Mortgage Rates Have Dropped: 10 Mortgage Shopping Mistakes You Don’t Want to Make
With mortgage rates dropping earlier this month to some of their lowest levels since April 2023, now could be a good time to buy a house or start mortgage shopping to secure a favorable interest rate. However, it’s crucial not to rush the process or overlook essential steps and potentially jeopardize your mortgage deal. This could lead to a higher rate than you can afford or, worse, no loan at all — neither of which is a good option for a prospective homebuyer.
Shopping for and securing an affordable mortgage loan is no easy feat; it takes time, research, and effort. And, considering it’s a commitment you’ll be locking yourself into for the next 10, 15, even 30 years to come, you need to do all you can to ensure you get the best, most affordable deal possible.
Do you want to make sure your mortgage loan comes through smoothly? That you get a great rate? Whether you’re a first-time homebuyer or looking to refinance your mortgage, make sure to avoid the all-too-common mortgage shopping mistakes listed below.
1. Overestimating how much you can afford
Before you start mortgage shopping, it’s crucial to know how much home you can afford. While the lower rates might make home-buying more appealing, you don’t want to waste time applying for a loan you won’t qualify for or start house hunting and realize you’re looking at homes outside your budget.
Your monthly mortgage payment includes more than just the loan amount — it also covers taxes, homeowners’ and mortgage insurance, and HOA fees. Many borrowers make the mistake of underestimating their monthly bills by not accounting for these additional costs.
You can also use a mortgage calculator to estimate your monthly mortgage payment. A mortgage calculator can help you estimate the cost of a home purchase by allowing you to plug in where you live, your annual income, how much you have saved for a down payment, and what your monthly debts or spending looks like to help you set a realistic budget.
2. Ignoring your credit
Even with lower interest rates, your credit score remains a major factor in determining the mortgage rate you’ll qualify for. That’s why, before you start thinking about buying a home, it’s essential to take a close, thorough look at your credit. Generally, you want a score of 650 or above, but the higher the better.
If you’ve had lots of late payments, loads of credit card debt, or you’ve just got a lower score, you may want to take some time to increase your credit score before you jump into the mortgage process. It’ll save you time and money in the long run.
3. Not mortgage shopping with a purpose
Don’t make the mistake of dragging on your search when mortgage shopping. Depending on your lender, a shopping window typically ranges from 14-45 days, so it’s best to stick with a 14-day timeframe to be on the safe side. Mortgage rates can fluctuate so it’s a good idea to move quickly if possible and lock in a rate once you find a deal that meets your needs.
Does shopping around for a mortgage hurt your credit? While your credit score allows for a shopping timeframe, a hard inquiry may temporarily deduct a few points off your credit score. However, credit scoring models recognize when a buyer is mortgage shopping, so if you happen to see your credit score drop a few points, don’t panic. Even if you’re applying for several mortgages, they’ll only count as a single inquiry if they’re within the same two-week timeframe. Plus, a hard inquiry only makes up a small percentage of your credit score and will lessen over time.
4. Opening new credit or making large purchases during the mortgage process
When you’re applying for a mortgage, your lender watches your finances like a hawk. If you open a new credit card or make a big purchase (like that new car you’ve been eyeing), it could send red flags that you may not be responsible with your money. Also, avoid racking up any large debts or applying for other types of loans when shopping around for a mortgage. The last thing you want is to jeopardize your chances of getting a good rate.
5. Choosing the first lender you find
Lenders don’t just differ in the loan products and rates they can offer, but they differ in service too. Some lenders will originate the loan and then hand you off to another company when the deal closes. Others will be by your side for years and years to come — as long as you own the home. Do your research and learn all you can about a potential lender before selecting yours.
6. Skipping the pre-approval
Pre-qualification and pre-approval exist to help you when you’re shopping around for a mortgage. Not only can they verify that you’re financially qualified to purchase a home (long before you start looking), but they also let you know what size loan you can afford. The first step is to get pre-qualified to give you an idea of how large of a loan you’ll qualify for. During this step, you’ll learn about different mortgage options available so you can find the one that’s the right fit for your budget and goals.
Once that’s done, your next step should be getting pre-approved by a mortgage lender. Getting pre-approved can make finding potential properties much easier since it gives you a better idea of the interest rate you’ll pay and your loan amount. It also indicates that you’re a serious homebuyer and may help strengthen your negotiating power if you’re up against competing offers.
7. Forgetting about other homeownership costs
When mortgage shopping, don’t make the mistake of thinking the mortgage is all you’ll have to pay for. Homeownership comes with all kinds of costs from electricity, water, and energy to repairs, maintenance, and general upkeep. For these reasons, you usually don’t want to get a loan at the very maximum end of what you can afford. You may have more to pay for than you think.
8. Ignoring the APR
Looking at a lender’s mortgage rate will certainly give you an idea of cost, but the APR is the true point of comparison. Most homebuyers make the mistake of solely comparing interest rates when shopping for a mortgage, but they can be misleading. A lender’s APR includes all the fees, points, closing costs, and other expenses that go into the loan, giving you much better insight into the total costs over time. APR is the only accurate way to compare lenders, so make sure you know APRs before choosing a mortgage company for your new home.
9. Scrimping on the down payment
Yes, an FHA loan will allow you to put down just 3.5 percent, but is that really the best idea in the long run? With a small down payment, you’ll have a few costly repercussions. For one, you’ll have to get private mortgage insurance that will last for some years into the loan. On top of this, your loan will also take much longer to pay off, ultimately paying more on interest over the life of the loan.
10. Not checking for prepayment penalties
Paying off a loan early might seem like a good idea, right? Not so fast. While it may seem like a cause for celebration, paying off all or part of your loan before the loan’s maturity date can incur a prepayment penalty. It’s worth noting that while VA, FHA, and USDA loans don’t come with prepayment penalties, conventional loans do. The best way to avoid this mortgage shopping mistake is by looking closely at the terms and fees and selecting an option that doesn’t carry any.
When you apply for a mortgage, the lender will give you a loan estimate that includes details about the loan, including the costs and terms. The loan document will also specify if there’s a penalty for paying off the loan early, along with the amount of the penalty and when it may apply.
Should you shop around for a mortgage?
The short answer is yes. A mortgage is one of the largest financial investments you’ll make in your lifetime, so it pays to shop around for a mortgage to get the best deal possible. Even a slight difference in interest rates can add a considerable amount of money over the life of the loan.
For this reason, it’s wise to do a bit of mortgage shopping rather than settling on the first offer you’re presented with. While the internet is a good place to start, talking to different lenders can help you understand the loan package best suited for you. Remember, no two mortgages are the same, and quotes can vary from lender to lender. Talk to different lenders about your ideal loan amount, type of loan, and loan terms so you can make comparisons.
Redfin does not provide legal, financial, or tax advice. This article is for informational purposes only, and is not a substitute for professional advice from a licensed attorney, financial advisor, or tax professional.
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