The Ten Biggest Mortgage Mistakes and How to Avoid Them

EP 68 - The Ten Biggest Mortgage Mistakes and How to Avoid Them

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Folks, have you ever been so ready to dive head first into homeownership only to feel yourself sinking under the weight of a giant mortgage and all the decisions you have to make about that or felt so lost in the jargon of the mortgage process? You weren't even sure if you're making the right decisions. If that sounds a bit too familiar. Then strap in because today on the Ask Ralph podcast, we're going to talk about the biggest mortgage mistakes. And how you can make sure they don't happen to you. Listen folks, this is one of the biggest financial decisions you'll ever make. So let's dive in and build those strong financial foundations.

 [00:01:00] Welcome to the ask Ralph podcast on another financial Friday, I'm here to help you navigate this huge financial decision. Listen, buying a home is a massive financial decision that comes along with an equal measurement of excitement. And questions it's great to find that dream home. But you have to be careful during this process and make sure you're making wise decisions. Well, I'm sure those of us who already own our homes have some great stories we can tell. Don't fear today, we're going to take a proactive stance and discuss these common mortgage stumbling blocks. We're going to help you purchase process with informed confidence.

And of course, we're always going to view it through the vital lens of our Christian values and principles.

 All right.

Let's kick things off with a granddaddy of mortgage mishaps, not knowing your credit score. If you listen to me for any time, you know, I always harp on this. This magical three digit number is a major factor in the interest rate you qualify for, and therefore can impact your monthly payments by hundreds of dollars. So you might ask Ralph. How does that happen?

Well, think of the score like [00:02:00] this. The higher your credit score number, the more trustworthy you appear to lenders. That's the key to this. The better your score, the better your rates are going to be the better you're going to appear to lender. So how do you. Fix that. Well, the first thing you need to do is understand your credit report.

So I'm going to give you a website to go to here and you get a copy of your credit report@annualcreditreport.com. I encourage you to get your credit report, look at it and dispute anything that's incorrect. Those things could be destroying your credit score. Also build up your credit. You know, pay your bills on time.

Keep your credit card balances low . Don't constantly open new accounts. It might take time, but your score will be grateful. So let's add a bit of Bible reflection to this In Proverbs 22 7, it says the rich rule over the poor. And the borrower is a slave to the lender. Now listen, folks, there's nothing wrong with taking on responsible debt, but don't let a poor credit score become a shackle in the process.

Aim to be a good steward of your finances .

So let's move on to mistake number two and that skipping [00:03:00] pre-approval. I know, I know you found the perfect house. Time is of the essence, your realtor, is saying, we got to make an offer. We got to do this right now. But rushing in without a preapproval letters like driving with your eyes closed, you're not going to make out well with that. A pre-approval letter essentially solidifies your financial standing in the eyes of a lender.

Here's why it's important. The first thing it does is helps, you know, your limits. You're not going to have that heartbreaking disappointment when your dream home turns out to be out of reach. You know, they're going to be real with you. They're going to say here's what you really can't afford Ralph. The other thing is, and the truth is most of the time seller's going to require this. And they take you seriously.

If you have a preapproval letter, imagine two offers. One with cash in hand and one still figuring out their finances who gets the keys. Well, I'm gonna tell you right now, the seller is going to do the one that's cash in hand. So at least if you have that preapproval letter, You'll be better off in the process.

So let's take a Bible reflection on this one as well. Proverbs 21 5 tells us the plans of the diligent lead to profit, as surely as haste leads to poverty. So the key is don't [00:04:00] rush blindly into such a big decision. take a look at this, understand that preapproval letter, what are you buying into?

 what is it going to cost you?

Let's move on to mistake. Number three.

And that's not shopping around for lenders. Yes. It's true. You can shop for a mortgage. Now. Loyalty is a virtue. But not when it costs you serious cash. Different lenders offer different rates and terms. Now I'm going to give you a couple online resources where you can go look at this information in more depth.

