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They may sound like good advice at first, but once you scratch the surface of these six common mortgage myths, you could find a different story. Don’t let these misconceptions keep you from your dream of owning a home.
Fact: Though popular, this type of mortgage may not be ideal in every situation. For example, if you only plan to stay in your house for a few years, you could save money with an adjustable-rate mortgage—which may have a much lower initial interest rate. A 15-year fixed-rate mortgage is an option for those who can handle higher monthly payments; making 180 payments versus 360 will save tens of thousands of dollars in interest over the life of the loan.
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Fact: Putting 20 percent down is ideal, but not having it isn’t a deal breaker—there are loans that require much less. But when you put down less, you’ll probably have to pay for private mortgage insurance, or PMI. It protects the lender if you default on the loan, and the cost is tacked onto your monthly payment until you reach 20 percent equity in your home—at which time you can cancel your PMI.
Fact: No doubt, the interest rate is important, because it affects the size of your monthly payments. But it doesn’t take into account other costs associated with the loan, such as closing costs and points (fees paid directly to the lender in exchange for a lower interest rate). A better measurement for comparing loans is APR—the annual percentage rate. It factors in all those extra charges and represents the total cost of the loan.
Fact: Having good credit is a major factor in getting approval for a mortgage—especially one with a low interest rate. But lenders will review your entire financial situation, and home shoppers with less-than-perfect credit scores often can still qualify for a loan. Just be prepared to pay a higher interest rate. To increase your chances of getting a better rate, take steps to improve your credit score—like paying down debt and paying bills on time—before shopping for a home.
Fact: When you first begin looking for a home, getting pre-qualified for a mortgage can give you a general idea of what you can afford. But it’s only based on preliminary numbers—such as your stated income, assets and debt—and it’s not guaranteed. The preapproval process is much more in-depth. Your lender will analyze your credit score, verify your income and assets, and gather all the necessary documentation to submit the loan to an underwriter for review. Having a preapproval letter—a commitment from your lender to loan you a specific amount—puts you in the best position to make an offer on your next home.
Fact: While it never hurts to make extra payments and reduce the principal on your mortgage, it might not always be the best use of your money. If you have high-interest credit card debt, it’s a smarter move to pay that off first. Or, if you have a retirement account that will earn, say, 6 to 8 percent in interest, putting your extra money there might be a better long-term investment. Additionally, depending on your situation, mortgage interest may present certain tax advantages, and you may want to consult a tax advisor.