Top Mortgage Myths—Busted
Buying a home and getting a mortgage typically go hand in hand. Yet home loans aren’t always easy to understand—and there’s a lot of misinformation out there about how mortgages work.
“A lot of home buyers think the process is simple, but when you start explaining the details, their eyes glaze over,” says Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”
While it’s understandable that mortgages aren’t a scintillating topic, falling for many of the rampant mortgage myths circulating among (well-meaning) friends and advice givers can hurt your home-buying chances, big-time. For instance: You might believe you can afford a $600,000 house and start looking at properties in that price range. But when you meet with a lender, you might learn your price range actually caps at $500,000. This is what the experts call “a rude awakening.”
To avoid this fate, make sure to crunch your numbers in our mortgage calculator or a home affordability calculator, and apply for mortgage pre-approval to see just where you stand in terms of how much house you can afford.
And make sure you’re aware of the biggest misconceptions about home mortgages. Here are four of the most egregious mortgage myths—debunked.
You need to make a 20% down payment
Sure, a 20% down payment on a home is ideal. After all, the more money you put down, the less you’ll owe—and the less strain you’ll feel to cover your monthly mortgage payments. Still, that doesn’t mean you must put 20% down. Plenty of loan programs accept far less.
The Federal Housing Administration lets borrowers get a mortgage with a down payment as low as 3.5%, as long as their credit score is 580 or higher. (People with credit scores between 500 and 579 are still eligible but must make down payments of at least 10%.)
The catch? If you pay any less than 20% on a conventional loan, you’ll have to cough up private mortgage insurance, an extra monthly fee paid to mitigate the risk that you might default on your loan. And PMI can be pricey, amounting to about 1% of your whole loan—or $1,000 per year per $100,000. Still, if you’re champing at the bit to buy a home, there’s no reason to lose hope if you lack a huge down payment.
The best mortgage is one with the lowest interest rate
Todd Sheinin, a mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD, compares shopping around for home mortgages to buying a car.
“Just because a dealership offers you the cheapest price doesn’t necessarily mean it’s the best option,” says Sheinin.
While your mortgage interest rate is important because it will affect the size of your monthly payments, don’t forget other fees can vary wildly from offer to offer. For instance, there’s an origination fee to cover the processing and paperwork of the loan, which can vary from 0.5% to 1.5% of your loan—that’s quite a spread.
To make sure you’re getting the best bargain, talk to at least three lenders.
“Don’t just ask about the interest rate,” says Sheinin. Instead, ask the lender for a breakdown of your total costs.
“Loan estimates should break down the fees so that borrowers know exactly what they’re getting,” says Staci Titsworth, a regional manager of PNC Mortgage in Pittsburgh. Another question worth asking is the loan officer’s availability. Do they provide clients with their cellphone number?
“If it’s the weekend and you need a pre-approval letter on a property ASAP, but your lender only works 9 to 5, you’re in a bind,” Sheinin points out.
Pre-qualification and pre-approval are essentially the same
“Pre-qualification is basically having a conversation with a lender,” says Redmond. “It means nothing.”
On the other hand, a pre-approval entails your providing a loan officer with all necessary documentation—your tax returns, bank statements, pay stubs, and more—to obtain a mortgage. The officer then packages the loan and submits the file to an underwriter for review. A lender will then provide you with a letter stating you’ve been pre-approved for a certain amount. And with that letter in hand, you’ll be in prime position to make an offer when you find your dream home. (Of course, the loan will still need to go through formal underwriting when you go to purchase a property.)
An adjustable-rate mortgage (ARM) is only for risk takers
ARMs got a bad rap after the 2008 financial crisis. Because while they offer a lower interest rate for a fixed initial period (typically five years), the rate is subject to change based on market conditions—and could go way up. This is how thousands of homeowners ended up unable to pay their loans, so it’s understandable plenty of potential homeowners are now hesitant to get an ARM.
Yet an ARM may be a viable option based on your unique circumstances. For example, if you’re planning to move within five years, then you’re a good candidate. An ARM’s rate won’t even start adjusting until you’ve left the property. And in that time frame, you’ll save a ton on interest, because an ARM’s interest rates are typically lower than that of fixed-rate mortgages. This translates to lower monthly mortgage payments and, of course, more money in your pocket.