Buying a house or refinancing an existing property can be overwhelming, especially with all the conflicting information out there. You might have heard some persistent myths surrounding mortgages that you’re not sure are accurate — but don’t worry.
We’re here to help separate myth from fact and provide expert advice on how you can make informed decisions during the mortgage process. In this post, we’ll discuss common mortgage myths and facts so you can easily move forward knowing your financial future is secure.
Myth 1: Worry About the Mortgage Only When You Find a House
This is a common misconception, as the mortgage decision should be made at the very beginning of your home-buying journey. You should know what you can afford and get pre-approved for a loan before you start searching for a property. This way, you’ll have an idea of your budget and will be able to narrow down your search accordingly. Additionally, when you make an offer on a house with pre-approval in hand, it makes it more attractive to sellers who may not consider offers from buyers without secure financing.
In October, desirable homes tend to sell like hotcakes – only requiring an average of 45 days on the market. This is a lightning-fast 8-day difference compared to last year and 21 days faster than in October 2019. If you want to be taken seriously as a buyer, getting pre-approved is an essential step in the home-buying process. Most sellers won’t even contemplate an offer if prospective buyers haven’t already been approved for financing.
Myth 2: Mortgages are Always 30 Years Long
The average length of most mortgages is 30 years, but there are many other options available depending on your situation. Some lenders offer 15-year mortgages, which require a higher monthly payment but give you the benefit of paying off your loan in much less time. This can save you thousands on interest payments over the life of the loan. Alternatively, if you’re looking to keep your monthly payments low and don’t mind paying more interest over time, a 10 or 15-year mortgage might be right for you.
Myth 3: You Can’t Refinance Your Mortgage
Refinancing is when one takes out a new loan to pay off an existing debt, such as a mortgage. There are many reasons why someone might want to refinance their mortgage – they could need lower monthly payments, want to shorten the term of their loan, or reduce their interest rate.
Refinancing can be a great way to save money and adjust your loan to better suit your needs. However, it’s important to note that refinancing comes with certain costs such as closing fees and other associated expenses. Make sure you do your research and speak to a financial advisor before making any decisions about refinancing your mortgage.
Myth 4: You Can’t Get a Mortgage If You Have Student Loan Debt
This is not necessarily true – having student loan debt does not automatically disqualify someone from getting approved for a mortgage. What matters most is how much debt you have in relation to the amount of income you make each month. Lenders look at what’s known as your “debt-to-income ratio” to get an idea of how much they can afford to borrow.
If your debt-to-income ratio is too high, it may make it difficult for you to obtain a favorable loan – but that doesn’t mean it’s impossible. Your best bet is to work with a lender who understands your financial situation and can help you find the right loan for you.
Myth 5: You Need a 20% Down Payment
This myth has been around for a long time, but today there are many options available that don’t require this amount of money upfront. For example, if you qualify for an FHA loan, they only require a 3.5% down payment and even offer loans with as little as 0% down. Additionally, many lenders offer mortgage programs with low or no down payment options for qualified buyers, such as veterans and certain first-time homebuyers.
Investigate the possibility of receiving assistance with down payments through your state or local government and charitable organizations. Such programs are readily available, making them an ideal option for those seeking financial help. Financing options available to you may include grants, no or low-interest second mortgages, and even loans that are eligible for forgiveness.
Myth 6: It’s Not Worth Refinancing a Mortgage
The decision to refinance your mortgage is a personal one and it depends on your financial situation. However, if you’re looking for ways to lower your monthly payments or shorten the term of your loan, refinancing may be worth considering. Refinancing can also help you save money in the long run by reducing your interest rate and allowing you to pay off your loan more quickly. Ultimately, the best way to decide if refinancing is right for you is to consult with a financial advisor who can help you weigh the pros and cons of each option.
A mere 0.5 to 1 percentage point reduction in your interest rate can result in substantial savings – it’s worth considering. Black Knight, an esteemed mortgage analysis company, estimates that 11.2 million qualified buyers can enjoy a 0.75 percentage point decrease in rate and save approximately $279 monthly at the current level.
By taking advantage of savings opportunities, 1.2 million borrowers could reduce their monthly payments by up to $500 – a combined potential annual saving of between $3,348 and $6,000. If you are looking to pay off debt, shorten the duration of your loan or secure funds for home repairs, refinancing might be the perfect solution. Take advantage of the equity in your home and get on track toward a financially sound future.
Myth 7: You’ll Get a Penalty for Paying a Mortgage Early
This is generally not true. Most lenders do not charge a penalty for early repayment of a mortgage, and in some cases, you may even get a rebate on the interest paid if you pay off your loan before its due date. It’s always a good idea to check with your lender before making any decisions about early repayment to ensure that everything is above board and to determine if there are any fees involved.
In the past, paying off a mortgage early meant incurring costly prepayment penalties. These fees could be either expressed as a percentage of your loan amount or an amount that equaled several months’ worth of payments – both adding thousands to your budget for pre-payment. Fortunately, these penalties are no longer enacted in most cases today.
Fortunately, several lenders have stopped charging these penalties. The ones that still do generally apply the fee just in the initial three to five years after closing your loan. At the end of your loan term, you can easily pay off your loan without facing any penalties. Moreover, if you wish to accelerate repayment and become debt-free sooner than planned, then consider making extra payments towards it.
Myth 8: Only Spend the Maximum Amount You Qualify For
It’s important to remember that the loan amount you qualify for is not necessarily the same as what you should borrow. When determining how much home you can afford, be sure to consider all of your other expenses and income. Also, it’s wise to have a healthy emergency fund in place before making such a large purchase.
When looking at mortgage loans it’s important to find one that fits within your budget and not just what you qualify for. Just because a bank tells you that they will lend you money doesn’t mean that it’s the best decision for your financial health. Many lenders are more than happy to approve larger than necessary loan amounts, so make sure to do your research when deciding on the appropriate loan size.
There is no obligation to commit to the most extravagant mortgage payment you are eligible for. Instead, prioritize your financial goals and strive for a monthly cost that maximizes both them and your lifestyle preferences. Don’t let yourself get carried away with spending more than you need!
Myth 9: It’s Mandatory to Have a Perfect Credit Score to Get Approved for a Mortgage
The truth is that while good credit certainly helps in the mortgage application process, it is not a deciding factor. Instead of focusing on having an impeccable credit score, focus on improving your overall financial health by paying off existing debts and maintaining a consistent history of responsible borrowing.
Having a perfect credit score may make you eligible for certain loan options with great rates but there are still many other financing opportunities available even if your score isn’t picture-perfect. A lender may be willing to overlook some credit issues when evaluating your application if other factors such as steady income or significant equity in the home work in your favor. Look into programs like FHA loans which are designed to help people with lower credit scores become homeowners no matter their circumstances.
No matter your credit score, it’s important to begin the process by speaking with a qualified lender who will review your qualifications and provide advice on what options are available. While having a good credit score is an asset, you don’t need perfect credit to be approved for a mortgage loan. With the right lender and knowledge of the market, you can find financing that works for you.
The Bottom Line
Mortgage myths can be a confusing and overwhelming subject to navigate, but separating fact from fiction can help you make informed decisions about your home financing. Remember that everyone’s situation is different, so it’s important to research and consider all options before making any major financial decisions. When in doubt, consult with a qualified real-estate professional or mortgage lender for personalized advice tailored to your individual needs.
