A a long time ago, my husband and I bought our first house.

At the time, we were both young and relatively inexperienced in the world of personal finance. We were eager to enter a property. And we listened to the advice of a mortgage broker ready and willing to help us with our purchase.

Unfortunately, we ended up making two big mistakes inadvertently due to our trust in the so-called professional and our lack of knowledge about the long-term implications of our decisions regarding our property purchase. If you’re considering buying your own property, understanding the mistakes we’ve made could potentially help you make more informed choices and avoid falling into the pitfalls we’ve made. Here’s what it was.

Image source: Getty Images.

1. Take out an adjustable rate mortgage

Our mortgage broker encouraged us to take out an adjustable rate mortgage (ARM) when purchasing our property. Specifically, it was an ARM 5/1, which meant that the initial rate was guaranteed to remain stable for the first five years only. After this period, it would begin to adjust each year, based on the movement of a financial index.

We could have easily paid the repayments of a 30-year fixed rate loan. Our rate would have remained the same throughout the payback period with this option. But the rate was lower on the ARM, so our broker encouraged us to choose it to lower our monthly payment and pay less interest up front.

The only problem, of course, is that as the end of five years approached, the rates were higher than they were at the time of the initial purchase. Faced with uncertainty about their potential amount – and unhappy with the cost of our loan – we chose to refinance as soon as possible.

Refinancing meant agreeing to a rate and monthly payment that was not only higher than what we were paying now, but also higher than what we could have qualified for four years ago. We also had to pay a second round of closing costs on the refinance, which totaled several thousand dollars and absorbed much of the interest we had saved by having the most affordable loan over the previous four years.

Now an ARM is not always a mistake. If you’re definitely going to move or refinance before your rate starts to adjust and the rate on the ARM is significantly lower than its fixed-rate counterparts, it may be a good idea to take advantage of the savings offered by the ARM. . But it’s risky, and opting for uncertainty in your mortgage could easily be a mistake you’ll regret, just like we did.

2. Make a 10% deposit

The other big mistake we made was only paying a 10% deposit. We wanted to move into a house as soon as possible after our wedding, and we found one that we liked. As a result, we didn’t want to wait until we had saved more money to deposit.

Unfortunately, putting less than 20% on the house meant we were responsible for purchasing private mortgage insurance (PMI). This added a few hundred dollars to our monthly bill, as PMI payments typically have an annual cost of around 0.5% to 1% of the total borrowed. PMI did not provide us with any protection but rather protected our lender in the event of a foreclosure – but we had to pay for it anyway.

Every month, the PMI bonuses took a significant chunk of our budgets that we couldn’t use for anything else. We regretted the choice as we could have bought a cheaper property or waited a bit longer to buy and avoided this unnecessary expense.

Again, buying with a small down payment is not a mistake in all situations. If you live in a very expensive area and this is the only way to get on the homeownership ladder, it may be worth incurring PMI costs to become a homeowner. This is especially true if you can get into a property that is likely to quickly appreciate in value. But if you can avoid incurring additional housing costs, it’s often best to do so.

Now we were lucky that the worst things that happened with our property purchase were an untimely refinance, a slight increase in our rate and a few thousand extra dollars in PMI payments.

An ARM that becomes unaffordable could easily lead to foreclosure, while a small down payment could leave you owing more than your home is worth and prevent you from selling or refinancing without bringing money to the table. Neither happened in our situation, but they could have – and these are risks to consider when buying a home if you’re faced with the same decisions as my husband. and me.

10 stocks we like better than Walmart
When our award-winning team of analysts have investment advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They have just revealed what they believe to be the ten best stocks for investors to buy now…and Walmart wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

Equity Advisor Returns 2/14/21

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.