4 mistakes that make your home loan more expensive
Many people make expensive, easily avoidable mistakes when shopping for a mortgage.
“Borrowers who don’t do their homework often end up paying more than they should, and in some cases that extra cost can really hurt,” says Paul Sian, a real estate lawyer and Realtor with HER Realtors in Cincinnati.
A study from the Consumer Financial Protection Bureau concludes that many consumers don’t shop for mortgages, and they tend to get their mortgage information from lenders and real estate agents, who aren’t impartial.
According to Sian, borrowers tend to fixate on the home’s purchase price, and secondarily, the loan’s interest rate. But factors like closing costs, the loan’s total price tag, whether the loan is fixed or variable, and whether the borrower is required to get private mortgage insurance can dramatically alter what borrowers end up paying.
Following are four common mortgage errors and tips for avoiding them.
Shopping just one lender: Whether it’s a new car or the latest gadget, consumers know it pays to shop around for the best deal. But half of mortgage borrowers consider just one lender or broker in their shopping process, according to the CFPB study.
“It is a good idea to shop around for mortgages in order to get better rates,” Sian says. “Sometimes large banks and lenders don’t offer the best rates that can be had. Additionally, some lenders add in fees. While the final fees do show up at the end, many borrowers don’t understand the fees and accept them as the cost of getting the loan, even though they could’ve avoided those fees by shopping around.”
A small difference in the interest rate can make a big impact on cost. On a $200,000 fixed-rate, 30-year mortgage, an interest rate of 4.5 percent costs $59 a month more than a 4 percent rate. That adds up to $3,512 in the first five years.
The lower interest rate means the borrower would pay off an additional $1,421 in principal in the first five years, even while making lower payments.
Failing to seek objective info: When questions about mortgages come up, borrowers typically turn to their lender, broker or real estate agent. While those are good sources, the CFPB found that many borrowers could benefit from seeking out additional, objective sources of information, such as housing counselors and news sites.
“Borrowers should seek a range of information, but each source should be vetted thoroughly,” says Greg Cook, a senior loan officer with Platinum Home Mortgage in Temecula, Calif. “Borrowers should remember that the right answers to their questions are often determined by the specifics of their individual situation.”
While Cook understands that many borrowers, especially first-timers, ask friends and family for advice, he says those sources are often unreliable because what works for one person may not make sense for their friend. News outlets, on the other hand, can be good places to get a “30,000-foot view” on the topic, but, Cook says, they won’t shed much light on an individual borrower’s situation.
As for housing counselors, Cook says they can be a valuable resource, but often their expertise is limited to lending programs, meaning they can help borrowers discover which types of loans are available, but they won’t necessarily have insight into which lender is the right choice.
Not learning about the process: Talk to homeowners and they’ll likely tell you about how complex, confusing and time-consuming the mortgage process can be.
Knowing that, it’s certainly a good idea to arm yourself with as much knowledge about borrowing as possible. But amazingly, the CFPB found about half of all borrowers “aren’t very familiar with the process” and 14 percent were “not at all familiar.”
“A good mortgage (specialist) will lay out the process for you in a very clear manner,” says Elan McMillin, a mortgage banker with USA Mortgage in St. Louis. “The borrower should receive some sort of outline that details step by step what is expected of them during the process and the details of what is required from application to close. If the lender can’t provide an outline like that immediately, then it may be time to shop for another lender.”
But the problem may not be with the lender, according to Cook, who says it’s surprising so many consumers don’t know more about the process, given the abundance of information out there.
“One reason is borrowers focus on the home they want and the best rate,” he says. “But once you understand the process better, you see that there are a lot more factors that come into play.”
Focusing on irrelevant factors: Given that so many borrowers look to a single lender when shopping for a mortgage, it’s not surprising the CFPB found that many borrowers often pick lenders based on geographic proximity, a pre-existing financial relationship, or other factors, like reputation, that may not be relevant to the loan’s total cost.
“The downside of picking a lender based on proximity, pre-existing relationship or reputation is that they can lose out on getting the best possible rates, resulting in long-term money going out the window,” Sian says.
But the best deal isn’t necessarily the lowest rate, according to McMillin, who points out that different loan products may have the same rate but substantially different costs, which underscores the need to learn about the variety of loans available.