Mortgage Mistakes

There's nothing that can ruin the thrill of buying a new home more than the immediate financial trouble from an unbearable mortgage. A lot of people, unfortunately, make some very big mistakes when choosing their mortgage. And more often than not, it leads to serious problems.

Here is a list of three big mortgage mistakes a lot of home buyers make. Avoid these traps and it will go a long way to improve your life. And remember, you are the one that needs to make the decisions about your mortgage. Don't let your Real Estate agent or your banker talk you into a mortgage that's not right for you. And don't just accept the first offer you get. Be selective. Be careful. Keep it in your mind that this is an important decision, and it may affect you for the next 15, 20 or 30 years.

MISTAKE #1: Choosing the Wrong Mortgage

You have to use some common sense when selecting a mortgage. Don't get a variable rate mortgage that's going to jump up in a couple years if you don't expect your salary to have jumped up to match it. On the other hand, if you plan to move within just a couple years, a variable rate mortgage might be just the thing for you. You can make the small payments and low closing costs, and then sell the house and move before the rate goes up. The point is, examine your situation. Think about how long you're going to be in the house. And think honestly about how your household income will change over the course of the mortgage.

Once you have a good idea of your financial situation, and how it might change, try to find a mortgage that works for you. Don't get a mortgage and pray that your finances will magically catch up to it. That is a risky move, and can easily end in forclosure. Pick one that has the most benefits for you, and be realistic. Trust me, you'll be happier in a smaller home that you can afford than in a bigger nicer one that's running you into the ground.

MISTAKE # 2: Letting Qualifying Ratios Get Out of Hand

Remember these numbers: 28 and 36. Your mortgage payment should not exceed 28% of your monthly income. Your total debt payment should not exceed 36% of your monthly income. Obey this rule.

These ratios used to be standard accross the industry. Now, banks are becoming more flexible. They're more willing to break these rules to get you a loan. But these rules existed for a reason. In general, this is how much people can comfortably pay for a house. If you are paying more than that, you're finances will be out of balance. If somebody trying to sell you a loan tells you that those numbers don't apply anymore, don't listen to them. They almost certainly don't have your best interest in mind.

The way to avoid this mistake is to use restraint. Banks these days are more willing to give you a loan on a house you really can't afford. But that doesn't mean you want one. Pay attention to how much of your income will go towards your debt service, and keep that number below 36%.

MISTAKE #3: Not Enough Downpayment

It may seem appealing to purchase a home with only 10% down (or less). But it's also a dangerous thing to do. First of all, it will mean higher payments and you'll end up spending more in the long run. Second, if the value of your home stops appreciating, you may get stuck with realator fees and closing costs if you decide to sell.

As long as the value of your home continues to increase, it's not so bad. But if the trend plateaus, or even reverses, you can get stuck in a bad situation. Try to make a downpayment of 20% if you can. And if you can't, make sure that you really can afford the loan you're trying to get.

Conclusion

Remember these three things:

1. Research your mortgage and pick one that's right for you.
2. Make sure your payments are not going to overwhelm your budget (28 and 36!).
3. Make a decent sized down payment.