Mortgage Myths

When it comes to home mortgages, there is a lot of conventional wisdom out there that is either misleading or flat-out wrong, causing borrowers to make poor financial choices and costing them thousands of dollars more in their mortgage payments. Even worse, these misconceptions may discourage them from even attempting to seek a home mortgage.

Here is a list of six most prevalent mortgage myths:

  1. Your credit has to be perfect or near-perfect: While there is no doubt that a high credit score helps in getting a home mortgage, a not-so-high credit score is not a deal-breaker. If you have some credit blemishes and financial scrape-ups, but for the most part pay your bills on time and make a steady income, you probably don’t have much to worry about.
  2. You must have a 20% or more down payment: This is a matter of preference, not necessarily a requirement. Putting 20% down payment is preferred by some borrowers to avoid paying for Private Mortgage Insurance (PMI – typically about 0.5% higher mortgage rate), but it is not required to qualify for many mortgage programs. If you can’t afford to put 20% down, there are several mortgage programs available for your situation (for example, FHA, VA, USDA, etc.). Depending on your credit history and income situation, you may even qualify for a conventional mortgage with less than 20% down payment.
  3. A 30-year fixed rate mortgage is always the best: The mortgage term is the total number of months it takes to pay off the mortgage. The longer the term, the lower the mortgage payment, but the more interest paid over the total life of the loan, and vice versa. Also, an adjustable-rate mortgage allows a lower mortgage payment but comes with a mortgage rate and payment volatility. Thus, whether or not a 30-year fixed-rate mortgage is the best for your situation depends on many factors including your mortgage payment affordability, budget flexibility, desired longevity of home ownership, and tax situation.
  4. Lowest interest rate is always the best: Not necessarily. For example, an adjustable-rate mortgage offers a lower interest rate compared to a fixed-rate mortgage during the initial mortgage term, but comes with a much higher volatility in interest rate and mortgage payment in later years. Also, while comparing two identical mortgage products, make sure the product with a lower interest rate doesn’t come with a higher mortgage fees to make up for the lower interest rate and then some more.
  5. Pay off your mortgage as soon as you can: While paying off mortgage early may relieve you from the financial burden of being able to make mortgage payment every month and may make sense in some financial situations, this is not always the right move and it warrants some considerations. For example, consider how paying off mortgage will impact your tax situation and needs for an emergency fund. Instead, consider using this extra money either to pay down your other debts that have higher interest rates than your mortgage rates, or to invest it in investment vehicle(s) with higher return potentials with the same risk, or both.
  6. You can tax-deduct your mortgage interest: While your mortgage interest is generally tax deductible, there are some limitations you should be aware of. For example, your mortgage interest is tax deductible only if you itemize your deductions on your federal tax return. Even then, you only benefit to the point where your total deductions exceed the standard deduction that you are already entitled to. Also, remember your interest payments shrink over time as you pay down the mortgage, so your tax benefit may not be as much as you expect it to be in later years.

Now that you are armed with better information about mortgage myths and what to avoid, go out and find a mortgage for your dream home with confidence.

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