It takes a lot of work to apply for a mortgage, from rounding up your financial records to ensuring that your credit rating is in perfect shape. Another important item on your to-do list is to look for misinformation and bad advice.
There are many myths surrounding home loans. Believing them can cost you time and money. We’ve rounded up some of the most common misconceptions and explained what you really need to know.
Myth # 1: Low mortgage rates mean you need to buy a home ASAP
Don’t let the FOMO mortgage rate lead you to make a big financial mistake. Of course, current mortgage rates are very low. (Well-qualified buyers have been able to achieve rates of around 3% since the end of 2020.) And, yes, lower rates mean paying less per month or affording a more expensive home.
However, low rates have also helped push home prices over 19% this year. You could end up paying too much for a house just because the rates are low, says Aaron Bell, wealth advisor for Northwestern Mutual. Adding, “Just because interest rates are low doesn’t mean it’s a good time to buy a home.”
Many pundits are forecasting rate hikes through the end of this year and next, averaging between 3.15% at the end of 2021 and 3.7% at the end of 2022.
While the predicted increase may make buying a home more attractive now, the reality is that mortgage rates have been going down for decades. In fact, rates peaked in 1981 with an average of 16.63%. Even if you buy a house at a higher rate, you will have the option of refinancing at a lower rate in the future (whereas if you buy at a low rate, the chances of being able to refinance at an even lower rate are greater. small).
The decision to buy a home should also always be based on your goals and preparedness for that financial leap, not interest rates alone.
Myth # 2: You need perfect credit to get a mortgage
If you’re worried that your credit score might not qualify for a home loan, relax. There are options for borrowers who want to get a mortgage despite having bad credit.
For example, borrowers with a credit score as low as 500 are eligible for FHA loans. VA loans typically require a score range of 580 to 660, but lenders look at your financial picture as a whole. USDA loans also have lower score requirements than conventional loans.
Other factors besides your credit score also determine your mortgage eligibility, says Rob Heck, vice president of mortgages at online broker Morty. Lenders will also look at your income, how much savings you have accumulated, your debt-to-income ratio, and how much you have put down.
“If you’re in good shape in more than one of these categories, that may be enough to overcome a low credit score,” says Heck.
Myth # 3: You need 20% of the house price for a down payment
The average buyer has only dropped 12% this year. For first-time buyers, the average is even lower at 7%.
Certainly, making a big down payment has its advantages. You start with more equity, you can benefit from a lower interest rate, and at 20% you avoid having to pay for private mortgage insurance (PMI) – which protects the lender, not you.
However, putting 20% is not always possible – or mandatory.
FHA loans only require a 3.5% down payment if your credit score is 580 or higher. If your score is between 500 and 579, 10% is needed. VA loans do not require a down payment, nor do USDA loans. If you are considering a conventional loan, some lenders will require as little as 3% down payment and may waive the PMI requirement if your income is high enough.
You may also want to consider down payment assistance programs. These are usually administered by state and local governments or by charities. Funding options include grants, low interest or 0% second mortgages, and forgivable loans.
Myth # 4: Finding a home, then worrying about a mortgage
That’s bad advice anytime, but in a bustling seller’s market like today, believing this myth can cause you to miss out on a home.
Get pre-approved for a mortgage before you seriously start looking for homes. Pre-approval means the mortgage lender has reviewed your financial information and is ready to loan you up to a certain amount of money.
It’s basically a guarantee that (unless something changes) you’ll have the financing you need to buy a home. This process will tell you how much of a loan you can get and get you to act quickly when the right home arrives.
Desirable homes sell out quickly, spending an average of 45 days on the market in October, which is eight more days year over year and 21 more days than in October 2019. Many sellers won’t bother. consider an offer from someone who has not been pre-approved.
Also, don’t forget to shop around and apply for a mortgage with different lenders. This is the only way to make sure you get the best rate.
Myth # 5: A 30-year fixed rate mortgage is always the best choice
Over 75% of borrowers opt for a 30-year fixed rate mortgage, attracted by the long return on investment and the resulting low monthly payments. But other options may be better suited to your goals.
If you can afford the higher payments, you can own your home in less time and for less money with a 15-year fixed rate mortgage. Shorter term loans also tend to have lower interest rates.
If you are planning to sell your home in the near future, you may want to consider an adjustable rate mortgage. The interest rate on an ARM will be fixed for a period of time before it becomes adjustable and begins to reset. With an ARM 5/1, the initial interest rate is usually very low. Once it starts to adjust, however, the rate can increase dramatically.
Myth # 6: You should spend the maximum amount you are entitled to
You’ve budgeted and figured out how many homes you can afford. You feel comfortable buying a house in the range of $ 400,000. You apply for a mortgage and voila, you get approved for $ 475,000. Should you increase your budget?
Much will depend on how comfortable you feel with higher monthly payments. You might be able to make these payments, but it might come at a cost – you might not be able to save as much for retirement, put money in a college fund for your kids, or pay off credit card debt.
There is no rule that you must spend the maximum mortgage amount for which you are eligible. Your mortgage payments should complement your overall financial goals. Don’t feel the need to overspend.
Myth # 7: Mortgage refinancing isn’t worth it
For some borrowers, the thought of going through the mortgage application process all over again can be stressful. But the benefits of a refi at least determine if it’s the right time to refinance.
Lowering your interest rate by 0.5 to 1 percentage point can save you a lot of money. Mortgage analysis firm Black Knight estimates that 11.2 million qualified buyers can cut their rate by 0.75 percentage points and save an average of $ 279 per month at the current rate. Some 1.2 million borrowers could save $ 500 per month. This represents a savings of $ 3,348 to $ 6,000 per year.
Consolidating debt, reducing the term of your loan, or cashing in your home equity to pay for repairs are other reasons to consider refinancing.
Myth # 8: You can’t prepay your mortgage without paying a penalty
There was a time when prepaying a mortgage meant incurring a prepayment penalty. These fees corresponded either to a percentage of the loan amount, or to an amount equivalent to a certain number of monthly payments. Either way, they added thousands of dollars to your prepayment budget.
The good news is that many lenders no longer impose these penalties. Those that do typically only receive the fee for the first three to five years after closing. You can repay the loan without penalty after the end of this period and you can pay extra for your loan at any time.
Paying off your mortgage early can offer a number of benefits, such as owning your home sooner, saving interest, and freeing up money for other purposes.
When applying for a mortgage, ask your lender if there is a prepayment penalty and what the terms, if any, are.
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