Summer time brings block parties here in Ft Wayne. We close off the street, bring out the BBQs, and have a fine time getting to know the neighbors. One participant, Angie from Hawaii, was visiting her friends on the street. When asked what she does, replied, “I’m a mortgage broker.” Somewhere in the conversation, we started asking her about some common mortgage mistakes.
Angie suddenly took on a serious expression. This, we realized, was important to her.
First, Adjustable Rate Mortgages (ARMs) have been some common mortgage mistakes. Many people took out ARMs that shouldn’t have. They tried to buy as much house as they could. The rates were low and fixed for a certain period of time and then the rates spiked and the homeowner was unable to pay the new mortgage payments, some $500 higher. ARMs can be great if you plan to live in the house less than five years. Longer than that, get a fixed rate for 15 to 30 years.
Second, let the bank assume the risk. When you take out a mortgage for thirty years, you want to bet that interest rates are going higher and the bank who borrows short and lends long to you will face the interest rate risk. You also want to have the ability to refinance. If interest rates go down substantially, you can save a lot of money by paying off the old mortgage and taking out a new lower rate mortgage. BTW, suppose you started with a 30-year mortgage and three years later, you want to refinance. Some common mortgage mistakes would be to choose another 30 year mortgage. You can choose a 27-year or something less.
Third, know that your credit history has an effect on the interest rate you pay. The lowest rate right now may be 3.50%, but if your credit history is spotty, you will pay more than 3.50%. Take a look before you seek a mortgage by pulling your FICO Credit report and repairing any errors. Late payments are killers of your credit score.
Fourth, once you have the loan, try to pay something extra on the loan. If your loan payment is $1,013.00, for example, you could pay $1,100 and the loan will get paid off faster. Not identifying where the extra money is to go is a big mistake. You want the extra to go to reducing the principal and you should say so in the memo area. Without proper identification, the extra money could go to reducing next month’s interest.
Fifth, always add your account number to your payment. Without that number in the memo space, the payment could be added to the wrong account.
Sixth, know the difference between recurring payments and monthly drafts. If you set up a recurring payment, your mortgage company will automatically bill your bank for the latest payment. It may change each year because of taxes and insurance. A monthly draft will be the same each month until you change it. If your mortgage changes, your monthly draft could be under or over the correct amount.
Angie paused. Our mouths were hanging open. She realized she had given us too much information. “Hey,” she said, “Enough about work. Who’s ready for some ribs and potato salad?”
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