The first one is bankrate.com. And the other one is nerdwallet.com. those are great websites to use to compare different mortgage lenders. they'll give you their current rates. They'll give you their underwriting procedures and all that sort of thing. And another thing I can't stress this enough. Don't forget about your community banks and credit unions.

Sometimes they offer even better deals. if you're a member of a credit union, contact your credit union, see if they have a mortgage. group that will help you there. So let's take our Bible reflection here and that's Proverbs 14, 15 says the simple believe anything. But the prudent give thought to their steps.

So do [00:05:00] your due diligence and choose wisely. Find that mortgage company that fits your needs and is the best for you to work with.

Let's move on to mistake. Number four.

Overstretching your budget. the truth is it's tempting to bite off more than you can chew.

Unfortunately, I've seen this in my practice many times. Husband and wife come in. They just bought their dream home. And then they finally realized that they made a huge mistake because the cost are so much more than they expected. Your dream home can turn into a nightmare. And it's a constant stress point over the payment.

So the first thing you need to do is be honest. look at your budget factor in not just a mortgage, but taxes, maintenance, one of the things that people don't think about. Is your insurance costs are going to be higher than when you were renting. Depending upon the square footage of your house, your utility costs might be quite a bit more.

There's a whole bunch of things that you have to consider. So what we say here is do a stress test. Can you handle the payments if your income drops. Or if interest rates rise. Now we'll talk about the different types of mortgages that might insulate you from that problem. [00:06:00] But how about if your income drops, if you're a two wage earner, both husband and wife are working in the home and one of you loses your job.

What does that look like? I mean, that's something you gotta be honest with yourself about. So let's take a Bible reflection here and that's in Eccelesiates these chapter five verse 10 reminds us. Whoever loves money. Never has enough. Whoever loves wealth is never satisfied with their income. Here's the deal. It's wise not to become a slave to a house payment. I don't know how many times I've heard that from my client.

 they're a slave to their mortgage. Don't let that happen to you. Plan wisely and look at your budget

now.

Mistake number five. Not putting enough down. While there are low down payment options. Hey, one first time I bought a house. I was 21 years old. I think I put down 2%. The truth is the more you put down the better off you'll be.

Here's why. It's very simple. The more upfront cash equals a smaller loan and less paid off each month. So you're going to reduce your payments. If you put more money now. Here's a big one. If [00:07:00]you were able to put more than 20% down, you're going to eliminate, what's called private mortgage insurance.

You might've heard this called PMI. This adds hundreds of dollars to your monthly mortgage payment because it's insurance. That the lender buys in the event that you default don't make your payments. If you put more than 20% down, you don't have to pay that. So let's look at a Bible reflection. Proverbs chapter 13, verse 11 says dishonest money dwindles away.

But whoever gathers money, little by little makes it grow. patience and saving can make a huge difference over time. So, if you're thinking about buying a home, pay attention to saving for that, build up that down payment money.

Let's move on to mistake. Number six.

And that's choosing the wrong mortgage type.

And we talk a little bit about this a few minutes ago. There are fixed rate. Adjustable rate 15 year, 30 year. It's enough to make your head spin. In fact, I just heard in California, they're doing 40 year mortgages. Can you imagine. Understanding these different options is vital. So let's break it down. You asked me what [00:08:00] Ralph, what is a fixed rate mortgage?

This is the classic choice. Your interest rate stays the same over the life of the loan. If you get a 30 year loan, your interest rate today is going to be the same at as 30 years from now. It's a very predictable. It's great for longterm peace of mind. Now, the problem with that is if we're in a situation where mortgage interest rates are high, then you might be locking into a high rate forever.

So there's this thing called an adjustable rate mortgage, or you may have heard it called an arm. These have lower initial interest rates, but the rate can change after a set period, meaning payments will go up or down. Obviously that's a calculated risk. It's good. If you plan to sell before the rate adjusts, if you think the interest rates might decrease.

