Wednesday, March 21, 2018
My Top 10 Mortgage Myths
Let’s be honest, buying a home can be very intimidating. If it is your first time buying a home, it can be especially stressful. Luckily there are many people out there trying to make the process easier for you. From realtors to brokers, to your financial advisor, knowing that someone has your back is a huge relief. Mortgage Week at Budget Boss is meant to clear the air and show you some useful tips when buying a home. Today, I am going to debunk some popular Mortgage Myths that exist. Sometimes all you need is someone to tell you what not to do so you can know exactly what to do. Let’s get started.
1) Owning a home is cheaper than renting
Many people will tell you that owning a home is cheaper than renting. Others will contradict this and tell you renting is cheaper. You must look at the source when determining if someone is telling the truth. The honest answer to which is cheaper varies from case to case. In my opinion, renting is cheaper because of property taxes, maintenance, condo fees, extra utility costs and various other expenses. That is not always the case however as you can sometimes find a suitable place to own for much cheaper than what you pay in rent. Many landlords bake in the price of all those extra costs. So, what is the answer? The answer is to know what your life costs and analyze the situation for your cheaper option. Long story short, make a budget for each. Yes, my friends, a budget.
2) You need a large down payment to buy a home
This one is completely false. All you need for a down payment to buy a home is 5% of the purchase price. A standard mortgage requires 20% of the purchase price as the down payment, so if you have less than that you must purchase Mortgage Loan Insurance. This will cost you extra, but it is still possible to get a home with less than 20% down. Again, you can weigh the costs versus rewards by having a detailed budget that shows what paying less than 20% will cost you versus renting until you have the full amount.
3) All you need is the down payment to buy a home
This is not even close to being true. You need a lot more than just a down payment to get a mortgage. Most importantly, you need an income. No one will lend you a cent if you don’t have money coming in every month. Secondly and almost as important, you need decent credit. If you have stuff in collections or are in any way seen as a risk to the lender, they will not give you a mortgage. You also need a good debt-service ratio. You cannot get a mortgage if your ability to service the payments is hampered by personal debts. Take some time to clear up your past before attempting to get a mortgage.
4) Bad credit means you cannot get a mortgage
While this goes against what I just said, you can get a mortgage if your credit is not so stellar. If you have decent credit, you should be fine. Where you run into problems is if you have a recent history of missing payments and of course, items currently in collections. Ultimately, your credit history should be trending upwards if you wish to borrow. Making regular payments and having little consumer debt will go a long way. You can get mortgages from B and C lenders, but they may charge you a higher interest rate to do so. Weigh the pros versus cons of going this route.
5) Get pre-approved means you are guaranteed a mortgage
Getting a pre-approval is the first step in getting a mortgage. Once you fully apply for the mortgage, the lender will go through numerous steps to verify your income, employment, and debt obligations. If all these pan-out you should be fine but if there was a discrepancy, you could be left hanging. Make sure if you have doubts that you leave yourself an out or condition with the seller, so you aren’t on the hook for the property should the funding fall through.
6) My bank will give me the best rate
This one makes me laugh. I have helped numerous people secure mortgage rates that were far lower than what their bank offered them. One thing to remember is that the bank isn’t there to fight for your business. With the volume that they deal with, they can offer what they want and not have to compete. Now they might offer you a good rate or even the best rate, but not always or often. Even if you have been with them since you were a teenager, don’t be surprised if you find a much better rate elsewhere.
7) You must pay for a mortgage broker
Mortgage brokers work on a commission basis. This means that they do not charge you for their services. While some shun commission-based salesmen, I would rather have someone who’s paycheque depends on providing me with good service than someone else who gets paid regardless if I am satisfied or not. That does not mean that you do not have to do your homework. You still must do your own research, but a knowledgeable broker can save you time and money.
8) Real estate agents are a rip-off
Now, this isn’t about mortgages, but hear me out. I am a full-fledged believer in the realty industry. The reason is simple. They are the experts and once they get to know you, they can match you with the right home. Much like a good broker, a solid real estate agent with a caring touch can guide you through the home buying process, show you what to watch out for and make sure your new home is exactly what you wanted. While there are undesirable people in every industry, many realtors are hard-working, genuine, knowledgeable people who will earn every dollar you pay for them. Therefore, most of them rely heavily on referrals for their business. They are that good, that people will seek out their services and recommend them to their friends and family.
9) You should find a home first, then get the mortgage approval
This is actually the opposite of what you should do. While house hunting is the fun and exciting part of buying a new home, the mortgage process is the boring part. Getting a mortgage might take time, as they check your references and verify your qualifications. It is also important to understand that the cost of the home you choose is not necessarily the amount of mortgage you will get. That is determined by various things we mentioned earlier including your debts, income and credit score. Finding the perfect home before knowing what mortgage you qualify for can lead to disappointment. Don’t put the cart before the horse.
10) You should pay off your mortgage as soon as possible
While the Dave Ramsey in me always thinks paying off a mortgage as soon as possible is the best bet, the former poor side of me likes the idea of small monthly payments. I personally like the idea of a very large down payment along with very small monthly payments. This will mean stretching out the mortgage as long as possible. I would also enjoy flexible payment options such as double-up payments, lump sum payments and various other ways to speed up my mortgage. I like the flexibility of being able to invest my money while paying down my mortgage as fast or slow as I want. The key is to save the extra money if you opt for a longer amortization. Smaller monthly payments shouldn’t mean you blow every dollar. Also, be wary of paying down your mortgage faster if it means you are cash-poor every month. There is no point in paying off a home in 15 years if you accumulated a large amount of debt on the side during that time. Have a solid plan and of course, a budget.
Finding the right fit for your situation takes a bit of research, but there are options for everyone. Remember that you shouldn’t feel pressured to do anything and the mortgage you accept should fit your lifestyle and budget. Your home is only an asset if you pay it off on schedule and fit it into your overall financial plan.
“It’s impossible to map out a route to your destination if you don’t know where you’re starting from.” – Suze Orman
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