By definition, a myth is a frequently told story that offers an explanation. However, repetition doesn’t make something true. While some myths are likely pure fantasy, others can be the result of misunderstandings, misconceptions, or outdated information. When making major financial decisions, you can’t afford to let myths lead you astray. Before seeking a home loan, take a little time to discover the truth behind these common mortgage myths.
Debunking Common Mortgage Myths
The history of mortgages extends back into ancient times, so mortgage myths have certainly had plenty of time to develop, grow, and circulate (source). Adding to the confusion is the fact that mortgages are a complicated subject. There are countless possibilities, and to explore them thoroughly, you will need to become familiar with some new vocabulary, delve deeply into details few people examine closely, and consider both your current and future finances. It’s a daunting process, but clearing away the fog of these common mortgage myths will make it easier for you to make smart decisions.
Myth: You Need an Excellent Credit Score to Secure a Mortgage
You do not need an excellent credit score to get a mortgage (source). In fact, there are several programs and organizations that work to help people with less-than-stellar credit become homeowners. A better credit score does increase your chances, however, of securing a mortgage with a better interest rate. Since a better interest rate can significantly lower the overall cost of your loan, it’s definitely worthwhile to tidy up your credit report and build up your credit score before seeking a mortgage if you have the time.
Myth: Prequalification Is the Same as Preapproval
When you begin shopping for a mortgage, you’ll probably encounter a lot of new vocabulary, including prequalification and preapproval. While these terms may sound similar, they are not synonyms. The difference is in the documentation (source).
When you get prequalified, the lender uses information that you provide about your financial situation to determine the loan amount for which you would likely qualify. When you get preapproved, you don’t simply fill in the blanks. You have to provide documentation regarding your financial situation, and the lender verifies it. Although both prequalification and preapproval provide you with insight into how much you can borrow, preapproval requires more work, offers a more accurate picture, and garners more respect from real estate agents and sellers.
Myth: Getting Prequalified Guarantees That You’ll Get the Loan
Obtaining prequalification does not mean that the home loan that you want is yours. According to Business Insider, the only time that you can be certain that you have secured a mortgage is when you are approved for one. Another one of the most common mortgage myths is the idea that preapproval translates to securement of a mortgage. A letter of preapproval is not a promise of a loan or specific rates or terms (source).
Myth: A Down Payment of at Least 20 Percent Is Necessary to Secure a Good Mortgage
Although a 20 percent down payment is considered the ideal, it’s not a necessity. According to realtor.com, there are several loan programs that accept smaller down payments. Why is the 20 percent figure tossed around so often? With many conventional loans, putting down less than 20 percent as a down payment will mean that you have to pay for private mortgage insurance, which can result in a higher monthly payment.
Myth: The Best Mortgages Are 30-Year Mortgages
The Motley Fool reports that 30-year mortgages are the most popular mortgage option for Americans, but that doesn’t mean that they’re your best bet. Your choice of mortgage term should be determined by your specific situation. A shorter loan term allows you to pay the loan off quickly and generally comes with a lower interest rate, but it also means higher monthly payments. On the other hand, a longer loan term typically comes with a higher interest rate, but stretching the loan out over more time means that your required monthly payments are lower.
Myth: Paying Off Your Loan as Soon as Possible Is Always the Smartest Strategy
Being in debt can be unsettling, and many people will urge you to pay off whatever you owe as quickly as possible. While a mortgage is a financial obligation, however, it’s quite different from other forms of debt. Investopedia offers three good reasons not to rush to pay off your mortgage. For starters, mortgage payments are tax deductible, so having a mortgage reduces your taxable income. There’s also the fact that, thanks to their relatively low interest rates, mortgages are among the cheapest loans; repaying your mortgage over time allows you to participate in other investments and build additional wealth. Finally, while many people want to eliminate their monthly mortgage payment, experts say that having to pay an installment regularly actually helps people to maintain a healthy, responsible financial mindset.
Myth: All Lenders Are the Same
When it comes to mortgage lenders, levels of experience can vary widely, and different lenders offer different programs and opportunities. Research lenders carefully. Look for a lender who is willing to help guide you through the loan process, who has a reputation for expertise, personal attention, responsiveness, and integrity, and who can match your borrowing needs (source).
Don’t let common mortgage myths trip you up as you prepare to purchase the home of your dreams. If you live in the Kansas City area, contact PrimeLending today. Our committed team will help you navigate the home hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. We’re more than happy to navigate you through the process of buying your first home. When you’re ready to learn more, please give us a call at 844-701-5626.