So if you're in a situation where. You think interest rates are high, but in the next, you know, six to 12 months, they might go down than an arm might be a good choice for you. Now here's the classic decision. I get this question constantly from my clients. Ralph do I do a 15 or 30 year mortgage? Well, let me explain it. A 15 year mortgage [00:09:00] usually has a lower interest rate for taking less risk. the bank isn't locking up their money for that full 30 years, which can save you thousands of dollars over the loans life.

But here's the problem. If you're only amortizing that payment over 15 years. Your payments going to be higher now that's the trade off for having lower interest rate your payments going to be higher. Whereas 30 year mortgage, a more common. You know, that's the set it and forget it. And I'm going to do it for 30 years.

My payment's going to be this, but the problem with doing that is you're going to pay more interest overall. So here's a quick tip. I tell clients this all the time. Get the 30 year mortgage, but pay it based on a 15 year amortization. So what does that mean? Ralph. Okay. So let's say you get that 30 year mortgage.

Now, the reason I tell you to do that is if you have a slow month or you. or have a downturn in your income. You're not going to lose your home. You can still make that basic payment. But what you would do is say, okay, so let's say a simple example. You buy a $200,000 house and your monthly mortgage payment is $1,500.

That's a [00:10:00] 30 year mortgage rate payment. What I'm saying to you is instead of paying $1,500, run that amortization at 15 years, it may be your payment would be $2,000. So go ahead and pay the $2,000 a month. And what you'll find is you'll pay off that mortgage. Quicker, you'll save a ton of interest over the life of the loan.

Now, just remember. The reason that you do it that way is if you have a loss of an income or you have a disability or something like that, you're not paying that high payment. You can always revert back to that 30 year payment. So let's talk about a Bible reflection here. and I going back to Proverbs again?

And this is chapter 27. Verse 12 tells us the prudent, see danger and take refuge, but the simple keep going and pay the penalty. listen folks don't pay the penalty. Choose the mortgage type that aligns with your risk tolerance and long-term financial goals. Don't get trapped in a situation you can't handle. It's really that simple.

Let's move on to mistake number seven.

And that's neglecting closing costs. Ah, those sneaky fees that a lot of people don't know to expect and they get them [00:11:00] about two days before closing. Closing costs can amount to thousands of dollars and can vary depending on when your lender. So when you're going through this process, Ask questions. Get a complete detailed list of closing costs upfront before committing.

Now a lot of lenders don't like to do that. But they have an obligation to do that. They've got to tell you within so many days of your application, here's your expected closing costs now, before you even get there. Talk to a professional and find out what those look like, because you might have 20% saved down payment, but you're not expecting all of the closing costs to go along with that.

And trust me, that can be a lot of money. At the same time negotiate in this process, some fees are negotiable. So don't be afraid to ask if it's possible to lower any. So what's our Bible reflection here. Will you go to book of Luke? Chapter 14 verse 28 reminds us suppose one of you wants to build a tower. won't you first sit down and estimate the cost to see if you have enough money to complete it. See folks there's wisdom in knowing the true cost of home ownership.

Let's move on to myth number [00:12:00] eight and that's ignoring a home inspection.

And trust me, I've been here. When I first bought my first house, it was a townhouse. In Newark, Delaware. And I said, you know what? I am really cutting it, close to having enough money to settle. I'm not even going to bother doing a home inspection. Well, that turned out to be a big mistake.

 Skipping a home inspection is like buying a car without even looking under the hood. Now, the truth is if I looked under the hood, I'm not sure I'd know what I'd be looking at anyway. So maybe that's not a great analogy, but see, the thing is

Even seemingly perfect homes can have hidden issues. Hire a pro a qualified inspector can spot potential problems like structural damage or plumbing woes that could end up costing you dearly. If you known up front. You know, when I bought that first townhouse, there were some issues I had no idea about.

