A mortgage is the largest single loan that most people will ever obtain in their lifetime, and with so much financial pressure it’s essential that you understand the process of obtaining a loan, repayment, and other critical factors that can impact your mortgage over time. Unfortunately there are some myths out there about mortgages that might cause some confusion, or cause you to miss out on the benefits that a mortgage can offer. We’re going to set the record straight on three common myths we hear.
Myth #1: You must have 20% to put down before you can buy a home
While it’s nice to put money down on a home, and we would encourage you to do so if you have that money available, it’s not actually a requirement. The benefit of putting money down is that it can provide immediate equity and lower your monthly payments and your overall mortgage loan, but if you are unable to come up with 20 percent there are other loan products for which you can qualify besides a conventional fixed-rate mortgage.
Even in cases where you do have 20 percent to put down, if that would wipe out your entire savings it may be more financially prudent to only put some of it down—for example, 10 percent—and save the rest in your “rainy day” fund.
Myth #2: There’s nothing I can do about the interest rate on my loan
Interest rates are perhaps the most critical factor in a mortgage loan, because lower interest means you will have a lower monthly payment and over the life of a 30-year loan you will pay less in interest. The best way to get a good rate is by having good credit, so if you are planning to purchase a home in the future, start checking your credit report now. The easiest actions you can take to improve credit are making all your payments on time for things like credit cards, student loans, and car payments, and paying down the existing debt you have.
If you are still unable to qualify for the lowest rate there are options to pay for “points”, which involves paying up front to lower your interest rate over the duration of your loan. Since there is cost at your mortgage closing, it will generally be more beneficial for homeowners who plan to remain in their house for a long period of time. If you’re thinking you might move in a few years, paying an up-front fee to lower the amount you’ll owe over the life of the loan might not be as good a deal. Talk to your mortgage professional to find out if it seems like a good option for your loan.
Myth #3: Fixed rates are always best
There are two main types of loans: fixed rates and adjustable rates. Fixed rates have a set rate that is locked in for the duration of the loan, while adjustable rates can change based on the market. The former is good if you can qualify for a low rate; the latter might be more beneficial if you think that rates will go down over the next few years. There are also hybrid options that can fix your interest at a low rate for a period of time, usually between 3 to 10 years, after which point it will adjust to market rates. This situation can work great for homeowners who only plan to stay in a house for a short period of time, because you can take advantage of lower locked-in rates now and sell the house before the rates start to adjust.
Talk to a mortgage professional to clear up any confusion and questions you might have about buying a home. It’s important to be clear about all your options and avoid the myths so you get the best possible loan.