7 Biggest Mortgage Loan Borrowing Blunders

A mortgage loan we take out will probably be our biggest debt ever and knowing how to handle it effectively is extremely important. In this article, we outline the 7 mortgage mistakes you should avoid doing at all costs! This will help your mortgage deal close favorably in your terms and you shall have no problem making those monthly payments:

i) Not Looking for the Best Deal

Check the interest rates offered by dozens of lenders in the American mortgage system. Also, check their closing cost estimates as well as other fees. If you find an interest rate at a quarter point lower, this could save you hundreds of dollars of interest costs every month + tens of thousands of dollars over the life of the mortgage term. Obtain quotes from your local mortgage brokers, banks and lenders.

ii) Not Checking your Credit Report

Do not apply for a loan without checking your credit report first. This is because there may be mistakes on your credit report that will cost you the favorable interest rate you were looking for. For example, if your credit score is lowered thanks to an error on your credit report, and you fail to correct it, you will find it difficult to find a good mortgage loan with a lower interest rate; you will end up having to sign up with a higher interest rate. Read more about this topic @ our 7 step strategy for a successful mortgage deal; Want a Mortgage Loan? Get Pre-Approved!

You can get a free copy of your credit report @ www.annualcreditreport.com

iii) Taking out a Loan that you cannot Afford

One of the biggest mistakes that all borrowers do is borrow beyond their limits, and take out too much debt. Real estators and loan officers also like to entice consumers with stylish more expensive homes than they can really afford to purchase, obviously because they get a bigger cut of the house you purchase.

Here's a piece of advice. Do not let your lender tell you how much of a mortgage loan you can afford to take out. Because this is NOT really what you can afford, it is inflated. Do your own Math, use our mortgage calculators to determine your affordability.

For example, many people will think whatever their lender says they can borrow, means that is the amount they can afford. If your lender shows you a $750,000 house while your income is less than $100,000 a year, obviously he's not on your side, he's out to rip you off!!

Eric Tyson, author of the book "Mortgages for Dummies" says many people fail to look at their current spending budget and how that will change with the new house they will be purchasing.

There is also the emotional effect many consumers feel when purchasing a home. They get so emotionally attached to the property their real estate agent is showing them that they will do whatever it takes to get it; even if that means taking out a mortgage loan beyond their limits.

Read more about this topic on How Much Mortgage Loan Can You Really Afford?

iv) Not Getting Pre-Approved for a Loan

With a mortgage pre-approval, a lender will look at your annual income, expenses, debt, savings and your credit history and determine whether you qualify for a mortgage loan or not. Also, with a pre-approval, the lender will determine how much of a mortgage loan you can really afford to take out. Read a comprehensive review of this topic on Want a Mortgage Loan? Get Pre-Approved!

v) Taking out Dangerous Mortgage Loans

Do not take out dangerous mortgage loans such as interest only Option ARMs to buy more expensive homes than you can afford. Hundreds of thousands of first time home buyers took out Option ARMs because they were promised lower monthly payments than most other types of mortgages. What these buyers were not told was that with these types of loans, they would only be paying the interest; and not building equity into their homes. It's like another way of renting, but at a more expensive price. Also, most of these buyers were shocked when their interest payments rose as early as 1-2 months after they took out the mortgage loan. Most of those buyers currently face foreclosures. Read more about interest only Option ARMs Mortgage Loans.

vi) Agreeing to a Pre Payment Penalty

You could be charged thousands of dollars in pre payment penalties if you pay off your home in the first few years. This prevents many homebuyers from refinancing their mortgage loans or selling their homes when they can't keep up with ever increasing interest payments thanks to adjustible rate mortgages (ARMs). Infact, 7 out of every 10 mortgage loans given to sub-prime borrowers had a pre payment penalty clause attached to them.

vii) Taking Out Piggyback Loans

If you have a down payment of less than 20% on your home, you have to get Private Mortgage Insurance (PMI) that protects your lender from your defaults. This PMI could potentially add several hundred dollars to your monthly mortgage bill. To get your way around that, mortgage brokers often recommend two loans; a primary mortgage for 80% and a home equity loan for the remaining 20%. The home equity loan will serve as the 20% down payment clause and avoid you having to purchase PMI. This idea was sound when interest rates for home equity loans were like 5%, which matches to that of mortgage loans. However, interest rates on home equity loans now hover between 7% - 9%, which makes them a less popular deal. You would actually be better off buying PMI than taking out a home equity loan.