There was actually a crack in the foundation. Now, fortunately, we were able to get it fixed, but. Had I had a home inspection. I might've walked away from that deal. At the same time, this gives you the ability to negotiate repairs. If you find issues, you can negotiate with the seller to fix them before closing our ask for a price reduction. You know, a good realtor will say to you, Hey, let's build [00:13:00] in a contingency for a home inspection so that if something's found you're not going to be on the hook for all those things.

Let's look at Proverbs 25, 28, like a city whose walls are broken through as a person who lacks self-control. a, faulty foundation, both physically, within a home and a metaphorically in terms of your financial situation can spell disaster. So spend a couple hundred dollars and get that home inspection.

Let's move on to mistake number nine.

And this is kind of a balance with the thing I talked about a few minutes ago, and that is the down payment. It's tempting to drain your bank account for the down payment, but you need to remember this. You need a safety net. Unexpected repairs are going to pop up. If your buying a new home or moving into a new home for you, they're going to be things that you're not expecting that you're going to have to be prepared for.

You know, life throws you curve balls. So maintain some reserves, keep at least a few months worth of expenses in an emergency fund, even after buying your home that the truth is most mortgage companies are going to look at that and they're going to make sure you have enough reserves, but you have to pay attention to that.

 Proverbs 2120 states [00:14:00] in the house of the wise are stores of choice, food and oil. But a foolish man devours, all he has. Well, I think that says it more eloquently than I can. It's vital to have resources set aside for the unexpected. And I preach about this all the time. Have that emergency fund be prepare for contingencies.

And last but not least.

Mistake number 10 is not thinking longterm. And here's the thing you got to ask yourself. Are you planning to stay in this house for five years, 10 years, 20 years. Your long-term goals matter in deciding what you're going to do. You know, think about it.

If your family might grow or if a job relocation is in the cards, choosing a mortgage that fits into that bigger picture is vitally important. You know, if you think, you know what, I'm only going to be here a couple years. Well then getting a 30 year fixed rate mortgage might not make sense. You know, you might look at an adjustable rate because worst case scenario, you're going to be refinancing it in five years and moving on. So James four 14 reminds us. Why. You don't even know what will happen tomorrow.

What is your life? You're a mist that [00:15:00] appears for a little while and then vanishes. So the truth is while we make plans, it's wise to hold them loosely. You got to trust in God's guidance and provision. And that goes along with everything I've said today.

Now that's a lot to digest.

It's true. Navigating a mortgage can be a maze. It can be scary. It can be overwhelming. Well, remember folks, knowledge is power and I hope today has given you some knowledge. By avoiding these common mistakes.

You're giving yourself a huge headstart towards a smooth and financial responsible home buying experience. And for those who already have a mortgage. Take these tips as a chance to reevaluate any areas where you could potentially save. I had a client in yesterday. Already owned his home. And he said to me, Ralph, I don't know a lot about this, but I'm thinking about doing a refinance.

I'm thinking about, getting a home equity loan. So all of these things could play right into that, understand the different options, understand the rates. Oh, before we close today, let me just remind you to go to our podcast page. That's at askralphpodcast.com. I encourage you to leave a review, share your thoughts, or send a message with the questions you have for future episodes.

If you find value. in what we do today. [00:16:00] Listen, folks. Tell somebody, if every listener tells another person we'll double our audience and we can help more people. And while you're there, make sure you join our email list to enter into our weekly Amazon gift card drawing. You don't want to miss out on that every week.

We're drawing. Another name that we're going to send a $25 gift card just for being a member of our mailing list. And while you're there, if you're interested in set up a consultation meeting to talk about mortgage process or talk about a refinance project. Do that you can just go to askralphpodcast.com/store and there you can schedule an appointment with me and I'll help you individually.

Remember everyone stay financially savvy, and God bless you during all of these difficult financial decisions. [00:17:00]