Mistakes in Buying, Financing and Refinancing a House

Buying a House

Look for a house without knowing how much you can afford to pay.

Assume that the FHA will protect you from buying a house with major defects.

Assume that stretching your house-purchasing ability to the limit will maximize your

Purchase a house with someone not your spouse without a written agreement.

Assume that you must close on the sale of your existing house before you can close on your new house.

Shop for a mortgage that allows home purchasers to consolidate existing debts.

Buy a manufactured house through a dealer with a package that includes house, installation, site and financing.

Allow the purchaser of your existing house to assume responsibility for your existing mortgage without a release of liability.

Decide in advance that you will consolidate debts in a new purchase mortgage, then only price mortgages that allow it.

Borrow someone else's bank account to show you have the cash reserves needed to buy the house.

Buy a house under a lease-purchase contract that allows the seller to cancel the option to purchase for a trivial violation, such as a single late rent payment.

Finance settlement costs without considering whether it will raise the price of the mortgage.
Building a House

Accept a deal from a builder that ties concessions to use of a preferred lender.

Assess a combination construction/permanent loan without comparing the lender's terms on permanent loans with those of other permanent loan lenders.
Shopping for a Mortgage

Select the loan provider offering the best price over the telephone or in the newspaper.

Assume that rate quotes from loan providers are always given in good faith.

Assume that the rates quoted in the media are the rates at which you can borrow.

Solicit price information without giving the loan provider all the information about your loan that may affect the price.

Accept lender referrals from other borrowers uncritically.

Assume that you can shop lender A today and lender B tomorrow.

Assume that the loan provider who offers the best deal on one type of loan will also have the best deal on another.

Assume that the loan provider offering the best deal at 0 points also offers the best deal at 3 points.

Assume that a payment made by the lender to the mortgage broker is not a cost to the borrower.

Assume that a "discount mortgage broker" will cost you less.

Select a lender without knowing any of the lender charges except points, then try to negotiate other charges afterwards.

Assume that the way to negotiate settlement costs is to make the lender justify each cost.

Assume that it never pays to shop for title insurance.

Assume that since finance charges are deducted from the amount financed, you won't have to pay them.

Allow yourself to be solicited for a reverse mortgage.

Neglect to ask what the margin is on your HELOC.

Assume that the Government requires lenders to disclose everything that is really important to borrowers.

Respond favorably to a solicitation without checking other options.

Confuse a no-cost mortgage with a no-cash mortgage.
Qualifying for a Mortgage

Assume that paying off credit cards on which you have been delinquent will improve your credit score.

Assume that because you are an authorized user of a credit card and not responsible for the payments, you can't be hurt if the responsible party does not pay.

Assume that shopping multiple loan sources will adversely affect your credit rating.

Confuse "qualification" with "approval".

Accepting that you need an adjustable rate mortgage to qualify because the loan officer said so.

Wait until you need a mortgage before paying off an old collection account.
Selecting a Mortgage

Assume that the amount of interest you pay over the life of the mortgage is more important than the interest rate.

Assume that paying points is a loser.

Assume the amount of cash you put into the transaction is the same as the down payment.

Assume that a "no-closing cost loan" is a good deal.

Assume that the cost of mortgage insurance is the premium rate which is comparable to the interest rate.

Assume that ARMs are to be avoided unless you need one to qualify.

Assume that negative amortization is to be avoided at all costs.

Assume that you must pay extra to convert a monthly payment loan into a biweekly payment loan.

Make a large down payment on an FHA loan.

Neglect to ask about the second mortgage lender's policy on subordination.

Neglect to ask whether your loan has a prepayment penalty, and verify the answer on the Truth in Lending (TIL) disclosure statement.

Use the APR to assess the cost of different mortgages, even though you expect to be in your house only a few years.

Use the APR to assess the cost of a cash-out refinance with the cost of a second mortgage, or the cost of different HELOCs.

Believe it when you are told that you will save money with a simple interest mortgage.

If you have a simple interest mortgage, not making your monthly payments early.

Assume that because you are a veteran, your VA loan will be fairly priced.

Believe that an interest-only loan is less costly to amortize, or carries a lower interest rate than the same loan without the interest-only option.

Believe that on an interest-only ARM, the initial rate holds for as long as the interest-only period.

Select a flexible payment ARM without considering the risk of serious payment shock down the road.

Assume that the rate index used by an ARM, such as COFI, Libor, MTA, etc, is all you need to know to assess the ARM.

Base a loan selection on the payment including the escrow payments.

Take a 30-year FRM, even though you can afford the payment on a 15-year FRM, in the expectation that you will invest the cash flow difference.

Confuse the payment rate with the interest rate.
Locking the Price

Allow the price to float on a home purchase transaction.

Accept a mortgage broker’s verbal assurance that the loan has been locked with the lender.

Select a lock period that isn't long enough for the lender to finish processing the loan.

Believe that fixed-dollar lender fees, and rate adjustment caps on ARMs, are covered by locks.
Taking a Second Mortgage

Consolidate existing debts in a new second mortgage without considering the implications for your ability to terminate mortgage insurance, refinance your first mortgage, move to another city, etc .

Raise needed cash with a new second mortgage, or with a cash-out refinance, without comparing the costs of the two alternatives.

Pay for mortgage insurance, or take a second mortgage to avoid mortgage insurance, without considering whether the alternative might be cheaper.

Raise cash by borrowing against a 401K rather than by taking a second mortgage.

Neglect to ask what the margin is on your HELOC.

Neglect to ask about the second mortgage lender's policy on subordination.
Refinancing

Measure the benefit of refinancing by comparing the reduction in monthly payment with the cost to refinance.

Shop your existing lender first, rather than last.

Refinance periodically as a way to raise cash.

Take a no-cost refinance when you expect to be in the house for a long time.

Measure the cost of a cash-out refinance with the APR.

Refinance into a biweekly at a higher interest rate for the purpose of reducing total interest payments.

Taking a cash-out refinance with the cash going to another lender who provides a lower-rate mortgage and assumes responsibility for the cash-out refinance.

Assume that a refinance is a good deal if it results in significant savings over your existing mortgage.

View refinance and prepayment as alternatives.

Refinance without taking advantage of the 3-day right of rescission to ask yourself if the deal will really leave you better off.

Respond to a solicitation for a 1.25% mortgage.

Rely on a mortgage broker or loan officer for advice on whether to select a second mortgage or a cash-out refinance.

Delay a profitable refinance because you have not yet recovered the cost of your past refinance.
Managing the Mortgage

Take out a mortgage for the express purpose of getting a tax deduction

Fail to check if the lender is crediting payments (especially extra payments) properly.

Assume your credit won't be badly damaged if you skip just one payment.

Agree to co-sign for a friend or relative without considering all the implications.

When a financial reversal endangers your capacity to pay the mortgage, do nothing until the lender calls about your delinquency.

When you have excess funds to use to reduce principal on either of two mortgages, allocate the funds to the mortgage on which the largest percent of the current payment is being allocated to principal.

Taking a short-term second mortgage when you can no longer make the payments on the first mortgage, and your credit is shot, but you still have equity in the property.

When you receive notice of an increase in required escrow payments that you know is a mistake, don't pay it.

Throw out mortgage servicing statements after a year or two.

Let the first ARM rate adjustment catch you by surprise.

Stop paying the mortgage in anticipation of the sale of the home.

When you can't afford the upcoming payment on an ARM, wait for the lender to approach you about modifying the contract.

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