Getting a mortgage can be daunting, especially when there’s a lot of your hard-earned money at stake. It’s critical to spend a few hours researching how a mortgage works (or at least as much time as you’d spend researching a vacation or a car purchase) before you begin the process. Unfortunately, nearly half of prospective home buyers don’t understand essential mortgage information, according to a recent mortgage survey conducted by Zillow Mortgage Marketplace. This lack of basic knowledge is likely leading borrowers to make costly mistakes. Here are some of the most common mortgage misunderstandings, and how to avoid them.
Buying Mortgage Discount Points – Nearly half ( 45 percent) of those surveyed in the Zillow poll believe they should always buy discount points when obtaining a mortgage. However, because mortgage discount points have an upfront cost that can be recouped through a lower interest rate over the life of the loan, the decision should depend on how long you intend to own the home. In some cases, you may not plan to remain in the house for long enough to break-even after buying points. A discount points calculator can help you do the math.
Not Monitoring Rates - Mortgage rates can change multiple times throughout the day, similar to how stock prices fluctuate. But more than half (55 percent) of the people polled thought rates were set one time each day. To get the optimum rate, it’s important to monitor rates and talk to different lenders. When you compare various rates make sure you are comparing the exact same loan.
Contacting Just One Lender – Many buyers believe lenders are required by law to charge the same fees for credit reports and appraisals. One-third (34 percent) of survey respondents do not understand that lender fees are negotiable and can vary by lender. Borrowers can save money by reaching out to several lenders and comparing rates and fees. This may appear time-consuming but sites like Zillow Mortgage Marketplace enable borrowers to put in a loan request — without sharing any personal contact information — and compare rates and fees personalized to their financial situation from hundreds of vetted lenders nationwide. Bonus feature: the site offers lender ratings and reviews to help borrowers choose the lender not only with the lowest rates and fees, but with the best service level to other borrowers.
Not Considering Various Loan Options - Many people may automatically avoid certain loan products, like Adjustable-Rate Mortgages (ARMs) because they don’t understand how they work. For example, when asked if interest rates on 5/1 ARMs always reset to a higher rate after five years, the majority of those polled (57 percent) said yes. In actuality, after five years, the rate could increase or decrease, meaning that there’s a possibility for a borrower’s monthly payments to go down. Whether an ARM makes sense for you depends on your personal situation such as your appetite for risk and how long you plan to live in the home. As you consider different loan products, ask your lender to go through the worst-case scenarios to avoid any surprises during the life of the loan.
Not Knowing Basic Terms – As you begin to think about securing home financing, you may hear terms like FHA loans and pre-qualification get bandied around. According to Zillow research, many people don’t know what those terms mean. Forty-two percent of prospective home buyers thought only first-time buyers could qualify for FHA loans, and 37 percent believed if they pre-qualify for a loan it means they’ve secured financing. Familiarize yourself with basic mortgage terms before reaching out to a lender. Most importantly, don’t be afraid to ask your lender, or even your real estate agent, lots of questions about the loan throughout the process.
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