When it comes to something as complex as mortgage, it’s not surprising that there are numerous myths associated with this financial product. Are you someone who believes that you can’t borrow money to purchase a house due to a tarnished credit score? Do you think that paying off your mortgage early is always the best option? If answered yes, you subscribe to the most common mortgage myths that can have a dear impact on your wallet. Here are some of the top mortgage myths that people normally fall victim to.
Myth No. 1: A 30 year fixed rate mortgage is always the best bet
Fact: Despite the fact that adjustable rate mortgages or ARMs constitute 1/3rd of home loans in the market, rates on 15 year and 30 year fixed rate mortgages are pretty low by historical standards. ARM rates are even lower but they’re susceptible to change when it’s time for them to adjust. First-time homebuyers as well as the seasoned buyers, are crazy to take out ARMs during times of historic lows. Yes, it is true to some extent that a fixed rate mortgage is the right loan type but mostly it is for someone who plans to stay in that house forever. Average homeowners stay in a house for about 9 years and for all such upwardly mobile people, hybrid adjustable mortgages that carry a teaser rate for about 3, 5, 7 or 10 years are perhaps the best bet.
Myth No. 2 : You should always pay off your mortgage as fast as possible
Fact: It might be natural to assume that you want to repay your mortgage as soon as possible but this is certainly not the best way to use your dollars. Paying off your mortgage may decrease your principal amount but this is not the same as accumulating assets or equity. When you make payments towards your mortgage loan, you lower the overall loan balance. But remember that every dollar that you pay towards the loan is a dollar that you did not invest. Although paying off the mortgage saves you money in the long term, it withholds the opportunity to earn interest with that money in other investments. This is more applicable if you do not intend to stay in your home throughout the length of the mortgage.
Myth No. 3: Interest rates are deductible on all kinds of mortgage including home equity
Fact: Most people find a mortgage as an appealing financial product because they can deduct mortgage interest payments during the tax season. However, it should be noted here that if your mortgage is too big, then you may not be able to deduct all the interest payments. You will only be able to deduct mortgage interest up to $1 million. In case of home equity, the limit is even lower – $100,000. Also, if you’re using the home equity loan for major home improvements, then that will fall under the $1 million cap for mortgage interest. Principal amounts exceeding $100,000 do not qualify for interest rate deductions.
Myth No. 4: It’s not possible to get a good loan unless you have a 20% down payment
Fact: The perception out there in the market is that you need to pay down at least 10%, maybe 20% while taking out a mortgage but this is completely wrong. Nowadays there are many lenders who have loan programs (including 0 down payment offers) for people who can afford to pay 5% down or even less. Previously, the 0 down payment loans were only available from the Veteran’s Administration but this is no longer the case. The FHA or the Federal Housing Administration is also there that insures loans, allowing you to put down as little as 3.5% of the total loan amount.
Myth No. 5: You can borrow money from a family member to pay down the right amount
Fact: These days many people are considering putting a large down payment while buying a home. In most cases, they turn to their family members for monetary help in this regard. But lenders may consider this as something bad. Rather it can be a red flag for them. Banks pay close attention to the source of your down payment. The lenders even want to check that the down payment money was in your bank account for some time. The lender may even ask for proper documentation of the money that is being transferred from one account to another. Hence stay prepared for stringent checks if you’re planning to borrow the down payment amount for your home.
Myth No. 6: 620 is the magic score for obtaining a mortgage loan
Fact: Many first-time homebuyers have the notion that 620 is the magic score for obtaining a mortgage loan. But did you know that while evaluating mortgage loan applicants, lenders pull credit scores from all the three major credit reporting agencies - TransUnion, Experian and Equifax? They use the middle score in order to measure the eligibility of the borrower. 620 indeed is the minimum eligible credit score but it’s prerequisite for the applicants to aim higher in order to avoid paying more.
Myth No. 7: With stellar credit scores, mortgage rates and payments are always low
Fact: With all the hype about the dire need of a stellar credit score, one may think that this is the ultimate formula to grab low mortgage rates and monthly payments. But it is not so always, especially if you’re buying a condo. Condominium buyers without minimum 25% down payment might require paying additional closing-cost fees equivalent to 0.75% of the total loan amount, irrespective of their credit score. Such fees are usually enrolled into the mortgage and it raises the monthly installments.
Myth No. 8: You can’t get a mortgage with a dinged credit score
Fact: Senior Vice President of E-Loan, Mr. Bonnikson says that America is a country that believes in recovery. Even after the sub-prime mortgage crisis, there are number of lenders that still find ways to lend to people with flawed credit histories. The word sub-prime describes loans to people with credit problems that are grave enough. In such cases, the lender demands a higher rate to make up for the higher risk. However, one or two 30 day-late payments on your credit cards won’t push you into the sub-prime category. On the other hand, foreclosure, bankruptcy, repossession, eviction from an apartment and a prolonged habit of making late payments can turn you into a subprime borrower.
Myth No. 9: Once you marry, you’re liable for your spouse’s mortgage
Fact: Marrying does not mean merging your debt and mortgage accounts. Unless your name is mentioned on the mortgage docs, you won’t be held liable for that mortgage. If you still want to be on a safer side and avoid any future discrepancies, then you and your spouse can sign a pre-nuptial agreement to keep your mortgage, debts and assets separate. However, if you're residing in a community property states, the law might be slightly different.
Myth No. 10: Adjustable rate mortgages are always a bad option for you
Fact: There are many people who pass on the idea of adjustable rate mortgages as they think that they’re unstable and may leave a borrower with a higher rate down the road. Although this is often true, an ARM isn’t always a bad bet. In fact, for many people, it is one of the best ways to get a low interest rate for a short period of time. For instance, military families move frequently and they can benefit from a short-term low interest loan as they know that they will be out by the time the higher rates kick in.
Buying a home is one of the largest investment that most of us will ever make. No matter what your investment strategy is, avoid believing in the above mentioned myths that may blow a hole in your wallet in the long run.