Top 7 Mortgage Myths Debunked
“There are many things a future homeowner needs to decide before obtaining a loan,” says TJ Freeborn, a mortgage professional at Discover Home Loans.
Because of all that goes into house hunting and securing a mortgage, Freeborn, who specializes in helping consumers understand the mortgage process, acknowledges that homebuying can be a daunting task. “People find mortgages confusing because it’s a multi-step process that deals with finances and has unique terminology and concepts,” she says. “If not explained properly, homebuyers can feel confused.”
One of the biggest issues is that there is a great deal of misinformation surrounding the homebuying and mortgage process. “Many consumers aren’t aware that they can, and should, compare lenders and shop for a mortgage,” Freeborn says. She also points out that there are several myths that can muddy the waters for homebuyers.
Before you start the homebuying process, make sure that you recognize myths — and know the facts.
Myth 1: Principal and Interest Are the Only Things Impacting Your Monthly Payment
When trying to decide what they can afford, many homebuyers base their figures on principal and interest only. However, there are other costs that are included in a monthly mortgage payment. Freeborn says that the majority of monthly mortgage payments consist of four parts — not two.
In addition to principal and interest, you can expect to have taxes and insurance included in your monthly payment. When deciding how much mortgage you can afford, don’t forget to factor in these costs as well.
Myth 2: Pre-Qualification Equals Pre-Approval
Many homebuyers think that a pre-qualification is as “good” as a pre-approval. However, this isn’t the case. “A pre-qualification is the first step in the mortgage process,” says Freeborn. With a pre-qualification, the borrower provides information to the lender, and the lender estimates how much the borrower might be able to qualify for.
Pre-approval is much more “official,” according to Freeborn. “Getting pre-approved means that a borrower has had their income and assets verified by a lender, and that their credit report has been reviewed,” she says. “With a pre-approval, the borrower knows they are backed by the commitment of the lender, and oftentimes that backing gives them more leverage in negotiations with sellers.”
You won’t be able to use a pre-qualification to show you’re serious about buying, but a pre-approval is accepted by most sellers and agents.
Myth 3: You Need a High Down Payment to Get a Mortgage
A number of consumers are turned off by the idea that they need a down payment of 10 percent or 20 percent to qualify for a mortgage. However, the reality is that there are many options out there for those who can’t find that much cash.
Home loans backed by the FHA require down payments as low as 3.5 percent, and there are programs that can help you reduce your down payment requirement. Speak with a knowledgeable home loan specialist or mortgage broker who can help you find programs offered by local, state, and federal organizations aimed at helping homebuyers qualify for loans.
Myth 4: All Mortgages Are Created Equal
Not every mortgage is the same. “It’s important to understand the components that go into determining the price of a mortgage,” says Freeborn. Some of these items include points, which are a type of fee that are used depending on the type of loan options you are provided. “Look closely at closing costs and other fees that can amount to thousands of dollars.”
It’s a good idea to look for lenders that can guide you through the process. And in some cases, it makes sense to return to a previous lender. Some lenders, like Discover Home Loans, offer bonuses and special credits for those who return for another mortgage. (See also: Wise Bread editor’s review of Discover Home Loans)
Myth 5: All Lenders Are the Same; Research Isn’t Necessary
Just as all mortgages aren’t created equal, not all lenders are the same. Freeborn suggests that you reach out to friends and family for recommendations, and that you look online for unbiased resources. She says that HUD.gov is a good place to start.
“A mortgage banker is someone you should feel comfortable with, who should be candid with you about fees, and who can flag potential issues,” Freeborn continues. “Your mortgage banker should help you make choices that best fit your financial situation.”
Don’t just choose any lender — even one at a bank where you already have accounts. Sometimes, looking online can provide you with a wider range of options for your loan.
Myth 6: Owning a Home Is More Expensive Than Renting One
While there are costs that come only with owning a home, it’s not always more expensive to buy — even with interest and taxes added in. “Depending on where someone lives, owning a home may be a wise financial decision,” Freeborn points out. “Many homeowners consider any costs or payments that go into their home an investment and see tax deductions as a plus to homeownership.”
Not only that, but there are some intangible benefits to homeownership. A monetary value can’t truly be placed on the safety, security, and pride that come with homeownership. Having a place that your family can call home and a stable living arrangement for your children is invaluable.
Myth 7: You Should Pay Off Your Mortgage Early If You Can
Finally, there is a belief that you should try to pay off your mortgage early. While this can make sense in some financial situations, it’s not always the best choice. With mortgage rates at historic lows, many homebuyers find that they are better off keeping the mortgage for the entire term and investing the money they would have used to pay off their home loan. This can lead to better returns over time. Evaluate your individual situation before deciding whether you want to pay off your mortgage early.
Discover Home Loans has provided me with compensation for my time and efforts on this article. As always, all opinions are 100% my own.