It’s difficult to buy that home for sale in Portland, OR, without taking out a mortgage. After all, not many of us have hundreds of thousands of dollars in cash sitting around just waiting to be spent. With the median price of homes in America resting right under $200,000, a home loan is the only option for most of us who want to own.
When we’re talking numbers like this, it’s no surprise that a mistake when trying to figure out how much house you can afford — and how high a monthly mortgage payment you can handle — can cost you big time. From failing to comparison-shop to forgetting about extra costs, it’s important to avoid these four mortgage calculation mistakes when buying your new home.
Not knowing your credit score
Not understanding your credit score is a big mortgage calculation mistake, because your credit score impacts the interest rate you’re likely to receive on your loan. And that interest rate can mean a difference of tens of thousands of dollars saved or spent over the life of your mortgage.
It’s tempting to give yourself a great interest rate when using mortgage calculators to estimate your monthly payment. But you may not be able to secure a 4% rate if your credit score is poor — which would mean your estimate could be very different from your reality.
Know your credit score and understand whether it’s good (and therefore likely to help you get a lower interest rate) or not. If your score is poor, take a step back from the home-buying process and work to raise your numbers first. Doing so can save you serious cash over the long run.
Failing to comparison-shop
Another mortgage calculation mistake tied to your interest rate? Forgetting to comparison-shop for the right lender. Not all lenders will give you the same terms on a loan. It’s worth the effort to find out if you could secure a better interest rate with one lender over another.
Before deciding on one institution to work with for your mortgage, ask for quotes from a number of different banks and lenders. Plan to ask for quotes from each within the same week. If you gather a number of quotes within a 14-day window, they’ll all count as one inquiry on your credit score.
Failing to account for all costs
While mortgage calculators can be really helpful and show you lots of useful information, they’re only as good as the numbers you plug into them. A calculator designed to show you your monthly mortgage payment will provide you with an estimate of how the loan’s principal and interest breakdown on a monthly basis — but it can’t show you what your properties taxes will be, and it may not take into account your specific homeowner’s insurance policy.
Forgetting to factor in these additional costs, along with all the other expenses associated with homeownership, can add up to a big calculation mistake on how much you’ll owe each month.
Not learning about the whole process ahead of time
Did any of the above sound foreign to you? If so, it’s time to head back to the drawing board and focus on education first. To be a savvy consumer who makes the most of their money and avoids costly mistakes, it’s important that you understand the mortgage process from start to finish.
Start by reading up on the mortgage industry. Create a list of questions that you need more details about and take them to a trusted professional. You can talk with a real estate agent, attorney, or better yet, a fee-only financial planner. Look for someone who can work as your fiduciary to get your financial questions answered.
Taking the time to inform yourself first is the best investment you can make in this entire process.
