Invest Smarter by Understanding the Top 6 Most Common Mortgage Myths

Common Mortgage MythsInvesting in real estate properties involves a significant amount of knowledge and decisions that must meet your financial goals for the near and distant future. Being able to tell the difference between what is real and what is a myth will not only help you invest smarter, but also better understand the industry and give you the chance of making a larger profit. Being misinformed about something that you plan on investing in is worse than gambling with your money. When it comes to mortgages, even a small mistake can cost you tens of thousands of dollars, so having the proper knowledge is more important than ever (Read: Mortgage Counseling Services You Need).

The mortgage industry is not the only one that is plagued by myths. Myths have a way of propagating themselves very quickly and not going away that quickly. The only way of finding out the truth, is through a little research or by seeking the help of a professional mortgage counselor. Misleading advertising tactics are part responsible for the spreading of these myths. Many borrowers truly believe lender advertisements which promise the best interest rates to absolutely everyone, or charge the same fees and closing costs.

Understanding the most common mortgage myths can help you prepare better, have a quicker and painless experience, and eventually reap the rewards of your investment. Taking out a mortgage loan can be a difficult process if you don’t have a good understanding of how things work, from the moment that you apply for a mortgage, to the moment that you pay the closing costs and start making your monthly mortgage payments. Throw a few myths in the mix, and you can become discouraged and change your mind, or become overly confident and make mistakes that will cost you, on the spot or in the near future.

The Top 6 Most Common Mortgage Myths

This is a top list of common mortgage myths, myths that can be quickly debunked by researching the basics of taking out a mortgage. Unfortunately, many borrowers and beginner investors are in a situation where they need to act quickly, or are simply careless, and end up spending more than they planned, lose opportunities, or have financial trouble later on (Read: Watch Out! Protect Yourself From Homeowner Scams). Here are the top 6 most common mortgage myths and what you need to know about them.

Myth #1 – Pre-qualification and pre-approval are the same thing

Based on your declared income and debt, pre-qualification allows you to find out how much money you can borrow. Pre-qualification makes it easier to find a home because you are aware of what your price range is. However, being pre-qualified doesn’t necessarily mean that you will be approved for the mortgage loan. Pre-qualification is based on what you declare you make and owe, so your lender will need documentation that backs up your claims. Being pre-approved when the time comes to make an offer on a home carries a lot more weight than being pre-qualified, because it means that your lender has already seen the necessary documents regarding your income, debt and credit, and they are willing to give you the loan without much more verification. A pre-approval document will make you look more serious in the eyes of a seller, and might give you the upper hand over someone who is only pre-qualified. To learn more about this click here.

Myth #2 – You need to make a 20 percent down payment

Putting down 20 percent may have been the only way to buy a home in the past, and the most common way in the present, but there are other options out there. The 20 percent will ensure that you won’t be required to pay for Private Mortgage Insurance, but that doesn’t mean you cannot put down less than that. Some borrowers may even qualify for a mortgage loan insured by the Federal Housing Administration (FHA), which will allow them to make a lower down payment, as little as 3.5 percent. Also, loans offered to current and past military personnel offered by the Department of Veterans Affairs (VA) do not require a down payment. There are other options out there, but most have stricter qualification requirements, so just keep in mind that you can make a lower than 20 percent down payment on a traditional mortgage, as long as you agree to pay a Private Mortgage Insurance for a period of time.

Myth #3 – A higher income means a larger mortgage loan

The truth is that your income has an influence over how much money you will be able to take out on a mortgage loan, but it is closely related to how much debt you have. Lenders will take a close look at your debt to income ratio, so having a large income means nothing if you also have large debt, making your debt-to-income ratio unfavorable. Lenders usually prefer that a borrower spend no more than 28 percent of his or her gross income on housing expenses, and no more than 36 percent on his or her total debt. Borrowers who are self-employed will have a harder time getting a big mortgage even if their income is large, because lenders consider their income less stable than the income of a person with an employer.

