Mortgage loans are the credits of a considerable amount which is sure to make a great impact on the borrower’s financial life. Mortgage loans are generally taken once in a lifetime and hence such credits are advised to be taken with much cautiousness. Because of it being a loan of a big amount, it needs a quite long period of time to repay the same. The repayment of a home loan runs for a decade or sometimes even more. It means that a great part of one’s most productive life is spent on repaying the loan.
Understanding the impact of such credits on a person’s life, the experts on personal finance always advise taking such critical financial decisions after a lot of analysis of all aspects. Even a small mistake can come back haunting and make the borrower feel trapped in the pitfalls of the mortgage Here we have brought top 10 mortgage pitfalls to avoid. Falling into any of the pitfalls are going to cost you a lot while you will be repaying the loan.
1) The First Is Always Not The Best
Most of the borrowers make a mistake of jumping to the first lender they come across for their home loan. This practice is not appreciated in finding lenders especially when it comes to mortgage lenders. You need to be lucky enough to get the best lender in the first meet. It is always best to check for all the available options and compare them to find the best lender. Choosing the best lender is the most important thing to take care of before a mortgage loan. If you choose a wrong lender, you will have to face the consequences of the same until the tenure ends.
2) Longer The Amortization, Higher The Payables
Amortization is one of the most influential factors that make a vast difference in the cost of borrowing. One may say that with a long amortization schedule, the loan burden minimizes as it makes the EMI amount smaller. It is true that if you have to pay a low EMI which would be easy to pocket. But in another hand, because of compound interest rate, you will have to pay much more than what you have borrowed. If you opt for a tenure of 25 years at the present day, you will end up your loan by paying more than 100% of the principal amount in interest payment.
3) APR- The Real Cost Of Borrowing
The APR of a loan is the annual percentage rate on the borrowed loan amount. In a broader meaning, an APR of a loan means the actual cost you have to pay for the loan. It includes the interest payment with the other fees and charges such as origination fee, documentation fee, taxes, mortgage broker fee and any other charges connected with the loan. An APR of the loan is always higher than the interest rate. Some of the lenders take an advantage of the same and keep the interest rate low while raising the other charges. Most of the borrowers enquire only about the interest rate, not the APR. If you ignore APR of a loan, you might have to pay a lot in the name of different charges while the loan will be in the process of progress. In such a condition, returning will be difficult for any loan seeker.
4) Missteps in The Application Form
The application form which you are to fill up while applying for the mortgage is a quite a long form which contains multiple pages and requires much information about the loan seeker. An applicant has to be doubly assured and cautious too while filling up the form. A single mistake or untrue information in the application form can cause not only the rejection of the application; it may cause many complications for both the borrower and the lender in days to come. One must have to fill up the correct information so that the borrowing and repayment both runs uninterruptedly.
5) Not Locking The Interest Rate
This is a lesser known fact is that one can lock up the interest rate for a certain period of time even when your loan is in floating interest rate. To lock up the interest rate, you may need to pay some extra money to the lender but that will work as a safeguard against the market fluctuations. Not locking interest rate while you are servicing a mortgage loan with floating interest can make your either EMI amount or the tenure go up if the MCLR increases.
6) Shutting Eyes to Credit Score
The credit score is one of the most important factors which determines your creditworthiness and interest rate. Ignoring the credit score before you apply for the loan is like standing at the tip of the iceberg where you are certain to face bigger problems in future. If your credit score is poor, your loan application can even be rejected. If you somehow manage to get the loan, you will have to pay a higher interest rate. Hence, checking credit score prior to applying for the loan is a must. Failing to do so can make you face difficulties in getting the loan. Additionally, if your loan application gets rejected, your credit score will be further spoilt.
7) A Loan Amount Higher Than the Affordability
The affordability is something which matters for persons of every income category. The affordability of an individual is best understood by the person himself and not the lender. Your lender may provide you with a loan which is more than your affordability as it is one of the ways of making business for the lender. But being a sincere borrower, one must refrain from such credits. A credit more than the repaying capacity is certain to cause financial troubles in days to come.
8) Less Down Payment
Sometimes some lenders allow taking a loan with a nominal down payment like 1% to 5% of the property price. This is nothing but another trick of the lender to attract more and more borrowers. One has to be aware of such tricks as such offers are traps in disguise. It is advisable to pay a large amount in down payment. This action of yours will save much interest payment and you will be able to repay the loan faster.
9) Adding Too Much Debt
The financial liabilities of a person must be checked while applying for a mortgage loan. Mortgage loans are generally loan of big amount hence the repayment runs for long. One should foresee the future and the upcoming financial liabilities too so that they don’t add much debt in their financial life. Adding too much of debt can result in defaulting in the loan.
10) The valuable Fine Prints
The fine prints of mortgage loans are the information regarding the loan such as the Mortgage rates, the tenure etc and the terms and conditions of the loan. It generally is a booklet of 10 to 12 pages and requires a number of signatures of the loan seeker. Most of the borrowers ignore these terms and conditions and simply put their signature which is again one of the irreversible mistakes. Such mistakes can land you in hot water at any given time during the loan repayment period.
It is beyond questions that a mortgage is the best aid to own the house of our dreams but at the same time we the borrowers not to forget the fact that every opportunity comes with some drawbacks. Picking up only the best can be done only when we make informed decisions. Being aware of the pitfalls of a mortgage loan will certainly help the borrowers to have a better experience with mortgage loans.
