10 great mortgage myths proved wrong, once and for all

These days, the world is full of misinformation. Let’s put aside some common mortgage myths once and for all so you don’t miss out on becoming a homeowner inadvertently.

After all, landlords tend to acquire much more wealth than renters, so why let these falsehoods get in your way?

You need perfect credit to get a mortgage

Let’s start with credit because it is a big problem. Many renters seem to think that you need a FICO score of more than 700 to get a home loan.

This is simply not true, nor anywhere close to the truth. Sure, a higher credit score can help you get a lower mortgage rate, but it’s not necessary to qualify.

In fact, you can get a FHA loan with a credit score as low as 500, and there is no minimum score for VA loans (Although lenders impose floors).

When it comes to a compliant loan backed by Fannie Mae or Freddie Mac (the most common type of loan), you only need a FICO 620.

These are not particularly high credit scores, or anything I refer to as “good” or even “average credit.” At first glance, the average FICO score was over 700.

Just put, you can get a mortgage with a low credit score. And while the mortgage rate may not be favorable, it is possible to refinance later once your scores improve.

You need a 20% down payment to buy a home

Again, it is not true and it does not come close. While the 20% advance It may have been customary for your parents, or your parents’ parents, it is much less common today.

Today, the average down payment for a home purchase is closer to 10%, but there are still many loan programs that allow for much lower down payments.

For example, VA loans and USDA Loans require a zero down payment, FHA loans require a 3.5% down payment, and the down payment requirement for conforming loans is a mere 3%.

On top of that, there are proprietary programs and grants from individual lenders and state housing agencies that allow you to pay even less.

In other words, you don’t need a 20% down payment for any major loan, except maybe a huge loan with some banks.

Buy a house only if you can pay a fixed 15-year

Here is another mortgage myth that I have heard on several occasions. You should only buy a home if you can afford a 15-year flat rate.

The logic here is that you are buying too much home if you have to go for the standard 30-year fixed mortgage.

But there is a reason why the 30-year fixed is the standard option, and not the 15-year fixed.

Sure, there are many good reasons to contract a fixed 15-year contract, like paying much less interest and owning your home in half the time.

However, it is simply not feasible for most home buyers these days in expensive areas of the country.

And there may be better uses for your money than paying off a super cheap mortgage.

Lastly, you may never make the leap from tenant to landlord if you live by this rigid made-up rule, hurting yourself even more.

Remember, homeowners get much more wealth than renters, regardless of the type of loan they choose.

Home prices will drop when interest rates rise

At first glance, this mortgage myth sounds logical.

If financing costs go up, house prices must go down. But to begin with, not everyone finances a home purchase.

There is a lot of cash home buyers out there too.

Second, the data does not support this argument. In the past, several dramatic increases in mortgage rates were accompanied by large increases in property values.

Yes, both house prices and mortgage rates increased at the same time. Now this does not mean that they cannot move in opposite directions.

But stating it as a foregone conclusion is not correct, and it is not something you can rely on if you are waiting on the sidelines.

Banks have the best mortgage rates

For some reason, a good part of the people surveyed by Zillow They felt they could get the best mortgage rate from their bank.

Again, blindly assuming this would be foolish as you can’t tell unless you shop around.

Also, I would venture to say that banks are usually the most expensive option, at least compared to online mortgage lenders and mortgage brokers.

Both of the latter options can often be much cheaper avenues for a home loan than a reputable bank.

Ultimately, you may be paying a premium for that brand, even though it provides additional value.

It really could be a more bureaucratic process compared to some of the newer fintech lenders.

If you don’t want to do any of the heavy lifting, just hire a mortgage broker to compare your rate with all of their partners.

That way you get the benefit of comparing prices without lifting a finger.

You need to use the pre-approved lender

While you may be told this, it is a lie. Sure, you may feel some loyalty to the bank, lender, or broker that pre-approved for a mortgage.

But that doesn’t mean you should use them. It’s perfectly acceptable to get pre-approved, shop around, and take your actual mortgage application elsewhere.

If they don’t have the best price, or they just don’t feel right, go ahead. Thank them for helping you get pre-approved, but don’t feel compelled to stay.

And if they try to tell you otherwise, then it would be wise for you to flee quickly.

The same goes for a real estate agent who tells you to use your preferred lender. Is not true. If they push you, maybe you’ll replace them too.

You need to wait a year to refinance

Once you have your mortgage, you may be told to wait X amount of time to refinance, such as a year.

And you might hear this, whether it’s a home purchase loan or a refinance loan. In fact, you may be required not to modify your mortgage at the urging of the loan officer.

While there is it can be six month waiting periods for things like a cash refinanceand waiting periods for simplified refinances, many home loans do not have a waiting period.

This means that you can potentially refinance your mortgage only a month or two after you have obtained the original loan.

Now it would make sense to do this, and the loan originator who helped with your original loan could lose their commission.

This is why you are often told to wait at least six months after the first loan closes. But if you got a bad deal or the rates just got a lot better, waiting may not be fair to you either.

Only Refi if the rate is 1% (or more) lower

By staying in the refinance realm, some financial experts may tell you that you only refinance if X.

A common one could be only refinance if the new rate is 1% lower (or more). But these so-called general refinancing rules are not all that they appear to be.

These are really just rules of thumb that cannot be applied to all homeowners.

We all have different loan amounts, various mortgage rates, investment routes, real estate plans, etc.

As such, a single rule just doesn’t work for everyone. And here they are many reasons to refinance They have nothing to do with the mortgage rate.

This is not an invitation to serial refinance your mortgage, but do the math instead of buying a magic bullet.

Adjustable rate mortgage should be avoided

No, they are just one of the many loan programs available to you. Any loan can be good or bad depending on the situation.

Even the revered 30-year fixed term can be a poor loan choice and cost you money because it has the highest mortgage rate.

Having said that, adjustable-rate mortgages aren’t for everyone, and they come with risks, namely a higher setting.

But they can also save you a ton of money if used correctly, with a safety net in place if you don’t sell or refinance before the loan is adjustable.

If you’ve already got one foot out of the door, but refinance rates are much lower on ARMs, one could make a lot of sense compared to more expensive fixed-rate options.

Just know what you’re getting into.

Mortgages are primarily interest

Last but not least, one of my favorites. The repeated myth that mortgages are primarily interest.

But how can that be if the interest rate is only 1-3%? Well, it’s silly, of course.

While home loans are loaded upfront with interest due to how are they amortized, does not pay primarily interest.

If you keep a loan to maturity, you will pay a portion of the principal and a portion of the interest.

Principal (the amount you borrowed) must exceed the total interest paid over the life of the loan.

For example, if you take out a 30-year fixed pool at 2.75% on a loan amount of $ 250,000, you will pay $ 117,416.00 in interest.

That’s less than half the amount that was borrowed from the bank in the beginning.

The caveat is that many homeowners don’t keep their mortgages for the entire term of the loan, so they may end up paying more interest than the principal.

But if you keep your loan for more than 10 years, you will often find that the repaid principal exceeds the interest. And it will happen even faster in a fixed period of 15 years.

Nonetheless, a mortgage is the best debt you can have because the interest rate is very low and is often tax deductible.

For this reason, investing your money elsewhere can often be a better measure than prepay your mortgage ahead of schedule.

(Photo: Michael Coghlan)

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