Getting a mortgage is a significant financial commitment, and is usually one of the largest payments most people will make during their lifetime. As a result, homebuyers will want to take their time with their mortgage to ensure that they are getting the best deal possible that works for them without making mistakes. Making a big mistake when taking out your mortgage can turn your dream house into a nightmare property. We will tell you some of the most common mortgage mistakes so you know what to watch out for to make sure your dream house becomes a dream home.
One of the original causes of the subprime crisis in the United States that triggered the recession of 2009 was the fact that lenders were offering loans to borrowers without the need for a deposit. This was a bad idea for two reasons:
- Placing a deposit on a home allows you to increase the equity you actually have in your home whilst decreasing monthly mortgage payments and the total amount owed.
- A deposit is important because it ensures that you actually have a significant stake of ownership in your home.
The larger a deposit you make as a borrower, the more likely you are to do whatever it takes to make your monthly outgoings, because you have already invested so much into your home.
A reverse mortgage is a loan usually available to homeowners over the age of 60 that turns their equity in their home into an income stream. Any available equity is paid to the homeowner in either payments or a lump sum.
Reverse mortgage can be a big mistake for elderly homeowners for two reasons:
- The upfront costs associated with reverse mortgages can get quite high. Factors such as appraisal fees, attorney fees, mortgage insurance, origination fees, and title insurance can add up quickly and rapidly take away from your equity.
- Even though the borrow retains the title of the home, it could potentially be a problem for your heirs, as they may not be able to inherit your home.
A longer loan may seem like a good idea at first. The longer the loan, the more affordable the payments, which means you could afford a more expensive home by taking longer to pay it off.
While a long amortization period might make sense for someone buying a home at a very young age who could potentially stay in the home for that entire period of time, it may not make sense for someone older. If you are older and you decide to sell your home after 15 years after getting a 40 year mortgage you will find that you have very little equity in your home. This is because the majority of your payments for the last 15 years have gone towards and interest, and you have not been building equity. As a result, when you do sell your home you will only see a small profit, if you even see a profit at all.