Buying and financing a home is the most important personal financial decision we will make in our lifetime. Over a lifetime, the average homeowner may pay one-half of a million dollars or more in mortgage interest, many times more than any other single expense.
Yet, the process and substance of home finance remains a mystery to the average American. We tend to know much more about our automobiles than we do about the mortgages that make our home purchase possible. Because of our unfamiliarity, many Americans have no idea if they are making the right decision in relation to their personal financial situation. This is because we tend to make up to ten essential mistakes when involved in the home buying process.
We do not have a relationship with a loan officer. An individual formulates a multitude of professional relationships in his or her lifetime. These include a doctor, attorney, accountant, financial planner and even a car dealership. We tend not to have a relationship with a mortgage lender because the need for the home finance transaction arises much less frequently than our trips to other professionals such as a tax preparer. With the advent of adjustable rate mortgages and refinances, chances are you will need the help of a professional more frequently. If you have no relationship with someone qualified, you are much less likely to find qualified advice when the need arises.
We have no idea whether the lender we pick is qualified. Since we do not tend to have long-term relationships, we do not tend to shop for the right reasons. We know how to ask about a company’s rates, but not the background of the entity with whom we are dealing. For example, what is their experience level? You are about to make your most important financial decision. Would it not make sense to check references?
We do not know how to shop. Most homebuyers know how to ask: what is your rate on a mortgage? We do not know how to ask about lock options, miscellaneous fees, annual percentage rates, or even the variety of programs available.
We do not know enough about mortgages in general–especially how the choices might affect our economic gains or losses. Since we do not know about mortgages, it is not likely we will know how to shop or what to look for in a mortgage. We tend to know that there are fixed rates and adjustables. We may not know that there are options that may require less of a down payment or closing costs. We tend to be clueless when asked how the down payment might affect our overall rate of return on our investment in the long run.
We think we know what type of loan we would like–without knowing all the options. Many of us begin by shopping for a 30-year fixed or a one-year adjustable because we are familiar with only one or two options and we have made our decision. There are several additional major loan types that should be considered. Are you familiar with buydowns, long-term ARMs and 20-year loans?
When we refinance our mortgage, we forget about the long-term. With lower rates, we think that we come out ahead when we refinance. Many times, we use the equity in our homes to finance additional debts. It seems very attractive to lower a payment from $500 monthly to $200 by stretching out the term. Did you know there are options that can accelerate your mortgage payoff?
We have no idea how the approval process works. Many of us sign a contract to purchase a home and then address the idea of obtaining a mortgage. Most do not know that it makes more sense to obtain an approval first. This helps our own piece of mind while we shop and also increases our bargaining power with the seller.
We do not know that the lock options may be as important as the rate. Most shoppers have no idea that many lock options exist. There are options which allow us to lock in the rate and points from 15 to 90 or more days. Some of the lock options may cost money up-front and the fees may or may not be applicable to closing costs. Many people shop different companies in order to save $250 in points and then make the wrong decision with regard to lock options.
We do not know what to ask the lender with regard to their services. The quality and service options can vary. For example, many lenders offer quick approval programs that will allow these lenders to render a decision in a few days. A smaller broker that sends your loan to a larger lender might offer you a wider range of programs than a bank. The important thing is that you are aware of what services are available and that tradeoffs must be made in order to make a final decision.
We are intimidated by the process. Buying and financing a home seems to be a very large task. The reason we become intimidated is that we are not knowledgeable. The decision is important enough to spend time learning. With knowledge comes confidence. With confidence comes the right decisions.