Avoid these common mistakes when taking a loan.
- Checking your credit report:
Three or four months before you plan to apply for your mortgage, get a copy of your credit report and check your score. This gives you time to correct any reporting errors and prepares you for what kind of interest rate you can expect.
- Focusing only on the interest rate.
When shopping for a mortgage, it is always a good idea to compare the interest rate. (It’s an even better idea to compare the APR. APR combines a loan’s interest costs with other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. See our article on the difference between Interest Rate and APR .) However, the cost of a loan includes much more than the interest rate – you may have to pay discount points to get that great rate, increasing your upfront costs; the loan type may be an adjustable-rate mortgage that could lead to rising payments in your future.
- Focusing only on the monthly payment.Monthly payment is a key component to any mortgage decision, but it is not the only component. Remember to look at things like interest rate and length of the loan, as well as loan type (fixed or adjustable rate). You want to be sure you are not overpaying over the life of the loan
- Over borrowing.Your lender may approve you for a loan amount that is larger than you expected. Before you celebrate, sit down with your budget and make sure you can actually afford it. Don’t forget the additional costs of homeownership besides the monthly payment: property taxes and maintenance, for instance.
5.Closing credit accounts. It may seem counter-intuitive, but keep your credit lines open and active in the run up to your home purchase. If you have a lot of debt, it’s good to get that under control before you apply, but don’t cancel your credit cards –decreasing your available credit can actually reduce your credit score.
- Not planning for closing costs.Finding out how much cash you’ll need at closing can be a shock. When you start looking at mortgages, plan to bring from 2 to 6 percent of the loan amount for closing costs. On a $150,000 mortgage 5 percent is $7,500. It’s a good idea to figure out in advance where that money is going to come from.