Homebuying can be a daunting task not only because it involves such complex decisions, but also because there’s a lot of misinformation circulating about mortgages. Such myths and misconceptions impede potential homebuyers in their decision making process. Even the most knowledgeable homebuyers give in to presumptions and speculations surrounding mortgages sometimes. We made an attempt to correct all such misbeliefs in one of our earlier articles—4 Mortgage Myths Busted. Since the article got a great response, here’s the sequel: 4 More Mortgage Myths—Busted!
Myth # 1
The sooner you can repay a mortgage the better.
A borrower’s instinct is to pay off a loan as quickly as possible. At first glance, it seems like the right thing to do. After all, taking the financial load off your chest can be such a relief! However, if you look a little closer, here’s what you will discover. Instead of paying off more of your mortgage, you should consider saving the extra money and investing it in something yourself. The financial experts explain that the interest earned by investing yourself will most likely outweigh the interest you pay for your mortgage during that same period of time.
Moreover, before you consider paying off your mortgage quickly, you should think about paying off your other debts first. You should always pay off your higher interest debts first, such as credit card debt or unsecured loans.
Myth # 2
The 30 year fixed rate mortgage is the best type of mortgage.
When it comes to mortgages, there is no universal ideal. What works for you might not work for others, and vice-versa.
But for some, the myth is valid. If you are buying a home with the intention of living in it for a long period of time, then the 30 year fixed mortgage plan is perhaps the best option for you. However, if you are planning to keep your home for fewer than 10 years, it makes more sense to get a fixed rate mortgage plan for a shorter period of time, say 7-10 years. Statistically speaking, the average period of ownership of a house in America is 9 years. So for the majority of homeowners, the 30 year fixed rate mortgage is actually not the best bet.
On a slightly separate note, there is also a debate as to whether Fixed Rate Mortgages (FRMs) are better than Adjustable Rate Mortgages (ARMs). The popular belief supports that FRMs are superior, because, unlike ARMs, they aren’t subject to market fluctuations. However, what people tend to forget is that ARMs shift within pre-fixed caps. So the fluctuations in ARMs are not much of a concern.
As a homebuyer, you need to understand that mortgages don’t function on a one-size-fits-all basis. The best plan is the one that works for YOU, be it the 30 year fixed rate plan or the 7 year adjustable rate plan.
Myth # 3
When it comes to saving money, renting is better than paying a mortgage.
Most people think that monthly rent payments are more affordable than the large down payment and subsequent monthly mortgage payments needed to own a home. And this certainly makes sense; one option has you paying monthly fees and the other has you paying monthly fees and a large down payment. But if you consider the debate from a long term perspective, you can see why owning a home is actually more financially beneficial than renting. Paying a mortgage on your own home enables you to build equity over time, while paying rent for the same home goes straight into your landlord’s pocket. When a homeowner sells their house, they walk away with cash in their pocket. When a renter terminates their lease, they walk away with nothing.
However, just as with your choice of mortgage type, your choice of whether to rent or buy should depend on how long you plan to stay in a home. The first few payments on a mortgage are mostly paying interest and very little of the debt on the actual house. Thus, if you are only staying for a few years, you may want to consider renting.
Myth # 4
Getting pre-qualified guarantees the loan amount to the borrower.
Congratulations! You just got pre-qualified for a loan. Hopefully, however, you already know that prequalification is different from pre-approval. Pre-qualification involves declaring to the lender your self-reported debt and income, and thereby helping them to determine the loan amount that you can be approved for. Once you pre-qualify for a loan, you can get an idea of which types of homes fit in your budget. In contrast, pre-approval is a more comprehensive process, as it consists of your lender delving into the details of your financials. Pre-approval takes into account your credit score, debt-to-income ratio, financial assets, etc. A lender grants you pre-approval once they are assured of your ability and willingness to repay the loan in a timely manner.
We hope this article helps you separate fact from fiction and make the right mortgage decisions! Happy homebuying!