No matter how affordable the home, mortgage borrowers typically pay hundreds of thousands of dollars in interest. For this reason, a half-percentage-point difference in interest rate can make a big difference in the amount you pay over time.
Most borrowers do some research before they take out a mortgage, but they stop thinking about it once they’re settled in the new home. This can be a costly mistake. Whether you’re planning to stay in your current home for years to come or are starting to shop around for the new place, we’ve put together a list of some of the biggest mortgage mistakes homeowners typically make and the best ways to avoid them.
1. Avoiding Automatic Payments
When you first get your mortgage, you decide whether to pay by automatic withdrawal or by cheque. Most people select the withdrawal method, but some lean toward paying by cheque. It can feel good to know you have control over when the bank takes money out of your account.
However, those who pay by cheque are more likely to miss a payment. You may hold off because you don’t have the money in your account or the cheque may simply get lost in the mail. Either way, missed mortgage payments can incur fines and put you at risk of foreclosure if you miss too many. They may even prevent you from getting your next mortgage despite a good credit score.
Fortunately, most banks will let you specify the date of withdrawal. You can set up the payment to coincide with your paydays so you’ll always have money in the account.
2. Not Locking Your Rate
Variable interest rates are attractive because they start out lower than fixed interest rates but you might be in for a surprise after a few years. A big increase in rates can add hundreds of dollars to your monthly payment, causing you to struggle to make your payments. These loans work best for those who expect to sell the home in a few years. Anyone who wants to live in their home more than five years should get a fixed-rate mortgage.
3. Ignoring the Current Mortgage Market
When your mortgage payments are affordable, you’re probably not paying any attention to what’s happening in the housing market. This can cost you money. Interest rates change all the time and you could get a better deal by renegotiating your mortgage. This is especially true if your credit has increased since you got your first mortgage. Refinancing the mortgage could lower your payment. In doing this, you’ll pay off the loan sooner and pay less interest overall. Keep in mind, you pay fees when you refinance and you may be extending the term of the loan.
4. Not Shopping Around
If you’re going to refinance or if you’re looking to buy a new home, you need to shop around. People tend to stick with their preferred bank, a local provider, or the builder's preferred lender. There may be advantages to these types of lenders but it’s always smarter to compare the options. It takes time to do this but it could save you tens of thousands of dollars in the end.
5. Consulting Biased Sources
You’re probably not a mortgage expert, so when you have questions you need to ask people who have a better understanding. Remember, though, your mortgage lender wants your business. This doesn’t mean they’ll lie to get your business but they’re more likely to portray negative aspects in a positive light. Don’t rely solely on your lender to get information. Do some online research or check with a financial adviser who works at a non-profit institution.
6. Carrying Two Mortgages
Ideally, you want to time the sale of your home and the purchase of the new one so there’s little overlap. Those who want to buy a brand-new home or who are having trouble selling the current one may find themselves in a bind. You may consider carrying two mortgages to get by but this is often a huge monthly expense.
Carefully plan your finances in this situation. Think about how long you can handle the two payments and what you’ll do if your home still doesn’t sell. Talk to lenders about the best ways to finance both homes. For instance, you may be able to take out a home equity loan for just the down payment on a brand-new home so you’re not dealing with two full mortgages.
7. Overestimating the Next Down Payment
You’ve been making payments on your current mortgage with the understanding you’d use your equity as a down payment on your next home. Don’t overestimate how much of this equity you’ll be able to use, though. Remember even if you have $100,000, it may only result in $75,000 that can go toward the next home after legal fees, closing costs, etc. Look into homes that are affordable even without the large down payment you’re expecting.
Your home is a big investment, so pay careful attention to your mortgage. By following our advice, you're sure to stay ahead of the game and maybe even pay your mortgage off faster.