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Applying for a mortgage requires a lot of work, from gathering your financial records to ensuring your credit score is in good shape. Another thing on your to-do list: keep an eye out for disinformation and bad advice.

There are numerous myths about house loans. Believing them might cost you money and time. We’ve compiled a list of some of the most frequent myths and outlined what you truly need to know.

Myth #1: Low mortgage rates mean you need to buy a home ASAP

Don’t let mortgage-rate FOMO lead you to make a big financial mistake. Sure, current mortgage rates are very low. (Well-qualified buyers have been able to snag rates around 3% since late 2020.) And, yes, lower rates mean paying less per month or affording a higher-priced home.

However, low rates have also helped push home prices up more than 19% this year. You could end up overpaying for a home just because rates are low, says Aaron Bell, a wealth advisor for Northwestern Mutual. Adding, “just because the interest rates are low it doesn’t mean it’s the right time to buy a home.”

Many experts are forecasting rate increases through the end of this year and into the next, with the average ranging between 3.15% at the end of 2021 and 3.7% by the end of 2022.

While the projected increase may make a home purchase more attractive now, the reality is that mortgage rates have been moving lower for decades. In fact, rates peaked in 1981 averaging 16.63%. Even if you do buy a home at a higher rate, you’ll have the opportunity of refinancing to a lower rate in the future (whereas if you buy at a low rate, the odds of being able to refinance at an even lower rate are smaller).

The decision to purchase a house should also always be based on your goals and how ready you are to take that financial leap, not interest rates alone.

Myth #2: You need perfect credit to get a mortgage

If you’re worried your credit score won’t qualify for a home loan, relax. There are options for borrowers who want a mortgage despite bad credit. For instance, borrowers with credit scores as low as 500 can qualify for FHA loans. VA loans usually require a score range of 580 to 660, but lenders look at your whole financial picture. USDA loans also have lower score requirements than conventional loans.

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Other factors besides your credit score also determine your eligibility for a mortgage, says Rob Heck, vice president of mortgage at online broker Morty. Lenders will also look at your income, how much savings you have accumulated, your debt-to-income ratio, and the size of your down payment.

“If you’re in good shape in several of these categories, it can be enough to overcome having a low credit score,” says Heck.

Myth #3: You need 20% of the home price for a down payment

The average homebuyer put down just 12% this year. For first-time buyers, the average is even lower at 7%.

To be sure, making a large down payment has advantages. You start out with more equity, may qualify for a lower interest rate and, at 20%, avoid having to pay for private mortgage insurance (PMI) — which protects the lender, not you.

However, putting 20% is not always possible — or required.

FHA loans only require a 3.5% down payment if your credit score is 580 or higher. If your score is between 500 and 579, 10% is needed. VA loans don’t require any down payment at all, nor do USDA loans. If you are considering a conventional loan, some lenders will require a down payment of as little as 3% and may waive the PMI requirement if your earnings are high enough.

You can also consider down payment assistance programs. These are typically administered by state and local governments or charitable organizations. Funding options include grants, low or 0% interest second mortgages and forgivable loans.

Myth # 4: Find a house, then worry about a mortgage

This is bad advice at any time, but in a hot seller’s market like today’s, believing this myth can lead you to miss out on a home altogether. Get pre-approved for a mortgage before you start seriously looking at homes. A pre-approval means that the mortgage lender has reviewed your financial information and is willing to lend you up to a specific amount of money.

It’s basically a guarantee that (unless something changes) you will have the necessary funding to buy a home. This process will tell you how large a loan you can get and will allow you to act quickly when the right house comes along.

Desirable homes are selling quickly, spending an average of 45 days on the market in October — eight days faster year-over-year and 21 days faster than in October 2019. Many sellers won’t bother considering an offer from someone who hasn’t been pre-approved.

Also remember to shop around and apply for a mortgage with different lenders. It’s the only way to make sure you’re getting the best rate.

Myth #5: A 30-year fixed-rate mortgage is always the best choice

More than 75% of borrowers opt for a 30-year fixed-rate mortgage, drawn by the long payback and resulting low monthly payments. But other options may be better suited to your goals. If you can afford higher payments, you can own your home outright in less time and for less money with a 15-year fixed-rate mortgage. Shorter-term loans also tend to have lower interest rates.

If you plan on selling your home in the near future, you can consider an adjustable-rate mortgage. The interest rate on an ARM will be fixed for a time before it becomes adjustable and starts to reset. With a 5/1 ARM, the initial interest rate is usually very low. Once it starts to adjust, however, the rate can jump significantly.

Myth # 6: You should spend the maximum amount you qualify for

You’ve worked out your budget and calculated how much home you can afford. You feel comfortable buying a home in the $400,000 range. You apply for a mortgage and, lo and behold, you get approved for $475,000. Should you bump up your budget?

A lot will depend on how comfortable you feel with higher monthly payments. You may be able to make those payments, but it could come at a cost — you may not be able to save as much for retirement, put money into a college fund for your kids or pay down credit card debt.