Myth #4 – Adjustable-rate mortgages are less advantageous than fixed-rate ones

It is true that you risk paying more on an adjustable-rate mortgage because the interest might increase after a while, but the interest might also decrease, making an adjustable-rate cheaper than a fixed-rate mortgage. Also, you might plan on not living in a home for a long while, which makes adjustable-rate mortgages better than fixed-rate ones. Adjustable-rate mortgages have a fixed-rate period in the beginning. The fixed-rate on an adjustable-rate mortgage will most likely be lower than the interest on a 30-year fixed-rate mortgage, for example, making it ideal for those who move a lot (Read: Even With Fixed-Rate Mortgages So Low, Don’t Overlook Adjustable Rates!).

Myth #5 – Everyone receives the advertised interest rate

Most of the time, the interest rate advertised by the lender on TV, online and in newspapers is reserved for those borrowers who have a perfect credit score, a great debt-to-income ratio and put down a large down payment. The interest rate is influenced by all these factors, plus the term of your mortgage, the points purchased and locking in your rate. You could probably read all that in the fine print of the advertisement, but most people don’t and are surprised when they find out that they don’t meet the requirement for receiving the advertised interest rate.

Myth #6 – The lowest quote that you receive is always the best

Usually, when something sounds too good to be true, it probably is. Some lenders will quote you a great interest rate and great terms for your mortgage loan, making it look like the best one that you have found. Then, after you have already started to spend time and money, everything becomes more expensive. Sometimes lenders do this illegally, but most find ways to do it legally, usually by not giving you a quote in writing, or by hiding behind the fine print. A well-known lender will probably like to avoid the bad press that this will generate, but you should always ask for things in writing before choosing a lender. Click here to read more about this.

Mortgage myths can be found in every aspect of taking out a loan, and some might make you think that you are not ready to buy a home, while others will actually cause you to spend more than you originally planned. The only way to invest your money smarter is to document yourself in order to make sure that you are in full control of everything that is involved in buying a home.

The Sooner You Know About Hybrid Mortgage Loans, the Better

Hybrid Mortgage LoansThe large majority of people who are purchasing a home do it by taking out a mortgage loan. Buying a home with cash is something that very few people can afford, and it’s not always a good investment (Read: Should You Pay for Your Home in Cash Upfront?). But mortgages come with interest rates, closing fees and many other costs, so finding a cheap mortgage becomes the number one priority when buying a home. Fortunately, there are many options out there when it comes to mortgages, and each are designed for certain categories of people.

The most popular mortgage loans feature fixed or adjustable interest rates. A fixed interest rate means that you will be paying the same interest rate for the duration of the loan, which means that you won’t have any surprises down the road. Adjustable interest rates fluctuate during the life of the loan, which means that you might have to pay either more or less in interest during the course of the repayment period.

The fixed-rate mortgage is considered safer than the adjustable-rate mortgage because the interest rate will remain the same, so you will always know how much your monthly payment will be, but sometimes an adjustable-rate mortgage may be a better deal (Read: Even With Fixed-Rate Mortgages So Low, Don’t Overlook Adjustable Rates!). Another type of mortgage is a combination of the fixed-rate and the adjustable-rate mortgages, and it is called a hybrid mortgage.

What is a Hybrid Mortgage Loan?

A hybrid mortgage loan is both a fixed-rate mortgage loan and an adjustable-rate mortgage loan. The hybrid mortgage starts off as a fixed-rate mortgage, and then converts to an adjustable-rate mortgage. During the fixed rate period, which can be up to 10 years, the interest rate remains unchanged. When the initial period ends and the mortgage is converted to an adjustable-rate mortgage, the interest will increase or decrease, based on several indices, annually until the end of the repayment period.

Hybrids are normally referred to as a 5/1 mortgage, for example. The first number represents the fixed interest rate period of the mortgage. In this example, the hybrid mortgage will have a fixed-rate period of 5 years. The second number represents the adjustment interval that will be applied once the fixed-rate period is over. In our example the interest is adjusted once every year.

