Are you looking to take a mortgage loan in 2017? Then it may be a good idea to check out these lending myths that many people still believe in.
Some of these are the result of financial ignorance and misinformation, so it’s a good idea to get a hang on what really happens when you come to get a mortgage loan, even if you don’t plan on doing it soon.
Myth 1: You automatically get the loan amount if you are pre-qualified
Getting pre-qualified for a home loan helps borrowers learn what they may be eligible to borrow in order to set a spending limit or budget. Getting pre-qualified is not the same as actually being approved for a specific loan amount.
The pre-qualification stage gives borrowers an overall idea of what you may be approved for based on what the lender learns about your finances by reviewing your credit history and assets. Keep in mind, the lender is not committed at this point since they only have a small amount of information about your finances. You are simply getting a hint at what you could borrow for a house.
Myth 2: It is recommended to get a thirty-year fixed mortgage
One of the most common mortgages that come to mind is a 30-year mortgage with a fixed rate. Unfortunately, such mortgages are not for everyone, even though it is considered a traditional option. Studies have shown people tend to move to another house within 7 years, depending on family living situations. This means borrowers may not be as concerned with having a mortgage with an adjustable rate (ARM).
ARMs are great for people that do not plan to live in the home for an extended time period. These loans can have changes in the interest rate over time. If you have no plans to move after acquiring the home, consider a fixed-rate mortgage. These make it easier to maintain the loan since the interest rate is capped.
Myth 3: Renting is a better option to save money
Renting is seen by many as a cheaper way to live vs. buying a home. But in some cases, you are better off paying a mortgage instead of rent.
For renters, the landlord is responsible for maintenance needs, but the cost is included in the monthly rental fee. Homeowners can actually save on similar costs when preparing ahead of time before buying a home. Over time, the homeowner pays less than a renter.
The amount paid in rent for many homes is the same you would pay on a mortgage. This means if you have a mortgage payment, you are able to build equity in the home. As a renter, you don’t have this advantage. If you rent and leave the premises at the end of the lease, you may only qualify to get the security deposit back.
Myth 4: Pay off the mortgage as fast as you can
People like the idea of paying off the mortgage quickly. But it may not be the best way to invest money into the home because this way, you don’t build as much equity as you could. In short, the balance of the loan may go down fast, but the equity of the home may not grow much.
If you have extra cash after paying your mortgage payment for the month, invest it. You may be able to make more money this way, and it could amount to be more than interest gained from the mortgage. When you do your taxes, you may be eligible to deduct interest paid on the mortgage.
Myth 5: 20% down payment guarantees the best loan you can get
It is often thought you need to make a 20% down payment on a home in order to get a great interest rate. The good news is you can get a mortgage when paying 3.5% after applying through FHA (Federal Housing Administration).
Borrowers can also take out a second mortgage known as piggybacking. Doing this helps reduce loan-to-value ratio by 20%. The PMI is not necessary for borrowers. Knowing this can make it easier to start the process of purchasing a home.
Myth 6: Pre-qualified and pre-approved are the same
When purchasing a home, home buyers may think pre-qualifying and pre-approval are the same. Some may use each term interchangeably, but they are as different as ketchup and mustard. The pre-qualification process is when the mortgage lender is getting to know you based on limited information. This process is basically scratching the surface of your situation. With this, they give you an estimated loan amount you could qualify for.
The pre-approval process is more complex since the lender learns more about you in further detail. This amount is based on income verification, credit history, assets, and the house you want to buy and appraise. This is considered a more formal process of the loan, but it gets you closer to knowing the exact amount you will get approved for.
Myth 7: The interest and principal determine the mortgage payment amount
It is true these aspects play a role in determining your monthly payment, but they are not the only numbers homebuyers should pay attention to when it comes to their mortgage payment. This is a common misconception for first-time buyers.
Some may even go into the process thinking about these aspects only. Using a trusted mortgage calculator can give more insight into what additional expenses factor into the monthly mortgage payment.
Myth 8: Mortgage lenders offer the same mortgage
People think if you get a $200,000 mortgage with 8% interest rate, you can get the same thing from other lenders. This is false. Aspects such as closing costs and other related fees can affect the final amount of the loan.
The cost to close a loan of this amount could be thousands. Meaning that at closing, you are responsible for paying the cost unless it is absorbed into the mortgage, and you decide to pay a higher mortgage payment each month.
Myth 9: You have to pay a large down payment to get a mortgage
Sometimes people think they are better off renting because they don’t have a lot of money to put down on a home. Some think you need 10% or 20% down payment. While this could help lower your monthly mortgage payment, it is not necessary. Loans backed by the Federal Housing Administration (FHA) only require 3.5% down. For example, on a $125,000 home, you could put down $4,375.
Having good credit can help you take advantage of multiple options. There are programs for veterans and options that may differ depending on the state you reside. Even if you feel you can’t put down a lot for a home, explore different programs to learn what you may qualify for.
Myth 10: The home is owned by the lender with a reverse mortgage option
This is false. The homeowner retains the title of the home, but they are still responsible for fees, homeowner’s insurance, and property taxes. The homeowner continues to live at the home and has the option at any time to refinance or sell. The lender does not own the home.
Myth 11: When you refinance you can’t take cash from home equity
This is false. You can do what is called a cash-out refinance when enough equity is built into the home. This is a great idea to consider if you are looking to increase the value of the home. Some do this to make their finances better. You can get equity in the form of cash and refinance the mortgage for more than what you are currently paying.
The key to making a successful decision when financing your home is staying well-informed and up-to-date with the latest government policies. Before deciding on your borrowing option, make sure to gather and compare all the related information, just to be on the safe side of the bargain.