Not surprisingly, purchasing a home is one of the most pivotal decisions a person could make in their lifetime. It’s an expensive investment into your future—a home that you’ll probably live in for several years. Because of factors like these, most people spend an abundance of time and energy researching houses on the market before they take their pick. However, what many home shoppers don’t realize in the process is that they don’t spend enough time and energy researching mortgages. This common misstep can lead to prospective first-time buyers believing all kinds of mortgage myths and misconceptions. Allow us to debunk the top four.
Far too many potential buyers believe the myth that all home loans are the same, regardless of the lender from which they come. This is absolutely false. A $100,000 mortgage with a 3% interest rate is not identical across lenders. When shopping for a mortgage, be sure to ask about closing costs and other additional fees, which could be as low as $1,500 and will depend on the loan and lender. Remember that you will have to provide this payment at closing or roll it into the mortgage, which will increase your monthly payments. You’ll have to decide which method is smartest and most affordable for you, but you’d be remiss to overlook this step.
Home shoppers are often convinced that to be pre-approved also means pre-qualified for a mortgage. These two terms may sound similar but they’re quite different. To be pre-qualified for a mortgage, a buyer will provide their information to a lender who will then calculate an estimated loan amount for which the buyer may be approved. This process of pre-qualification is informal compared to the pre-approval process.
When you are pre-approved for a mortgage, the lender verifies your income and assets, checks your credit, and commits to lending you a mortgage up to the pre-approved amount. This formal process may result in final approval, depending on your desired house’s appraisal amount. You can think of both of these processes like a job interview. To pre-qualify, your potential employer looks at your application and makes sure that you didn’t lie about your age or address. But to be pre-approved, the employer would meet you for an in-person interview, ask about your experience, and decide whether you are the right candidate for the job. Consequently, pre-approval in this example may result in the employer offering you the job.
All too often, renters get purchase-aversion because they think 20% down is a requirement to buy. This isn’t entirely true. While a larger down payment means lower monthly payments, a $20,000 cash down payment (or similar amount) is not always required. Take our fixed rate conventional loans for example: The average prospective borrower may be eligible for as little as 5% down. Or consider VA and USDA loans which require 0% down for borrowers who meet their conditions and requirements. Don’t be discouraged by the notion of mandatory down payments that break the bank—it’s just not entirely true.
Borrowers often fumble with the common idea that interest and principal are the only two elements of your monthly mortgage payment. This unfortunately underestimates your total because it fails to include insurance and taxes. These absolutely necessary additions can add hundreds of dollars to a monthly payment. It’s imperative that borrowers factor these amounts into their interest-plus-principal payment to ensure the most accurate estimate.
Whether you’re ready to buy or still dreaming of owning your first place, consider these components and be informed before making the decision to buy.