Getting a mortgage takes a lot of time and effort. I hav refinanced at least 10 mortgages since 2003 and I've learned from a lot of my mistakes. I want to help you not make my same mistakes.
Mortgage interest rates are at all-time lows and real estate will likely due well due to increased affordability and a rotation out of riskier stocks. A mortgage will likely be your largest ongoing liability for years to come. Therefore, it behooves you to get your mortgage done correctly.
I've taken out multiple mortgages and refinanced multiple more since I first started buying real estate in San Francisco in 2003. Let me share with you the four most common mortgage mistakes people make when getting a new mortgage or refinancing an old one.
The Biggest Mortgage Mistakes To Avoid
1) Not shopping around for the best rate. You should always get written quotes from various lenders to have them compete with one another. This is why I like to start by getting free mortgage quotes from Credible, a leading online lending marketplace that allows you to compare real rates from qualified lenders in one place.
2) Refinancing for a longer fixed rate duration than you need. The average American lives in his or her own home for roughly nine years. Therefore, if you get a 30-year fixed rate mortgage, you'll end up paying way more in interest over your duration of ownership. Instead, you should try and match the fixed rate duration as close to your estimated duration of holding the mortgage as close as possible. I prefer an ARM over a 30-year fixed because I believe interest rates will stay low for the rest of our lifetimes.
3) Not refinance when the yield curve is inverted. When the yield curve is inverted, you are getting the best deal possible at the time. You will not only earn a higher savings deposit on the short-end, you can get a lower interest rate on the long-end. Paying off your mortgage when the yield curve is inverted or flat is a suboptimal financial move as well.
4) Not choosing a lender that closes on time. When interest rates go down, lenders get busy because more people want to refinance. Be careful of lenders promising a short close to get you to do business with them. A short close is generally considered about 30 days. The reality is that mortgage refinancing in 2020 and beyond often takes 60 – 90 days. Banks have gotten way more stringent in their lending process. For example, the average credit score for an approved mortgage is now close to 760!
It took me almost four months to refinance my 5/1 ARM. As a result, I ended up paying $1,400 in extra mortgage interest I didn't realize I was going to pay. My 5/1 ARM at 2.5% reset to 4.5%, and I had to pay the 4.5% rate for an extra 45 days because my new 2.625% 7/1 ARM refinance took so long.
My loan officer said that because mortgage rates continued to go down after we locked, there was a huge backlog of applications their underwriters had to go through.
The only silver lining is that I've been able to pressure them to re-lock to a lower rate given the process is taking so long. Originally, we had locked at 2.875% and closed at 2.625%. But I did have to give up about $3,000 in credit.
One of the most common sales tactics is to lure you in with a deal that sounds too good to be true For example, car dealerships used to advertise a smoking good deal for a car in the paper with the fine print “only one available at this price.” By the time you got to the store, the car was of course gone. All that's left are the full-price vehicles.
Refinancing A Mortgage Should Save You Money
If you are able to get an interest rate that is 0.5% lower than your existing rate, you can break even within 24 months and plan on living in your house for five years or longer, then you should refinance.
Make no mistake. Refinancing a mortgage or getting a new mortgage will cost money. You either have to pay for the costs separately or can have your lender roll the costs into your mortgage through a higher interest rate.
I personally like “no cost refinance mortgages” because I don't like paying a separate cost. Since there is no out of pocket expense, if I sell the property shortly after I refinance the property, there's not as big of a psychology damage at least. Imagine paying $4,000 to refinance and then selling the property the next year. What a waste!
Take advantage of low interest rates today. Get free quotes from multiple lenders with LendingTree, one of the largest online marketplaces where lenders compete for your business. Getting the best rate is all about getting a written quote and leveraging it to try and get an even better one.
Diversify Your Real Estate Investments
Another thing you want to consider besides getting the best mortgage possible, is diversify your real estate investments. When rates are low, demand for real estate goes up. Further, you want to invest in areas of the country that have promising job markets that are low cost.
Technology has made telecommuting and freelancing much more ubiquitous. No longer do employees have to live in an expensive coastal city and work in their employer's main office.
Buying a single property with a mortgage is a huge financial undertaking that shouldn't be taken lightly, hence why you're reading this article. You have concentration risk.
Once you own your primary residence, it's worth investing in real estate in different parts of the country. You can do so by investing with Fundrise, one of the best real estate crowdfunding platform today. Real estate crowdfunding has really taken off after the passage of the JOBS Act in 2012.
Fundrise carefully vets all their properties before investors can even evaluate them on their platform. They have speciality eREITs, where investors can invest in a particular region or type of investment objective for as little as $500.
I've personally invested $810,000 in 18 different commercial real estate properties across America after selling one of my SF rental properties for 30X annual gross rent in 2017. I believe there will be a multi-decade demographic trend towards lower cost areas of the country.
Fundrise is my favorite platform for all investors. CrowdStreet is also great for accredited investors focused on secondary cities with higher growth rates, lower valuations, and higher net rental yields. Both are free to sign up and explore.
