The Most Costly Home Loan Myths
Home Loan Myths Can Be Bad for Various Reasons. These Particular Mortgage Myths Are Costly, Increasing the Expense of Higher Rates, the Risk of Foreclosure, or Missing Your Dream Home.
Home Loan Myths
Home loan myths are generally problematic for potential borrowers because they lead to misinformation, bad decisions, and sub optimal strategy for home and mortgage shopping. And the bottom line is that these are problematic because they are costly. Whether that means more expensive mortgage payments that put you behind financially, emotional stress because you can’t find a deal that works for you and puts you in a home that fits, or just squeezing you out of the market because you feel like you don’t have any options, these home loan myths exact a price. So if you are considering buying a home and getting a mortgage, consider these expensive but clearly debunked home loan myths and get informed.
1. You Are Powerless
This is a broad and generally very problematic misconception that people have, believing that they are at the mercy of lenders. You always have options and no matter your financial situation, you can find a lender that wants to make money selling you a mortgage product. What’s more, there are almost always a number of things you can do to strengthen you position and gain more power to get a better deal. The first key is giving yourself the time to make yourself a better mortgage loan candidate, and taking the time to shop around and compare your options, because information about where else you can go is always empowering, and banks that see you as informed will be more willing and able to help you find the best deal they can offer.
One example of this is that you can negotiate your rate and fees. After you know what type of loans you may want and have two or three banks that seem interested in lending to you based on your preliminary information, you should ask them what they can offer. For example, with a 15-year FRM, ask what the best low-fee-high-rate and low-rate-high-fee loans they can offer are to get an idea of how low they can go. You can work with this information to compare between lenders and make a lot of progress towards a better deal. As long as you are calm and informed, you have some power no matter what.
2. Bad Credit and Bankruptcy Are Killers
There are a number of ways to deal with bad credit and bankruptcy that don’t mean paying excessive fees and facing untenably high. First, there are a number of ways you can improve your bad credit if you give yourself time (see number one) to work on it. Second, even if you have poor credit and don’t have time to wait to get your score up, you can still shop around, work with lenders, and find decent rates. You are not powerless. And you might be able to find a way to keep your rate down, if high monthly payments are a concern, such as by paying more basis points up front or borrowing from a relative to make a higher down payments.
Bankruptcy use to be seen as the end of home buying-dreams. In the wake of the 2008 crisis, huge swaths of the population have a bankruptcy on their record, and specialized lenders have sprung up, either as new businesses or at established banks, to make financing accessible to these people. The government has encouraged this to support the recovery. As long as your bankruptcy was more than two years ago and your credit has been improving since then, you will be able to find a lender that wants to help get you into a home. Just be sure you do your research so you don’t pay more than you should in fees and monthly payments.
3. No-Point, No-Cost Loans Are the Best
There are a number of different confused ideas about one “best” type of loan or loan deal existing, and they are all expensive if they lead you to ignore other options that fit your financial needs and situation better. If they put you in a home or a plan that you can’t afford and which ultimately costs you your home, or one that doesn’t match your earning potential and has you paying more, you’re risking a big expense. But the idea that no points and no up-front costs is the best way to go is especially foolish.
There is an obvious and painful tradeoff for paying no fees up front: higher monthly payments from the higher interest rate they charge. Unless you absolutely have no cash or have an incredibly lucrative investment opportunity from which you can earn more than you’d save, you’ll be throwing away money for years on that more expensive loan. This isn’t to say that you want the lowest rate possible either. It’s just that everything has a tradeoff, and if you go into the search blindly looking for no-point loans without any other considerations, you will put yourself in an expensive situation.
Understanding these simple home loan myths and why they are inaccurate is a great way to get a better mortgage and avoid costing yourself tens of thousands of dollars in the next decade.