Buying a home is one of the most important and exciting purchases you’ll ever make, so understanding the mortgage process should be your top priority as a first-time homeowner. A little bit of wisdom and a lot of planning can help you avoid costly mortgage mistakes, so here are the truths behind some of the most common mortgage myths.
Myth #1: Having a mortgage is more expensive than paying rent. Renting a home can actually be more expensive than owning one. Homeownership can help you save significantly at tax time by deducting the mortgage interest, mortgage insurance and property taxes you pay. It also builds equity over time that can be used to cover loans, cash out refinances, and lines of credit which can be used to improve your home and boost its value. Your mortgage payments may not be cheaper than rent in direct comparison, but over the long term, buying a home has a number of financial benefits.
Myth #2: Once you pre-qualify, then you’re set. Getting pre-approved for a mortgage may make you a more competitive buyer, but that doesn’t mean your mortgage-securing process is over. The prequalification process is simply to get an idea of how much qualify to borrow based on your credit and debt-to-income ratio, but the bank will have a number of follow-up questions related to your financial and income situation. If you are self-employed or have a new job, you may have to supply additional information to combat any possible risks this may provide.
Myth #3: Comparing mortgages at the advertised rate. Lenders advertise low interest rates but may make up for them with high fees. So comparing a 3.5% rate to a 3.6% rate isn’t as obvious a decision as it appears. Since most mortgages have fees, it’s important to compare APRs (annual percentage rates) from lender’s truth-in-lending disclosure forms to see which mortgage really costs the least. Make sure you’re shopping around before jumping at what seems the lowest rate upfront.
Myth #4: Your mortgage payment should be exactly 28% of your income. It’s not realistic to simplify all the financial factors that go into this big of an investment into one standard percentage. What are your savings goals? Your other monthly spending? Any other debt you currently have? There are a number of mortgage calculator tools that banks and lenders provide in order to help you estimate what you can a lot to your monthly payments.
Myth #5: You need to pay your mortgage off ASAP. It seems sensible to prioritize paying off your mortgage, especially with low current interest rates. But compare this rate and it return on your money to other things you could be investing in, such as a retirement account with maybe a 6% or 8% earning over the long run. Credit card interest rates can even be 2-3x higher than your mortgage interest rate, and isn’t tax deductible, so make sure you are considering all your options and current situation when deciding where to spend your money.
Myth #6: Your credit score needs to be perfect. Even if your credit isn’t excellent, that doesn’t mean you won’t be able to qualify for a mortgage. It’s true that the higher your score, the better your interest rate will be, (anything above 670 is typically good), but each lender has its own minimum score, and consider additional factors when reviewing your financial situation as well. It’s a good idea to start gathering all the information you need and start working on raising your score now.
Understanding the mortgage process is the first step to owning your new home. The more you know, the better prepared you’ll be, so you can stop stressing about your finances and fully enjoy all the excitement that comes with buying a beautiful new home!