Pros and Cons of the Hybrid Mortgage Loan

Like most mortgage loans, the hybrid mortgage is also designed to accommodate the need of a particular group of home buyers. Here are the benefits of such a mortgage:

  • Compared to 1 year adjustable-rate mortgages, hybrid mortgages have lower risk, and a lower interest rate when compared to most fixed rate mortgages.
  • Hybrid mortgages are a great choice for home buyers who only wish to live in the home for a predetermined period of time.
  • The interest during the fixed-rate period will be lower than the interest on a 30-year fixed-rate mortgage, making this type of mortgage a great choice for those who don’t plan on living in the home for a long time (Read: Is Flipping Houses for You?) .
  • There is always a chance that the interest will decrease during the adjustable-rate period, making the monthly payments and overall loan value lower.

The largest downside of hybrid mortgage loans is that once the initial period is finished, there is a large risk that your interest rate will increase significantly, making it hard for you to pay your mortgage on time each month (Read: Do You Recognize the Early Warning Signs for Increasing Home Interest Rates?). Most hybrid mortgages have a maximum interest increase set, usually 2 percent per year, but that 2 percent can mean a lot of money, depending on how much you have borrowed.

Hybrid mortgages are great for those who wish to remain in the home for less than 10 years, and they can work for some others as well. But before you start shopping around for any mortgage, be sure that you know what your budget is and how long you plan on living in the home. If it’s a short while, then you will actually save money with a hybrid mortgage, but if you plan on living for a long while, you should look at other types of mortgages.

Fact or Fiction? Reverse Mortgage Myths Exposed!

Reverse Mortgage MythsReverse mortgages are designed to help home owners over the age of 62. They can take out a reverse mortgage as a lump of cash, monthly payments, or as a line of credit. There are many misconceptions surrounding reverse mortgages, which make a lot of people avoid them. The truth is that reverse mortgages can be of great help when used by someone who knows how they work (Read: Buying a Home With Your Reverse Mortgage – It’s a Reality!). This article will expose the most common reverse mortgage myths.

Myth #1 – The Lender Owns the Borrower’s Home

Fact: Lenders have a few requirements when giving out a reverse mortgage, but they will not own your home. The title and ownership of the home will still be yours during the life of the loan, but the loan will have to be repaid if the owner relocates or dies.

Myth #2 – Reverse Mortgage Loan Proceeds Can Only Be Used For Certain Things

Fact: The truth is that the money you receive from your reverse mortgage can be spent however you like. You can use it for home repairs, medical bills, living expenses, or save it (Read: You Can Borrow How Much With a Reverse Mortgage?).

Myth #3 – Home Owners With a Mortgage Cannot Get a Reverse Mortgage

Fact: If you have enough equity in your home, you can use it to pay off your existing mortgage so that your reverse mortgage will be in first lien position.

Myth #4 – Reverse Mortgages Are Only Given to Low Income Seniors

Fact: The truth is that many seniors have money issues, but reverse mortgages have nothing to do with that. Many seniors prefer to take out a reverse mortgage in order to pay off their mortgages. Others use the money for medical bills, savings, travel, or even investing.

Myth #5 – Borrowers Are Evicted If They Exceed Their Life Expectancy

Fact: Reverse mortgages only have to be repaid when the borrower sells the home or dies, so living longer than expected will not have any negative effect, as long as the borrower keeps paying the property taxes and insurance, and continues using the home as a primary residence (Read: Delinquent on Your Reverse Mortgage? – Here’s the Help You Need!).

Myth #6 – Reverse Mortgage Advisors Work for the Lenders

Fact: In reality, most borrowers work with reverse mortgage advisors that are approved by the United States Department of Housing and Urban Development (HUD). Being 3rd party advisors, they have no interest but to help borrowers make the best choices.

Myth #7 – The Borrower’s Children Will Be Responsible For Paying Off The Reverse Mortgage

Fact: The borrower’s children will only have to pay off the debt if they wish to keep the property. The home can also be sold in order to pay off the debt, and any equity that remains will belong to the current home owner (Read: Top 10 Steps to a Reverse Mortgage) .

