Getting a mortgage can be an overwhelming process filled with confusing terms, misconceptions, and hard-to-understand loan options. It isn’t just first-time buyers who can feel they are in over their heads; buyers on their second or third home purchase may also fall for common mortgage myths that can end up costing thousands over the life of the loan. The following are some of the most common myths about getting a mortgage that should be dispelled.
Myth #1: The down payment is the only upfront cost when getting a mortgage
The down payment is often one of the largest upfront costs of taking out a mortgage, but it isn’t the only expense to pay at closing. As a general rule, closing costs are 2-5% of the home’s purchase price and these fees are usually split between the buyer and seller. The average buyer pays about $3,700 in closing fees in addition to the down payment. Closing costs include not only loan-related fees like a loan origination fee and discount points but property-related fees like a home inspection and appraisal. It may be possible to roll the closing costs into the mortgage to pay them over time, however.
Myth #2: It’s impossible to get a mortgage without excellent credit
One of the most common mortgage myths that hold back potential home buyers is the myth that getting a mortgage is only possible with very good credit. The truth is it’s possible to get a home loan with a credit score as low as 600 with the FHA program or a score as low as 620 with a conventional mortgage. A borrower’s credit score is just one of many factors a lender considers along with ability to repay and debt-to-income ratios.
Myth #3: If the bank approves a mortgage amount, it will be affordable
Many homebuyers make the mistake of assuming they can afford whatever the bank approves them to borrow. A lender’s approval decision is typically based on the borrower’s current income and assets — but not the borrower’s comfort level. A borrower may be approved to borrow enough for mortgage payments to reach 30% to 40% of his or her income, a level of debt that may not be comfortable or feasible in the long run.
This can lead to being “house poor,” a situation that refers to someone who spends a large share of their total income on mortgage payments, home maintenance, property taxes, homeowner’s insurance, and utilities.
Myth #4: A 30-year fixed rate loan is always the best option
The traditional 30-year fixed mortgage is the most common home loan and it works well for many borrowers, but that doesn’t mean it’s the right choice for every home buyer. A 30-year fixed mortgage means lower monthly mortgage payments but a higher interest rate and much higher interest charges over the life of the loan.
Borrowers who can afford the higher monthly payments of a 15-year fixed mortgage can save tens of thousands of dollars. For borrowers who do not plan to live in the home for many years, an adjustable-rate mortgage (ARM) can also be a good option for very low interest rates for the first few years.
Myth #5: It’s a good idea to pay off a home loan as soon as possible
While it may seem wise to pay down any debt as soon as possible, this isn’t necessarily true with mortgage debt. Home loans typically have the lowest interest rates of all types of debt. If the loan has a rate of 4%, paying off an extra $1,000 is like earning 4% interest on the money — but investing the $1,000 instead will typically offer a better return.
Other debt should also take higher priority than a mortgage, particularly high-interest credit card debt and student loans.
Myth #6: FHA loans are only for home buyers with bad credit or low income
The FHA home loan is one of the most popular loan programs in the United States. These loans, which are insured by the Federal Housing Administration, are especially popular among first-time buyers as FHA loans require a low down payment of just 3.5% and lending standards are generally looser than standards for a conventional mortgage.
It’s a common misconception that FHA mortgages are only a good choice for borrowers who have bad credit or lower income, but these loans can also offer advantages for other borrowers. For example, FHA loans tend to offer very competitive interest rates and borrowers who put down at least 20% can avoid PMI insurance.