10 Mortgage Myths Dispelled
Everyone receives bad advice from time to time, but what if that advice ended up costing you thousands? These common mortgage myths can end up doing just that. You may feel like it’s the right time to buy a home due to reasonable housing prices and affordable interest rates. Don’t let faulty mortgage myths keep you from making the best decision regarding homeownership.
1- You need perfect credit to get a mortgage.
Most homebuyers do not have perfect credit. While there are still strict credit requirements for getting a mortgage, you can have some blemishes on your credit. Many lenders and investors will grant mortgages to borrowers with credit scores below 700. Read our article on “How to Get You Credit Ready to Buy a House” to prepare your credit report for your mortgage application.
2- You must have a huge down payment to get approved.
There are many loan programs that do not require a 20% down payment. Various government insured and private sector loans allow a loan to value over 80%. Many of these programs require mortgage insurance, but it may be worth it to pay the insurance to take advantage of homeownership sooner.
3- If you don’t put 20% down you’ll pay mortgage insurance.
While this is true in most cases, there are a few loan programs that don’t require mortgage insurance on loans over 80% financing. The two most common programs are VA Loans and USDA loans. Look into these two loan programs to see if you are eligible of taking advantage of these opportunities.
4- Buying is always cheaper than renting.
In most cases a mortgage payment is less than the rent amount on the same property. However, there are a lot of costs associated with owning a home that can ultimately make owning more expensive. When considering whether or not to buy a house factor in the maintenance costs, property taxes and any HOA fees you’ll be responsible for. Also remember that there is a greater risk in owning a home. It is much more difficult to sell a home than to break a lease and there’s a lot more money on the line.
5- 30 year fixed mortgage is always the best deal.
A 30 year fixed mortgage is a great conservative loan option for many buyers. However, it is not always the best deal. Depending on your circumstances you may benefit for a shorter term mortgage or even an adjustable rate mortgage. Do your research to determine which mortgage best suits your needs before settling on a mortgage loan product.
6- Always choose the lender with the lowest interest rate.
Getting a low and competitive interest rate is one of the deciding factors when choosing what lender to use, but it should not be the only factor. Sometimes the lowest interest rate is not always the best deal. Compare the annual percentage rate (APR) amongst different lenders when choosing who to do your financing with. The APR reflects the true cost of the loan by calculating the fees associated with the loan in addition to the interest rate. Another factor to consider while choosing a lender is the reputation of the lender who will be servicing your loan.
7- You can afford whatever you are pre-approved for.
Just because you can be approved for a loan of a certain amount, doesn’t mean you should buy a house for that much. Mortgage loan approvals are based off of your gross monthly income, not the amount of money you receive after taxes, retirement, and insurance are deducted. Sit down and write out a thorough budget to help yourself understand how much mortgage you are really comfortable paying.. Don’t forget to factor in miscellaneous costs such as HOA fees, higher utility bills and maintaining the home.
8- You should keep a mortgage for the tax deduction.
One of the benefits of a mortgage is that you can claim the interest paid on the mortgage as a tax deduction. However, if you can pay off your mortgage, it does not make sense to remain in debt just for that tax deduction. Here’s an example of a homeowner that is in the 30% tax income bracket. They pay $10,000 each year in mortgage interest, and they are saving $3,000 when taxes roll around. However, really they are paying $7,000 to save the $3,000 at tax time. Don’t keep your mortgage just for tax deduction purposes.
9- You only need to save for a down payment.
Before you apply for a mortgage you should have enough money saved to cover your down payment, closing costs and still have money for cash reserves. You may be able to get the seller to pay for all or some of the closing costs, but you don’t want to miss out on a home because the sellers wouldn’t agree to pay closing costs. Most lenders do require applicants to have money still available in their account to cover 2-4 months on mortgage payments after the down payment and closing costs are paid for.
10- You only need to budget for a mortgage payment.
While analyzing what type of housing costs you can afford you should factor in more than just a payment of principal, interest, tax and insurance. Homeownership comes with extra costs such as home maintenance, and HOA fees. You’ll need to allocate money each month for higher utility bills and other routine expenses such as trash, sewer and water.
These common mortgage myths have caused many to pay dearly in the home buying process by having them buy too soon, too late or even not at all. Don’t allow these mortgage myths to keep you from experiencing a rewarding homeownership.