Myth #8 – Lenders Take Advantage of Borrowers Because They Are Old

Fact: Taking the time to research a lender before applying for a reverse mortgage is very important. This applies to all types of mortgages, not only reverse mortgages. Lenders will usually try to make as much money as they legally can, so it is up to you to get the proper counseling and make sure that you know exactly what you want from a reverse mortgage.

In Conclusion

Reverse mortgages may seem scary, especially if you are old. Doing a bit of research and asking for help goes a long way when considering taking out a reverse mortgage. Before starting to believe in reverse mortgage myths, you should take the time to educate yourself on the subject. That is the only way to avoid being scammed, losing money, and many other problems that can arise when taking out a mortgage without knowing what you are doing (Read: Top 10 Things to Know if You’re Interested in a Reverse Mortgage).

When to Buy and Sell a House

buy-sell-image1-150x150The ability to sell a home within a few weeks or months is determined by several variables. Some factors are hard to clue into, but the market conditions play the biggest role in your house’s turnover time on the market. In an attempt to ensure that both the buyer and the seller close a house deal without losses, strive to buy or sell a house in the best season possible. Read on to know what to look for when you’re buying or selling and what the best seasons are for both.

What to Look for When You’re Buying or Selling

  • Interest rates. The prevailing interest rates in the market are always a force to reckon with. A buyer will always want to strike a deal when the interest rates are very low so that they can have a good lock-rate deal. On the other hand, a seller markets their house most when the interest rates are high in order to make larger gains.
  • Demand and supply. The higher the demand for homes, the higher the price. Sellers will bump up their house price and buyers won’t get nearly as good of a deal. On the other hand, a high supply means lower house prices and buyers will get better deals.

The Best Season to Sell a Home

Perhaps the real estate market has indicated signs of progress and the value of homes is rising steadily! If you own a house, then you might be tempted to sell right away. But is this when you can set the best price? Not necessarily! The best price for your house will entirely depend on the time when you sell it.

The new year is always ushered in by winter—the most difficult time to sell a house. The real estate market is always slow with some buyers returning to the market after a long holiday break. So instead of selling, this time is the best for building/renovating a new home or improving your existing home. It’s best to wait to put your house on the market until May or so- this has been established as the best time to sell.

Why You Should Sell Your Home in Spring

  1. Great weather. Most buyers prefer to stay in their houses during winter. People are often caught up with holidays during the first part of the season. But the situation takes a U-turn in spring as buyers rush to buy homes so they can settle in over the summer while kids are out of school.
  2. A buying hustle and bustle. As the snow melts away in spring, many buyers are more willing to drive out to see a house. As buyers hunt for houses during this time, real estate agents begin to advertise houses heavily. This creates a bidding atmosphere with some buyers quoting more than the seller’s asking price. This means more profit for the seller.
  3. Low inventory. Spring is always a time when demand exceeds the supply. This means that there are fewer homes for the buyers to choose from. A potential seller with a quality house will definitely stand out from the crowd.
  4. Rising prices. Owing to the low inventory of houses on the market, the forces of demand and supply dictate that buyers don’t have an option but to accept buying at the ruling price. The prices can get even higher as buyers outdo one another through competitive bidding.
  5. Low mortgage rates. Spring is always characterized by the lowest mortgage interest rates. As real estate experts and economists generally agree, this is the best time to sell a home because buyers are anxious to purchase during this season.

Buyers, on the other hand, are always looking for convenience and low market prices when purchasing a home. If summer is approaching and you haven’t bought a house then you shouldn’t be in a hurry as you may want to wait for a better buying season. Winter has been established as the best time to buy a home for several reasons.

Why You Should Buy A Home In Winter

  1. Desperate sellers. With many people holed up in their houses, on vacation, and focusing on holidays, the real estate market is very dormant during winter. Since house-hunting rates are low, many sellers are desperate to close a sale. This desperation cushioned with low demand from buyers means that you can land a lucrative home deal with a low price offer.
  2. Few buyers. There are much fewer buyers in winter compared to the number of spring buyers. This means that there is often no bidding war for buyers. A house will most likely cost less during the winter season.
  3. Low moving costs. The relocation expense is not usually factored by many buyers but it can be quite high. Movers ask a low price during winter because there are fewer people moving. So relocation costs in winter will be much lower than your cost during spring or summer.
  4. Making school transitions. If you have children, then the best time to buy a home is winter. This season favors the school calendar because they can comfortably move to new schools and start again in the new year.

