Just keep in mind that a slight rise in interest rates is not only a normal part of the market’s cycle, but is also a signal that the economy itself is improving

If you do decide to invest in a home before interest rates increase any further, just be sure to work through a reputable lender. If any institution tries to charge you a mortgage interest rate over 4%, shop around before you sign anything. With the exception of seller financing, which is bound by fewer restrictions, all mortgage transactions should adhere to market trends, so do a bit of research into current interest rates before applying to ensure you’re getting a fair deal.