How to Avoid Slipping Over Thousands of Dollars in Home Loan Interest
With all the recent changes in mortgage regulations, many home buyers don’t realize their options are greater than ever before. But just as changing seasons drive us to retreat to our warmest sweaters to handle winter, we shouldn’t abandon our core values: cashmere sweaters.
No, but the first four letters do matter, and that’s cash.
Whether this is your first time buying a home or you consider yourself an experienced property purchaser, here are six major cash killing habits you should avoid during the home-buying process.
6 Cash Killing Mistakes That Could Cost You Thousands
1. Counting Chickens Before They Hatch (Foregoing Mortgage Preapproval)
Would you buy an extravagant dog house before knowing the size of the dog?
Would you invest in Apple before understanding dividends or municipal bonds?
Would you ask your date if they want to attend your fifth chili-eating contest before asking if they’re vegetarian?
Of course not! Speaking from experience (he said no and never texted back), you should always get a preapproval before starting your home buying journey.
Preapproval is an easy process—see a breakdown here—and every potential home buyer should get this done with a lending institution before looking at homes.
Not only does preapproval help ensure you’re ready to strike while the iron is hot, but it also gives you an idea of how hot your prospects can actually be.
Falling in love with properties before you’re preapproved is a lot like thinking how pleasant the hotel in The Shining looked from the outside.
Looks great in pictures, but there are always terms and conditions hidden behind locked doors.
Looks pretty friendly from the outside, doesn’t it?
Don’t overextend your financial reach to avoid disappointment or less-than-favorable financing options.
2. Keeping it Real
This is Nancy. Everything about her is smart.
So now you’ve got a preapproval number from the lending institution. Great, so that means you can filter out all the homes outside your price range? Not exactly.
A far better strategy is viewing your preapproval number as an upper limit and then decide what you’re comfortable paying every month.
No one knows your spending habits better than yourself.
My wife is so wrong. According to this chart, I CAN order lobster and caviar every day.
If annual vacations or child educational expenses are a factor, calculate all that into your monthly expenditures to ensure your mortgage doesn’t take too much of your earnings.
3. Thinking Short Term
Say you’ve got a great job that pays well. It’s tempting to buy a beautiful home at the very top of your financial reach. But what if you unexpectedly lose that job? What if you need to make a career change?
Finally following your dreams to become a professional lounger
Too many home buyers assume their current circumstances will never change. If 2020 taught us anything, it should be to expect the unexpected.
Home isolation and 20+ pounds later.. Who knew gluten-free pancakes would betray our waistlines?
It’s important to stay open-minded about unforeseen events when determining what we’re comfortable paying each month.
Considering the ups and downs of real estate is vital too. Identify conditions like interest rates and whether they seem to be dropping or rising. This will help you decide if you should lock into a fixed rate or consider an adjustable-rate mortgage.
4. Ignoring Prepayment Privileges and Payment Frequency
Most people assume you pay your mortgage once a month, and that’s definitely the most common situation. But that’s not the only option available.
It’s perfectly normal to pay your mortgage once a week or once every two weeks. If your lender doesn’t amortize monthly, this can result in real savings.
But you can’t pay whichever way you feel like at the time.
“Hi, I just don’t feel like paying this month. Can I get back to you next year?”
You should check with your specific lender to see how their process is structured. (For a more detailed discussion of this topic, snoop this article.)
The guaranteed way to see incredible savings over the life of the loan is by paying more than your mortgage amount every month. (Just check with your lender to make sure there aren’t any early payment penalties.)
Those extra savings go directly to the loan principal and can significantly reduce the interest you pay over the life of the loan.
Here’s one example to illustrate:
- Mortgage Amount: $500,000
- Interest Rate: 3.0%
- Mortgage Term: 30 Years
- Monthly Payments: $2,108.02
- Total Interest Paid (Over Life of the Loan): $258,887.26
- Estimated Payoff Date: January 7, 2051
If you pay just $100 more per month, see how those numbers compare:
- Mortgage Amount: $500,000
- Interest Rate: 3.0%
- Mortgage Term: 30 Years
- Monthly Payments: $2,208.02
- Total Interest Paid (Over Life of the Loan): $238,385.58
- Estimated Payoff Date: December 7, 2048
That’s a difference of $20,501.68, and you’ll be done paying off your loan about two years faster. That’s a tremendous difference for just another $25 each week!
Thank you Andrew Jackson and Abraham Lincoln
Want to play with the numbers? Use this calculator to see how much you could save.
Still unsure if you should own or continue renting? Use this calculator to see which makes sense for your situation.
5. Not Asking about Portable or Assumable Mortgages
Portable mortgages aren’t always available, so as with many of these situations, check with your specific lender.
If it is an option, this is a mortgage you can carry with you when you purchase your next home. Benefits include avoiding both discharge penalties and having to go through the mortgage process again when you purchase.
An assumable mortgage is one where the buyer can take over your existing mortgage. This makes your property much easier to purchase and more desirable for buyers.
When you’re just itching to pass your mortgage onto the next person
Talk through these scenarios with your lender to see if they apply to you.
6. Becoming a One Person Army (Not Using a Mortgage Expert)
Having somebody who specializes in mortgages in your corner can help you bob and weave incoming financial jabs to get the best possible deal.
That person can advise you about what type of mortgage makes the most sense in your situation, what payment structure you could confidently take on, and much more.
If you’re working with a Realtor with ample experience and local knowledge, your agent could fill that role.
Just like houses, not all Realtors are built the same. Working with Ray Gernhart & Associates could literally save you thousands. If you’re looking for a trusted partner in your home-buying journey, reach out today. We can put our knowledge, experience, and commitment to customer service to use for you! Would you like a more formal and actionable guide for home buying mistakes to avoid? You can download your report here.