While you can buy or sell a house anytime, if you are looking to get the most out of your money you should seriously consider these seasons. These factors also vary from one state to the other in conjunction with the law. But before you opt to buy or sell a home, you must know what you expect and the driving force behind your decision. To make an informed decision as a buyer, be sure to read “How Much Home Can I Afford?” and take a look at our list of the “Top 10 Lenders for First Time Home Buyers”.

Pre-Approval – The First Step in Getting a Mortgage

pre approval- 150x150With lending institutions turning down 50% of all potential home buyers due to unsatisfactory credit scores, insufficient incomes, and high debt obligations, it is a good idea for borrowers to seek pre-approval to make qualifying more favorable. Getting pre-approved is the best way to know where a borrower stands in the loan qualification process. A preliminary lender can evaluate creditworthiness by requesting income, savings, debt obligations, credit reports, and credit ratings to be followed up by the lender’s appraisal regarding approval status. If qualifications are met, the amount considered for funding is also offered. Loan pre-approval will get you one step closer to being a home owner!

Steps to Take When Seeking Loan Pre-Approval

Access and Repair the Credit Reports – Evaluate the reports from each of the three credit bureaus for accuracy, checking every detail and entry for verification and correctness. Take any necessary steps to correct any mistakes affecting a lender’s decision. Take sufficient time to accomplish this important step before approaching any lender to put the credit status in the most positive framework.

Gather All Required Documentation – Along with the pre-approval or loan application, there will be numerous documents required for inspection by the lender, including proof of current and past employment via pay-stubs, existing loan documentation, credit card bills, banking statements, social security numbers, and telephone and email contact addresses. In addition, there will be requests for verification of current residency as well as a list of previous addresses and length of time lived in those locations. On top of this will be questions regarding the number of dependents, annual income, and a list of all assets including property owned, checking and savings accounts, as well as any stocks, bonds, and retirement accounts.

The pre-approval process can take anywhere from one to two weeks for complete evaluation and response from the lender. Naturally, depending upon how complete the documentation was provided, and how complex the finances, determines the response time. In addition, if the loan pre-approval is granted, it will have a 30 – 90 day time limit stipulation attached to the lending offer.

 

Smart Strategies for Getting the Best Mortgage

best-mortgage-rates-todayWhen a potential home buyer sets out to purchase a home, the primary goal is to make it as affordable as possible, so securing a mortgage with the lowest possible interest rates, fees, and  closing costs will save the buyer thousands of dollars before and after they are handed the keys to the front door.  It  requires a bit of planning and preparation, as well as some knowledge about the application process as a whole to land the best deal. Following  these smart strategies below will assist in making  this a hassle-free experience.

Evaluate the Credit Scores– A good credit score can open quite a few doors toward getting the most affordable interest rates and loan choices. Check with the three credit bureaus to find out where credit ratings stand. Determine whether or not there is any incorrect or outdated information to adversely affect the score, and take measures to improve or eliminate any derogatory influences.

Find the Best Mortgage Rates– Spend as much time investigating all the available mortgage rates as is spent looking for the right home to buy. Banks and lending sources offer a wide range of rates and fees, on and off-line, and the best rates could save hundred of dollars on monthly payments, and thousands in closing costs and up-front fees.

Determine the Affordability Factor – To keep from underestimating the true costs involved with owning a home, it is wise to also factor in the costs above and beyond the monthly payment, which may or may not include the property taxes or homeowners insurance. Make good use of online mortgage calculators to determine the loan affordability based on monthly income and expenses.

Get Pre-Approved – To meet the more stringent demands of today’s credit requirements, ask any lending institution to pre-approve the qualifications for the mortgage. The lender evaluates the credit history and credit scores, income, savings, and debt obligations to provide a mortgage qualification rating and funding amount, which elevates the credibility with other lenders and financing resources.