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Glossary:
Get help understanding the terms.
Top Ten Mortgage Mistakes |
Buying a
home | Refinancing your home
| Getting a home-equity loan
If you're like most people,
purchasing a home is the biggest investment you'll ever
make. If you're considering buying a home, you're
likely aware of the complexity of the endeavor.
Because of the numerous factors to consider
when purchasing a home, it's important to prepare
as best you can. Some common home-buying principals
and caveats are presented here for your consideration.
By keeping them in mind, you'll help create a successful
and more enjoyable experience. These Top Ten
lists are by no means exhaustive. Since your
home could cost you 25 to 40 percent of your
gross income, it's important to conduct research,
ask questions and study the process carefully.
Buying
a home
- Looking for a home
without being pre-approved. As a potential buyer
competing for a property, you'll have a better chance
of getting your offer accepted by being as prepared
as possible. Consider this hierarchy of preparedness:
- Neither pre-qualified nor
pre-approved
- Pre-qualified
- Pre-approved
The benefits available at each level can be easily
understood when viewed from the seller's perspective.
Imagine you're a seller in receipt of multiple offers
to purchase your property. A complete stranger (buyer)
is asking you to take your property off the market
for at least the next two to three weeks while they
apply for a loan. As the seller, lets consider the
type of buyer you'd prefer to deal with.
- Neither pre-qualified
nor pre-approved
- This buyer provides no
evidence that they can afford to purchase your
property. You may wonder how serious they are
since they're not at least pre-qualified.
- Pre-qualified
- This buyer has met with
a mortgage broker (or lender) and discussed
their situation. The buyer has informed the
broker regarding their income, expenses, assets
and liabilities. The broker may also have seen
their credit report. The buyer provided you
with a letter from the broker stating an opinion
of what the buyer can afford.
- Pre-approved
- This buyer has provided
a broker written evidence of income, expenses,
assets, liabilities and credit. All information
has been verified by a lender. As a result,
much of the paperwork for this buyer's loan
has been completed. This buyer will probably
be able to close quickly. They provide you with
a letter (pre-approval certificate) from the
lender. You're as certain as possible that this
buyer can close.
As a potential buyer, you can see that being pre-approved
will give you the best chance of getting your offer
accepted. This is critical in a competitive situation.
- Making verbal agreements.
If you're asked to sign a document containing
instructions contrary to your verbal agreements--don't!
For example, the seller verbally agrees to
include the washing machine in the sale, but the
written purchase contract excludes it. The written
contract will override the verbal contract. More
importantly, your state may require that contracts
for the sale of real property be in writing. Do
not expect oral agreements to be enforceable.
- Choosing a lender just because
they have the lowest rate. While the rate
is important, consider the total cost
of your loan including the APR
, loan fees, discount and origination
points. When receiving a quote from a lender or
broker, insist that the discount points (charged
by the lender to reduce the interest rate) be distinguished
from origination points (charged for services
rendered in originating the loan).
The cost of the mortgage, however, shouldn't
be your only criterion. Have confidence that the
company you select is reputable and will deliver
the loan with the terms and costs they promised.
If in the final hours of the transaction you
determine that the lender has suddenly increased
their profit margin at your expense, you won't have
time to start again with a different lender. Ask
family and friends for referrals. Interview
prospective mortgage companies.
- Not receiving a Good Faith
Estimate. Within three business days after the
broker or lender receives your loan application,
you must receive a written statement of fees associated
with the transaction. This is both the law and the
best way to determine what you'll pay for your loan.
Bring the Good Faith Estimate (GFE) with you when
you sign loan documents. You should not be expected
to pay fees which are substantially different from
those contained in your GFE.
- Not getting a rate lock
in writing. When a mortgage company tells
you they have locked your rate, get a written statement
detailing the interest rate, the length of
the rate lock, and program details.
- Using a dual agent--i.e.,
an agent who represents the buyer and the seller
in the same transaction. Buyers and sellers
have opposing interests. Sellers want to receive
the highest price, buyers want to pay the lowest
price. In the standard real estate transaction,
the seller pays the real estate commission. When
an agent represents both buyer and seller, the agent
can tend to negotiate more vigorously on behalf
of the seller. As a buyer, you're better off having
an agent representing you exclusively. The
only time you should consider a dual agent is when
you get a price break. In that case, proceed cautiously
and do your homework!
- Buying a home without professional
inspections. Unless you're buying a new home
with warranties on most equipment, it's highly recommended
that you get property, roof and termite inspections.
This way you'll know what you are buying. Inspection
reports are great negotiating tools when asking
the seller to make needed repairs. When a professional
inspector recommends that certain repairs be done,
the seller is more likely to agree to do them.
If the seller agrees to make repairs, have your
inspector verify that they are done prior to close
of escrow. Do not assume that everything was done
as promised.
- Not shopping for home insurance
until you are ready to close. Start shopping
for insurance as soon as you have an accepted offer.
Many buyers wait until the last minute to get insurance
and do not have time to shop around.
- Signing documents without
reading them. Whenever possible, review
in advance the documents you'll be signing.
(Even though some specifics of your transaction
may not be known early in the transaction, the
documents you'll sign are standard forms and are
available for review.) It's unlikely that
you'll have sufficient time to read all the
documents during the closing appointment.
- Not allowing for delays
in the transaction. In a perfect world,
all real estate transactions close on time. In the
world we live in, transactions are often delayed
a week or more. Suppose you asked your landlord
to terminate your lease the day your purchase transaction
was scheduled to close. A day or two before your
scheduled closing date, you discover your transaction
is delayed a week. In a perfect world, no one is
inconvenienced and your landlord is willing to work
with you. More likely, however, your landlord is
inconvenienced and angry. Will you be thrown out?