There’s no rule that you have to spend the maximum mortgage amount you qualify for. Your mortgage payments should complement your overall financial goals. Don’t feel the need to overspend.

Myth # 7: Refinancing a mortgage isn’t worth the hassle

For some borrowers, the thought of going through the mortgage application process again can be stressful. But the advantages a refi provides make at least finding out if it’s a good time to refinance worthwhile.

Lowering your interest rate by 0.5 to 1 percentage point can lead to big savings. Mortgage analytics company Black Knight estimates that 11.2 million well-qualified buyers can reduce their rate by 0.75 percentage points and save an average of $279 per month at the current rate. Some 1.2 million borrowers could save $500 per month. That represents a savings of $3,348 to $6,000 per year.

Consolidating debt, reducing your loan term or cashing out equity in your home to pay for repairs are other reasons to consider a refinance.

Myth # 8: You can’t pay your mortgage off early without paying a penalty

There was a time when paying a mortgage off early meant incurring a prepayment penalty. These fees were either a percentage of the loan amount or an amount equivalent to a specific number of monthly payments. In either case, they added thousands of dollars to your prepayment budget.

The good news is that many lenders don’t charge these penalties anymore. The ones that do, typically only levy the fee during the first three to five years after closing. You can pay the loan off without penalty after that period ends and you can pay extra toward your loan at any time.

Paying your mortgage off early can provide a number of advantages, such as owning your home outright sooner, saving on interest and freeing up money for other purposes. When you apply for a mortgage, ask your lender whether there is a prepayment penalty and what the terms and conditions are if there is.

Is it Wise to Have a Mortgage?

Homeownership is a worthy goal. It allows you the freedom to live your life as you see fit, as well as a sense of responsibility for your property. Many people, however, try to pay off their mortgage faster in order to increase equity, save interest, and cut ties with the bank. Here’s why we believe it’s worthwhile to keep your mortgage.

1. Equity is Unrelated to Value

Contrary to popular belief, the value of your home is completely unrelated to the equity. In fact, the value is probably going to increase whether you have a small mortgage or a large mortgage. In other words, the market is going to influence your home’s value whether you’ve got a brand new mortgage or your home is completely paid off. The lack of a mortgage doesn’t make your home a better investment, or somehow build your equity better.

2.  It Costs $$$ Either Way

When you pay off your mortgage, you are NOT eliminating an interest cost, only an interest payment.  By locking equity in your home and making greater payments on your mortgage, you lose the opportunity to save or invest those dollars. This costs you interest, yet many people are unaware of this cost because it doesn’t show up as a bill.

We refer to this as “opportunity cost.” Your opportunity cost is what you could have earned if you had used your dollars to invest or save at a profit instead of paying off low-interest, tax-deductible debt. (And yes, we actually think of this as “good” debt.)

3. It’s Potentially Your Largest Deduction

There are very few deductions left for the middle class. When you keep your mortgage, you’re actually preserving what may be one of your largest deductions. This helps shield some of your income from taxation, and at a reasonable cost.

It is only an advantage to have the deduction instead of a smaller mortgage IF you save or invest the dollars you could have used to pre-pay your mortgage. If you can invest in a side fund earning only the same low rate of return as your mortgage, the tax deduction actually makes a 30-year mortgage more efficient than a 15-year mortgage.

4. It’s Cheap Money

Nobody will lend you money to invest at a cheaper rate than what you can get for a home mortgage. Borrowing money against your home is properly utilizing your most valuable asset.

There is a difference between bad debt and good debt, and in many cases, mortgage debt is “good debt” when managed properly. There are many ways that a savvy investor can put a tax-deductible loan for 3.5% to work!

5. You’re Safer Because of It

Banks foreclose on homeowners with larger equity first because it is easy to turn those homes for a profit. A large mortgage means you are less likely to be foreclosed upon if you can’t make payments. Most likely (if you have kept your equity in a safe side fund) this will never be a problem for you.

It’s a good plan to grow your equity in a side fund. Even if your desire is to pay off your home fully, you’ll maintain more control by keeping the money you would have contributed to a mortgage elsewhere where it is under your control.

Yet until the side fund grows large enough to pay off your existing mortgage, you will be at risk. No matter how much equity you have—or don’t have—there’s nothing “safe” about not paying your mortgage! And as the 2009 mortgage crisis showed, plenty of homeowners with “underwater” homes with no equity lost them in foreclosure.

6. You Have Great Liquidity

Keeping your home equity in a safe side fund means you have access to liquid funds in the event of an emergency. It also means you can move quickly if an investment opportunity presents itself in a time-sensitive manner.

When you use your dollars to pay down your mortgage balance, your dollars are doing the only job they can do. Unfortunately, it can be difficult to access those dollars to use them to do anything ELSE now, because they are locked up and under someone else’s control. The emergency/opportunity fund that you create allows your dollars to be used for many jobs, making them far more efficient.

By keeping the dollars in a side fund, instead of having an opportunity COST, you’ve got OPPORTUNITIES.

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