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Common Mortgage Myths

Knowing the truth behind mortgage myths can save you money. Whether you're buying a home for the first time or trying to refinance, you might have been misled in the past about some common mortgage beliefs. As with every big purchase, be sure to study all the options before deciding which is best for you.


Mortgage Myth 1

A 30-year fixed mortgage is the best mortgage option out there.

These days, the average homeowner will stay in a house for nine years. If you're a first time homebuyer, that average goes down to just a few years. If you fall under this category of homebuyer, an adjustable-rate mortgage (ARM) might be better for you. While interest rates on fixed mortgages are fairly low right now, ARM rates are starting out even lower. These introductory rates could last up to 10 years before rising when it's time for them to adjust. Of course, if you're looking to spend the rest of your life in your new home, a 30-year fixed mortgage is probably what you need.


Mortgage Myth 2

You have to save up for a huge down payment before buying a home.

Some people feel that a minimum 10 percent of the purchase price is required for a down payment on a home. Some even go as high as 20 percent. However, there are many lenders out there with loan programs for homebuyers that can only afford five percent or less on a down payment. Some lenders will even accept zero down. So, if you're living paycheck to paycheck right now and feel like you're stuck in a vicious bill cycle without an opportunity to save, don't panic. There may be a loan option out there for you.


Mortgage Myth 3

If you don't pay 20 percent down, you have to buy mortgage insurance.

This is not necessarily true. Now there's an option out there called piggyback financing to help you avoid purchasing mortgage insurance. A piggyback loan is essentially a second loan designed to minimize your down payment. Your first mortgage loan covers 80 percent of the purchase price, and, depending on how much you can afford, the second loan can cover 10 percent or even 15 percent of the remaining cost. There are a couple advantages to taking this route. First of all, it maximizes the amount of house you can afford by decreasing your down payment. Second of all, it increases your tax deduction. The interest on a piggyback loan is tax deductible, while the premiums for mortgage insurance are not. However, a disadvantage of the piggyback loan is that the interest rate may be at a higher rate.


Mortgage Myth 4

Refinancing your mortgage extends your loan term by another 30 years.

Many homeowners are reluctant to refinance for fear of starting over on their payment plan. However, there are ways to get a lower monthly payment and still stay on track to finish at the same time. All you need to do is ask your lender to amortize your payments to get a shorter payment schedule.


Mortgage Myth 5

Bad credit takes away your chances to qualify for a loan.

If you have a damaged credit history, you could still be qualified for a home loan. Things like bankruptcy, repossession or a habit of paying bills late can make you a very high-risk loan candidate. The truth is, there are a lot of lenders out there that make it their business to help homebuyers with less than perfect credit.


Mortgage Myth 6

You need to pay off your mortgage as quickly as you can.

Usually, homeowners feel like they need to get rid of their monthly mortgage payments as soon as possible. However, if the interest rate on your ARM can be deducted from your federal taxes, your effective interest rate will be lower. Therefore, it makes more sense to pay off other forms of debt first, such as high-interest credit cards or car loans. It can be a good idea to pay off a mortgage early if doing so helps you achieve your long-term financial goals and if you have no other debt.


Mortgage Myth 7

It doesn't matter where you get your loan, all lenders offer the same products.

The truth is, different lenders have different incentives and they might not have your best interests in mind. Also, you should take into consideration the array of products that different lenders offer. Most banks and credit unions might not have quite the variety of loan options to choose from, while a mortgage banker will. Because mortgage bankers carry a wider variety of products that are available to different investors, you can find a mortgage that best fits your financial situation. The bottom line: do your homework and search around for the mortgage lender that's right for you. Don't just settle for the most convenient.


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