Mortgage myths can make the home-buying process confusing — especially for those who are going through it for the first time.
What should you look for in a mortgage? How do you know if you have a good interest rate? How much down payment do you need?
One quick Google search for the answers to these questions and more can turn up all sorts of misinformation.
In real estate transactions, time is of the essence. Simply applying for a mortgage is a tedious process so you definitely don’t want to waste your time following bad advice.
That’s why we’re here. Let’s debunk 10 common mortgage myths.
Myth #1: You Must Have a 20% Down Payment
The idea of coming up with a 20% down payment to buy a home can be overwhelming. Yet, many people are under the assumption that this is what is needed — or else you won’t be able to make the purchase.
This is a myth that stems from the common lender requirement of private mortgage insurance (PMI). This protects your lender should you default on the loan. How it works is if you do not put down 20% of your loan as a down payment, you may have to make up the difference by purchasing PMI. This will add additional payments to your monthly mortgage payment until you reach 20% equity.
Conventional loans usually require 3% down and many first-time buyer programs don’t require any down payment at all. Know your mortgage options before you apply.
Myth #2: You Can’t Qualify for a Loan Unless You Have Perfect Credit
Having perfect credit means you have access to the best loan options available. However, you do not need to have perfect credit to buy a home.
If your credit score is less than perfect, don’t be discouraged. There are many mortgage options, each with its own credit requirements. Some work with credit scores as low as 580.
Myth #3: Renting is Cheaper than Buying
The idea of investing in something that is hundreds of thousands of dollars, like a new home, can seem excessive when compared to paying a small monthly rental payment. But when you look at the bigger picture, it is easy to see that renting is not cheaper than buying.
Here are a few things to consider:
Homeownership builds equity, meaning that you are paying money into something that is yours. Renting, on the other hand, is paying money to someone else with no concrete long-term gain.
With most loans, mortgage payments are fixed. Rental payments are not.
When you own a home, you can usually take advantage of tax benefits.
Renting can be more costly, shelling out a lot of money each year with nothing of value to show for it.
Myth #4: The Lowest Interest Rate is Always the Best
Most people look for the lowest interest rate. But is that always the best option? No. This is another one of the common mortgage myths you will want to avoid.
Sometimes lenders can entice buyers with a low rate and then hit them with higher fees, including loan origination fees, PMI, closing costs, and the like. Take a closer look at your loan’s APR in order to confirm the interest you’d be paying.
Myth #5: Adjustable Rate Mortgages (ARMs) Are Always a Bad Idea
An adjustable-rate mortgage (ARM) will have an interest rate that changes over time. It may begin with a low, fixed interest rate before it begins to fluctuate up and down. Homebuyers often shy away from ARMs because of the uncertainty.
Does that mean ARMs are always a bad idea? Not at all. Some may find it to be the best choice, especially those who don’t intend to live in the home for a long time or who plan to pay the loan off early.
Myth #6: Pre-Qualification and Pre-Approval are Essentially the Same Thing
Pre-qualification and pre-approval are not the same thing. Both are assessing your qualifications for a mortgage, but one requires more verifications than the other.
A mortgage pre-qualification means that your chosen lender has used very basic, self-reported financial information to assess whether or not you may be approved for a loan — including how big of a loan you will qualify for.
A mortgage pre-approval is a little more in-depth, often including the review of some of your financial information rather than just going by self-reporting. This will give you more detailed results about the size of the loan you may be approved for.
Myth #7: The Down Payment is the Only Upfront Cost
As many search for their new home, they may assume that having their down payment is all they will need when it comes time for the real estate transaction. It is important to note that there will be closing costs that will vary based on the price of the home. These will have to be paid upfront, too.
Myth #8: A 30-year Fixed-Rate Mortgage is the Best
Sure, a 30-year fixed-rate mortgage is one of the most popular loans out there, but it is not the only one. There are other mortgage options available that may be a better fit for you. For instance, 15-year mortgages often have lower interest rates and help you build equity faster.
Always check your options before assuming one loan is better than another.
Myth #9: People with Student Loan Debt Cannot Get Mortgages
The last of these 10 common mortgage myths – Student loans stick around for a long time. Don’t fall for the mortgage myth that this debt will keep you from being able to buy a home. It will not.
Lenders are more concerned about how much income you have and how much money you have in the bank than they are about how much student loan debt you have.
Myth #10: You Can’t Have Debt and Buy a Home
How many times have you told yourself that you’d start the homebuying process when you paid off this credit card or that outstanding bill? Needing to be debt-free to buy a home is a myth. As long as the debt-to-income ratio is where it needs to be, you can have debt.
Lenders are only concerned with your ability to pay the mortgage with the amount of debt you carry.