Mortgage myths

Taking out a mortgage is a serious commitment, and is especially nerve racking if you are a first time buyer. Taking out a mortgage should not be a scary thing, but rather a great thing because it is allowing you to achieve your dream of owning a home.

If you have the proper knowledge, you will be confident and in charge of your finances.

Holden Lewis, writer for Bankrate.com, explains in his April 7, 2005 article, “6 mortgage myths that can cost you money,” how one should not pay attention to popular myths when taking out a mortgage.

The fist myth is that a 30-year fixed rate mortgage is always the best option.

Lewis says that the 30-year fixed mortgage is the best way to go if you plan on staying in your home for a long period of time, like 30 years. Other than that, adjustable-rate mortgages may be the way to go because they will have lower rates and offer lower monthly payments.

“Adjustables, especially the popular hybrid adjustables that carry an introductory rate that lasts three, five, seven or 10 years, are appropriate for those whom Walters [senior vice president for a marketing firm] calls “‘upwardly mobile people, people who are transient, people for whom a payment increase wouldn't be the end of the world.’"

The second myth is that you should pay off the mortgage as soon as possible. You can actually save money by not paying off the loan as soon as possible.

“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.”

The third myth is that you need a down payment of 20 percent or at least 10 percent. “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.”

As a result, the next myth is that 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. A piggyback loan lets you avoid paying for mortgage insurance.”

Piggyback financing basically consists of two loans. The first one is for 80 percent of the purchase price. The second "piggyback" loan is for the rest of the purchase price, not including the down payment.

The fifth myth states that you cannot get a mortgage if you have blemishes on your credit.

Mortgage lenders have been finding more and more ways to approve borrower’s with less than perfect 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.”

The last myth is that 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.”

These myths were valid points years ago. Mortgages are now a lot more flexible and understanding of realistic financial situations than they used to be.