Guest post by Diana Fishlock for Zillow.com. Diana Fishlock has researched and written articles on a wide variety of subjects for newspapers in New York, Pennsylvania and Maryland. She lives near Harrisburg, PA and writes for Zillow.
Securing a mortgage can be a daunting, confusing process for first-time home buyers as well as experienced homeowners considering moving or buying a second home. There are lots of myths and misconceptions about mortgages, such as who qualifies and what makes a good one.
Myth 1: Prequalified means preapproved.
Reality: Prequalifying for a mortgage and being preapproved are two different steps. Prequalifying is a lot simpler. It requires informing a lender about debts, income and assets in a general sense. Prequalifying helps buyers loosely determine their affordable price ranges.
For preapproval, a buyer must submit to the lender much more detailed information, including a financial history. The lender then verifies the borrower’s debt-to-income ratio before agreeing in writing to loan a specific amount. Preapproval indicates to home sellers that a buyer is approved by a lender and serious about making a purchase.
Myth 2: Buyers should choose the mortgage lender with the lowest interest rate.
Reality: The annual percentage rate (APR) is a better measure of the cost of a mortgage because it includes not only interest rate, but points and other fees. With all of the high costs of buying a home, owning a home and maintaining the property, it’s important to consider all the costs.
Myth 3: Buyers should always choose the lender who offers the lowest APR.
Reality: There are other important factors too. It’s important for buyers to look at lenders’ costs and fees, which can add up quickly. But borrowers should opt for well-known, reputable lenders. Buyers should ask friends and neighbors for recommendations on lenders they used for buying or refinancing homes. They can also read online reviews of lenders on Zillow Mortgage Marketplace. Reviews include information on which lenders were easy to work with, available to answer questions and clear and respectful with their responses.
Myth 4: Salary is the most important factor to lenders.
Reality: While lenders like to work with borrowers who earn large salaries, they’re looking for the whole package with the lowest risk. Lenders factor in debt, credit ratings and both financial and work histories. A borrower with a big paycheck but numerous loans and a history of job-hopping isn’t as attractive to lenders as the patient saver who stayed at one job for years. Lenders also want to see someone who made a habit of saving money, not a person whose parents made a big deposit right before it was time to buy a house.
Myth 5: Bigger downpayments are always better.
Reality: Putting 20 percent down is great for buyers with loads of cash on hand, but these days many people can secure favorable mortgages with 10, 5 or even 3.5 percent down. With interest rates low, some homebuyers prefer to use as little cash as possible for a downpayment and opt instead to keep a bigger nest egg for buying furniture and appliances or maintaining a safety cushion.
Myth 6: Refinancing is a smart decision.
Reality: Refinancing is not always the best decision. Refinancing a mortgage to pay a lower interest rate or consolidate loans can be a very good idea. Refinancing is not the right choice for homeowners who don’t plan on staying in their houses for many years, or those whose credit has depreciated. Any savings realized from lowering the interest rates for homeowners planning to move soon may be eaten up by the lender’s closing fees. Homeowners with poor credit risk getting higher interest rates on their refinances.
Myth 7: Homeowners should pay off their mortgages as soon as possible.
Reality: Although outright homeownership is a major achievement, homeowners should be in less of a rush to pay down their principals if they have more expensive debts to pay. Homeowners should pay off their highest-interest rate debts first, which usually means credit cards. Interest on a mortgage is also tax deductible, while credit cards and car loans are not. Paying off a mortgage ahead of schedule is beneficial to avoid some interest payments but should be evaluated on an individual basis.
Mortgage shopping can be a long, frustrating process without the right information. Smart homebuyers who can separate myth from reality can secure the best mortgages available, saving money and inconvenience by locking in a great rate with a reputable lender.