3 Mistakes First Time Homeowners Make when Choosing a Loan

First time homeowners have a lot of information to process. You are bombarded with loan offers from every company under the sun and can be easily confused. An added layer is the sales people in the real estate industry because they can sway you in the wrong direction. If you choose the wrong loan product, you could pay thousands of dollars more than you should. Here are a few common mistakes that first time home buyers make when choosing a loan product. 

1. Deciding Based on Payment

While the monthly payment on the loan might seem like the only important thing to you at first, you should not make your decision based on this. The payment should be one of the many factors that you look at when deciding on a mortgage product and lender. The payment that you see in front of you can be manipulated in a number of different ways. If all that you are concerned with is the payment, unscrupulous mortgage brokers might try to take advantage of you. They could show you an extremely low initial payment that changes over time. This is a good way to get yourself in trouble by not reading the fine print. Review the loan and be sure the loan is a fixed rate. If it is not, review the final ARM payment, and use that amount as your monthly payment amount. Do not assume you will be able to refinance in the future.

2. Getting a Balloon Mortgage

One of the most common pitfalls that homeowners fall into is getting a balloon loan on their first house. A balloon loan is a lending instrument that allows you to pay only the interest each month in your payment. When you do this, none of the principal balance is paid off as you go. Therefore, you will go the entire mortgage term without paying off a cent of the mortgage balance. Then at the end of the mortgage, your entire balance will be due. This will require you to sell the house or possibly lose the house to foreclosure. This is rarely in the best interest of the buyer as they do not understand the consequences of the decision. They might be drawn in by the lower payment at first. Then they later realize that they've made a terrible decision. 

Balloon Loans are very common second mortgage instruments. Be sure you review your loan terms carefully and if you see that you are offered a balloon, ask for a fully amortized loan instead. Your rate may be higher, but you can rest assured you will not lose your home because you cannot come up with the entire balance of the loan in ten or 15 years.

3. Not Shopping Around

Another common mistake that first time home buyers make is not shopping around for the best product for them. They might just walk into the nearest bank and decide that they want to apply there for a loan. After they are approved, they just work with that bank through the entire process. Shopping around is in your best interest and will net you the best deal for your mortgage. You will not know what is out there until you get out and do a little shopping. If you have a particular bank in mind, that is fine. Shopping around can help you negotiate with them for better rates and closing costs. Typically, they will waive fees if you show them another company has lower fees or costs.