Mortgage Myths...
What First-Time Home Buyers Should Know
Many first-time buyers still
have misconceptions about mortgages, which can cost you money, experts say.
Here are six common myths:
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Myth 1: A 30-year fixed is the best way to go.
Rates on 15- and 30-year fixed-rate mortgages are generally between 5 percent
and 6 percent. Rates on adjustable-rate mortgages, or ARMs (one-third of home
loans these days), are even lower, but they could rise when it's time for them
to adjust.
It's true, say Bob Walters, senior vice president for Quicken Loans, that a
long-term, fixed- rate mortgage is the right loan "if somebody says, 'I'm going
to be in that house forever.' That's an automatic 30-year fixed."
But the average homeowner stays in a house between seven and nine years.
First-time home buyers, who usually are young and have expanding families and
growing incomes, are likely to remain in their starter homes for just a few
years before moving on and up.
●
Myth 2: Pay off that mortgage as soon as possible.
Accelerating mortgage payments are another area where emotion often trumps
reason, Walters says. "We're not talking about finances; we're talking about
psychology, or at least where the two meet," he says.
Walters advises people to imagine a scenario where they have a 5 percent ARM and
are able to deduct the interest from their federal income taxes. That lowers
their effective interest rate to somewhere in the neighborhood of 3.75 percent.
Instead of paying extra principal on such a mortgage, it makes more sense to pay
down higher-interest debt, such as for credit cards and auto loans, or to invest
the money where it can earn a return greater than the mortgage interest rate
after taxes.
At the same time, it's perfectly fine to pay off a mortgage early if doing so
satisfies a long-term financial goal. Doug Perry, senior vice president of
Countrywide Home Loans, says a lot of aging baby boomers want to eliminate their
mortgage debt so they can retire debt-free.
●
Myth 3: You need a down payment of 20 percent or at least 10 percent.
"The perception out there, that you need 10 percent down at least, maybe 20,
that's completely incorrect," Perry says.
Many lenders have lots of loan programs for people who can afford to pay 5
percent down or less - including zero down. In the mortgage industry's horse-
and-buggy days, the only zero-down loan was available from the Veterans
Administration. That's no longer the case.
●
Myth 4: You have to pay mortgage insurance if you don't have enough money for a
20 percent down payment.
"What's called 'piggyback financing' is now almost 50 percent of home
purchases," says Peter Bonnikson, senior vice president for E-Loan. A piggyback
loan lets you avoid paying for mortgage insurance.
Piggyback financing consists of two loans. The first is for 80 percent of the
purchase price. Then there's a second "piggyback" loan for the rest of the
purchase price, minus the down payment. A piggyback loan has a higher rate than
the primary mortgage for 80 percent of the price.
But for people with good credit, piggyback financing usually costs less than
getting one mortgage for more than 80 percent of the price and then paying for
mortgage insurance.
●
Myth 5: You can't get a mortgage if you have blemishes on your credit.
The word "subprime" is used to describe loans to people who have credit problems
that are serious enough to justify charging higher rates. The lender demands a
higher rate to compensate for the higher risk. About one-third of households
fall into the subprime category, says David Herpers, director of consumer
affairs for mortgage lender Amerisave.
When a consumer applies at Herpers' company and acknowledges having credit
problems, "we will pull their credit and analyze their credit, and if they can
be approved for prime, we will approve them for prime," Herpers says.
"This is a country that believes in redemption," Bonnikson says.
"More and more lenders are finding ways to lend to people" with flawed credit
histories. He advises talking with several lenders.
●
Myth 6: The term of the mortgage has to be the term on the note.
Lots of borrowers are reluctant to refinance because they don't want to start
all over again with a new loan that's due to be paid off in 15 or 30 years. But
you can ask the lender to set you up with a shorter payment schedule so you can
pay it off when the original loan would have been retired.
- Holden Lewis, Scripps Howard News Service, Newsday, Friday, October 29,
2004
This page was last updated on
06/30/10.