Will you have to find interim housing for a week
or more? The eviction process takes a little time,
so the Sheriff won't immediately remove you, but
this type of stress-producing episode can be avoided.
How? Terminate your lease one week after your real
estate transaction is scheduled to close. That way,
if there is a delay in closing your transaction,
you have some leeway. This approach might cost a
little more, then again, it might not.
Refinancing
your home
- Refinancing with your existing
lender without shopping around. Your existing
lender may not have the best rates and programs.
There is a general misconception that it is easier
to work with your current lender. In most cases,
your current lender will require the same
documentation as other companies. This is because
most loans are sold on the secondary market and
have to be approved independently. Even if you have
made all your mortgage payments on time, your
existing lender will still have to verify assets,
liabilities, employment, etc. all over again.
- Not doing a break-even analysis.
Determine the total cost of the transaction,
then calculate how much you will save every month.
Divide the total cost by the monthly savings to find
the number of months you will have to stay in the
property to break even. Example: if your
transaction costs $2000 and you save $50/month,
you break even in 2000/50 = 40 months. In this case
you'd refinance if you planned to stay in your
home for at least 40 months.
Note: This is a simplified break-even
analysis. If you are refinancing considering switching
from an adjustable to a fixed loan, or from a 30-year
loan to a 15-year loan, the analysis becomes
much more complex.
- Not getting a written good-faith
estimate of closing costs. See item number four
above.
- Paying for an appraisal
when you think your home value may be too low. Have
the appraisal company prepare a desk review appraisal
(typically at no charge) to provide you with a range
of possible values. Your mortgage company's appraiser
may do this for you. Do not waste your money on
a full appraisal if you are doubtful about the value
of your home.
- Using the county tax-assessor's
value as the market value of your home. Mortgage
companies do not use the county tax-assessor's value
to determine whether they will make the loan. They
use a market-value appraisal which may be very different
from the assessed value.
- Signing your loan documents
without reviewing them. See item number nine
above.
- Not providing documents
to your mortgage company in a timely manner.
When your mortgage company asks you for additional
documents, provide them immediately. They are
doing what's necessary to get your loan approved
and closed. Delays in providing documents can result
in a costly delays.
- Not getting a rate lock
in writing. When a mortgage company tells
you they have locked your rate, get a written statement which
includes the interest rate, the length of the
rate lock and details about the program.
- Pulling cash out of your
credit line before you refinance your first mortgage. Many
lenders have cash-out seasoning requirements. This
means that if you pull cash out of your credit line
for anything other than home improvements, they
will consider the refinance to be a cash-out transaction.
This usually results in stricter requirements and
can, in some cases, break the deal!
- Getting a second mortgage
before you refinance your first mortgage. Many
mortgage companies look at the combined loan amounts
(i.e., the first loan plus the second) when refinancing
the first mortgage. If you plan on refinancing your
first loan, check with your mortgage company to
find out if getting a second will cause your refinance
transaction to be turned down.
- Not knowing if your loan
has a pre-payment penalty clause. If you
are getting a "NO FEE" home-equity loan, chances
are there's a hefty pre-payment penalty included.
You'll want to avoid such a loan if you are planning
to sell or refinance in the next three to five years.
- Getting too large a credit
line. When you get too large a credit line,
you can be turned down for other loans because some
lenders calculate your payments based upon the available
credit--not the used credit. Even when your equity
line has a zero balance, having a large equity line
indicates a large potential payment, which can make it
difficult to qualify for other loans.
- Not understanding the difference
between an equity loan and an equity line. An
equity loan is closed--i.e., you get all
your money up front and make fixed payments until
it is paid if full. An equity line is open--i.e.,
you can get numerous advances for various amounts
as you desire. Most equity lines are accessed through
a checkbook or a credit card. For both equity loans
and lines, you can only be charged interest on the
outstanding principal balance.
Use an equity loan when you need all the money up
front--e.g., for home improvements, debt consolidation,
etc. Use an equity line when you have a periodic
need for money, or need the money for a future event--e.g.,
childrens' college tuition in the future.
- Not checking the lifecap
on your equity line. Many credit lines
have lifecaps of 18 percent. Be prepared to
make payments at the highest potential rate.
- Getting a home-equity loan
from your local bank without shopping around. Many
consumers get their equity line from the bank with
which they have their checking account. By all means,
consider your bank, but shop around before making
a commitment.
- Not getting a good-faith
estimate of closing costs. See item number
four above.
- Assuming that your home-equity
loan is fully tax-deductible. In some instances,
your home-equity loan is NOT tax deductible. Do
not depend on your mortgage company for information
regarding this matter--check with an accountant
or CPA.
- Assuming that a home-equity
loan is always cheaper than a car loan or a credit
card. Even after deducting interest for
income tax purposes, a credit card can be cheaper
than a credit line. To find out, compare the effective
rate of your home-equity line with the rate on your
credit card or auto loan.
Effective rate = rate * (1 - tax
bracket)
Example: The rate of the home-equity line is 12
percent,your tax bracket is 30 percent, your effectiverateis: .12 * (1 - .3) = .12 * .7 = .084 = 8.4
percent.
If your credit card is higher than 8.4 percent,
the equity loan is cheaper.
- Getting a home-equity line
of credit when you plan to refinance your first
mortgage in the near future. Many mortgage companies
look at the combined loan amounts (i.e., the first
loan plus the second) when refinancing the
first mortgage. If you plan on refinancing your
first, check with your mortgage company to find
out if getting a second will cause your refinance
to be turned down.
- Getting a home-equity line
to pay off your credit cards when your spending
is out of control! When you pay off your credit
cards with an equity line, don't continue to
abuse your credit cards. If you can't manage
the plastic, tear it up!
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