Mortgage myths can be costly
By Holden Lewis
Do you believe that you can't borrow money to buy a house if you have some dings on your credit? Do you think it's always best to pay off the mortgage early? If so, you subscribe to mortgage myths that can cost you money.
Here are six common myths.
MYTH 1: A 30-year fixed is always the best way to go.
Adjustable-rate mortgages, or ARMs, constitute one-third of home loans these days. Yet rates on 15- and 30-year fixed-rate mortgages are very low by historical standards. ARM rates 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 the house about 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.
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.
It 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 with good credit, piggyback financing usually costs less than getting one mortgage for more than 80 percent of the price and then paying for 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, adding that more lenders are finding ways to lend to people with flawed credit histories.
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.
IN OTHER MORTGAGE NEWS, the benchmark 30-year fixed-rate mortgage fell 4 basis points to 5. percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.31 discount and origination points. One year ago, the mortgage index was 6.04 percent.
The 15-year fixed-rate mortgage fell 4 basis points to 5.04 percent. The one-year adjustable was unchanged at 4.07 percent.
This is not a commitment for a loan or an ad for credit as defined by paragraph 226.24 of regulation Z.