Mortgage Myths Busted

December 30, 2011

Myth: A 30-year fixed rate mortgage (FRM) is always the best option.

The 30 Year FRM is attractive because, right now, it provides long-term rate protection for low payments. However, a FRM is the most expensive option in terms of the interest-to-principal payment ratio. Other loan products offer borrowers greater savings—for example, a 5/1 adjustable rate (ARM) can be more beneficial to a borrower over 7 years when compared to a 30-year fixed, given today’s rates. Consider how long you expect to keep the mortgage before moving or refinancing.

Myth: At least 20 percent down is required for a home loan.

A 20% down payment will often come with the lowest rates, without mortgage insurance, and give you the best shot at qualifying for a mortgage. However, cash-poor but good- income home buyers can get a good loan for as little as 3.5 percent down and mortgage insurance through many lenders. Sometimes it makes sense to pay the mortgage insurance in a lump-sum up front to keep your payment lower.

Myth: The rate must drop by 2 percentage points to make refinancing worthwhile.

Cutting the interest rate by even half a point can be a prudent decision. Also, do the math and check your budget. Even switching from a lower ARM to a slightly higher FRM can be a viable option that allows you to lock in your mortgage payment and not worry about interest rates inevitably rising, if not for a year or more down the road. The key is to sit down and run the numbers to find the break-even point to see if refinancing makes sense for your given situation. Don’t forget closing costs, and the amount of time it’ll take to recoup them after refinancing to a rate that saves you money each month. You’ll have to remain in the home for sufficient time after refinancing if you want to recoup your closing costs and not cancel out potential savings.

Myth: There’s no point in shopping around for a mortgage when all lenders offer the same programs.

There may be fewer loan programs available today then there were 5 to 10 years ago, but lenders continue to offer a host of different home loan programs. And rates can vary by more than a point from one lender to another. Always comparison shop for home loans, but not just the interest rate. Look at closing costs and other fees that can amount to thousands of dollars.

Myth: A pre-qualification is the same as a pre-approval.

A mortgage loan pre-qualification is simply an estimate of how much house you likely can afford and, based on that, how much money a lender might be willing to loan you. Pre-approval means that a borrower has a commitment from a specific lender for mortgage funding based on actual credit, income and asset verification. Most sellers won’t consider your offer if you don’t have a pre-approval from a well-known lender.

Please let me know if you would like a referral to a trustworthy lender.

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