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.

Mortgage Myths Finally Explained

Mortgage Myths Finally Explained-150x150Before buying a home, most people go through the same process, which mostly involves researching for lots of information. While going through mortgage loan options, pros and cons of each type of loan, and using mortgage calculators, you may come across on some information that has very little truth to it. Mortgage myths are very common, especially online, where anyone can post information about buying a home. While some of these myths are harmless and you will probably find out the truth before buying a home, there are others which can potentially cause some serious damage, and interfere with your ability to buy a home. In this article, we will explain some of the most common and dangerous myths, to ensure that you make the best decisions when shopping for a mortgage loan.

Top 5 Mortgage Myths

  1. The best mortgage is the one with the lowest interest. Looking only at the interest rate when comparing mortgage loans is a huge, but common, mistake. Several other important factors should be researched before deciding on a mortgage loan. Things like the overall cost of the loan, the down payment required and the closing fees are also important, if not even more important than the interest rate. There are also the adjustable-rate mortgages which offer a low interest rate in the beginning, but which can increase significantly over the repayment period.
  2. Pre-approved for a mortgage loan is like already being approved. The mortgage loan pre-approval process is designed to take a simple look at your financial situation, and give you an idea about how much you can borrow. Once you find a suitable home, you will have to provide more important information about your finances, such as employment information, to your lender. Sometimes, this additional information can affect the amount of money that your lender will let you borrow, or even cause your lender to refuse giving you a mortgage loan.
  3. 30-year mortgages are your best choice. 30-year mortgage loans are, indeed, very popular, and probably the most common choice among home buyers, but that doesn’t mean that this type of loan is the best for you. Depending on your situation, a 15-year loan, for example, might be a better choice, even if the payment will be higher. Paying off a loan in half the time, means that you will save significantly on interest, which will make the overall cost of the loan lower, and save you money.
  4. Fixed-rate mortgages are your best choice. Fixed-rate mortgages may be more popular, but you should decide on which loan you want to go with, based on your situation. For example, many home buyers don’t live in the home that they bought for very long, which makes adjustable-rate mortgages a better option for them. Adjustable-rate mortgages start out with a fixed interest rate, which lasts for a predetermined period, and it’s generally lower than the interest rate on a fixed-rate mortgage loan. By getting a mortgage loan with an adjustable-rate, you will be saving money over a loan with a fixed-rate, if you don’t plan on living in the home for a long while.
  5. You won’t be granted a mortgage loan if your credit score is low. Credit score has a large influence on whether you receive a mortgage loan or not, the loan type, loan amount, interest rate, and the down payment. But having bad credit doesn’t necessarily mean that you will be refused when you apply for a mortgage loan. You lender will see you as a high default risk, and your loan will probably not have the best terms, such as the interest rate, and the required down payment, but your lender will be willing to help you buy a home. After all, they have only to gain if they bring in a new customer.

You’ll be encountering mortgage myths at every step when researching mortgages and the home buying process. It is up to you to tell apart myth from reality. Knowing the dissimilarity between these two can make the difference between getting a mortgage loan that you are comfortable with, or one that will cause you nothing but issues down the line. Getting the best deal is your main goal when shopping for a mortgage, so being prepared will help you avoid falling into some expensive traps, and even ruin the chances of becoming a home buyer.