A home loan can be instrumental in helping you realize your dream of purchasing a home. However, given that it is a long-standing financial commitment, there are certain key mistakes you should avoid. Want to know more? Read on.
Opting for an Adjustable-Rate Home Loan
Adjustable-rate mortgages, also known as ARMs, can seem really appealing, given that they usually start off with a low rate of interest for the first few years. This helps you get a larger loan amount than what you would normally be approved for. However, over time, the interest rates of ARMs usually go up. This can be an issue since borrowers may have to make higher payments than what they would have with a regular home loan.
Not Paying a Downpayment
Some lenders allow people to borrow home loans without having to make a down payment. But applying for such a loan is a mistake — first, because you will not have any equity in your home; and second, because you’re likely to pass up on a better loan offer. Borrowers who make large down payments usually receive better rates from lenders, so it’s important that you start saving up for this payment.
Applying for A Liar Loan
Liar loans are those loans that require little to no documentation and hardly any verification. The loan would be based on the applicant’s stated income, expenses, and assets. These loans are called liar loans because applicants would often lie in their applications. While these applicants would usually be approved for a loan, the problem starts when they have to make monthly payments. People who would fall behind on their payments would often face foreclosure or bankruptcy.
Choosing a Long Amortization Period
If you can repay your home loan in 10 years, don’t choose a 30-year loan term. While the monthly payments may be more affordable, you’ll end up paying a lot more as interest over the duration of the loan tenure. What’s more, you’ll also have less equity in your home, given that the bulk of your payments during the first few years will go toward the interest and not the loan amount.