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These days, the world is full of misinformation.
You can thank the Internet for that, which has led to an explosion in content, both good and bad.
Social media isn’t much help either, with everyone looking to go viral regardless of what they say is actually true.
Let’s put some common mortgage myths to bed once and for all so you don’t inadvertently miss out on becoming a homeowner.
After all, property owners tend to acquire a lot more wealth than renters, so why let these falsehoods stand in your way?
You Need Perfect Credit to Get a Mortgage
Let’s start with credit because it’s a biggie. Lots of renters seem to think you need a 700+ FICO score to get a home loan.
This simply isn’t true, nor anywhere close to the truth. Sure, a higher credit score can help you get a lower mortgage rate, but it’s not necessary to qualify.
In fact, you can get an FHA loan with a credit score as low as 500, and there’s technically no minimum score for VA loans (though lenders do impose floors).
When it comes to a conforming loan backed by Fannie Mae or Freddie Mac (the most common loan type), you only need a 620 FICO.
These aren’t particularly high credit scores, or anything I’d refer to as “good” or even “average credit.” At last glance, the average FICO score was over 700.
Simply put, you can get a mortgage with a low credit score. And while the mortgage rate might not be favorable, it’s possible to refinance later once you improve your scores.
So if you really want to become a homeowner, know that credit score perfection isn’t a requirement.
You Need a 20% Down Payment to Buy a Home
Once again, not true, and nowhere near it. While the 20% down payment may have been customary for your parents, or your parents’ parents, it’s much less common today.
Today, the average down payment for a home purchase is closer to 10%, but there are still lots of loan programs that allow much lower down payments.
For example, VA loans and USDA loans require zero down payment, FHA loans require 3.5% down, and the down payment requirement for conforming loans (the most common loan type) is a mere 3%.
On top of that, there are proprietary programs and grants from individual lenders and state housing agencies that allow you to put down even less (see homebuyer assistance for more on that).
In other words, you don’t need 20% down for any major loan type, other than maybe a jumbo loan with some banks.
Despite this, down payment continues to be the leading hurdle preventing renters from becoming homeowners.
Only Buy a Home If You Can Afford a 15-Year Fixed
Here’s another mortgage myth I’ve heard uttered on several occasions. That you should only buy a house if you can afford a 15-year fixed.
The logic here is that you’re buying too much house if you have to go with the standard 30-year fixed mortgage.
But there’s a reason the 30-year fixed is the number one choice for home buyers, and not the 15-year fixed.
It’s simply not feasible for most home buyers these days in expensive areas of the country.
And there can be better uses for your money other than paying down a super cheap mortgage.
Sure, there are a lot of advantages to a 15-year fixed, like paying much less interest and owning your home in half the time.
But you might never make the leap from renter to homeowner if you live by this rigid made-up rule, thereby hurting yourself even more in the process.
Remember, homeowners on average gain a lot more wealth than renters, regardless of the loan type they choose.
Home Prices Will Go Down When Interest Rates Go Up
At first glance, this mortgage myth sounds pretty logical.
If financing costs goes up, home prices surely must go down, right?
Well, for starters, not everyone finances a home purchase. There are plenty of all-cash home buyers out there.
Secondly, the data simply doesn’t support this argument. In the past, several dramatic mortgage rate increases were accompanied by equally large increases in property values.
Yes, both home prices and mortgage rates rose in tandem. Now this isn’t to say they can’t move in opposite directions.
But declaring it a foregone conclusion isn’t correct, and it’s not something you can bank on if you’re waiting on the sidelines.
Just look at 2022-2023. Mortgage rates skyrocketed and home prices continued to rise, albeit a bit more slowly.
Banks Have the Best Mortgage Rates
For some reason, a good chunk of folks polled by Zillow felt they could get the best mortgage rate with their bank.
Again, to blindly assume this would be silly since you can’t really know unless you shop around.
Ironically, I’d venture to say that banks are often the most expensive option, at least when compared to online mortgage lenders and mortgage brokers.
Both of those latter options can often be much cheaper avenues to obtain a home loan than a big-name bank.
Ultimately, you might be paying a premium for that brand name, despite it providing no additional value.
Really, it could just be a more bureaucratic process versus some of the newer fintech lenders.
If you don’t want to do any of the heavy lifting, just enlist a mortgage broker to shop your rate with all their partners instead.
That way you get the benefit of comparison shopping without lifting a finger. And compare mortgage brokers while you’re at it!
Tip: How are mortgage rates determined?
You Need to Use the Mortgage Lender Who Pre-Approved You
While you might be told this, it’s a lie. Sure, you might feel some loyalty to the bank, lender, or broker who pre-approved you for a mortgage.
But that doesn’t mean you need to use them. It’s perfectly acceptable to get pre-approved, shop around, and take your actual mortgage application elsewhere.
If they don’t have the best price, or simply don’t feel like a good fit, move on. Thank them for helping you get pre-approved, but don’t feel obligated to stay.
And if they try to tell you otherwise, then it might be prudent to run away, fast.
Same goes for a real estate agent who tells you that you must use their preferred lender. Not true. If they pressure you, maybe replace them too.
You Need to Wait a Year to Refinance Your Mortgage
Once you have your mortgage, you might be told you need to wait X amount of time to refinance, such as a year.
And you might hear this whether it was a home purchase loan or a refinance loan. In fact, you might be urged not to tinker with your mortgage at the loan officer’s behest.
While there can be six-month waiting periods for things like a cash out refinance, and waiting periods for streamline refinances, many home loans don’t have a waiting period.
This means you can potentially refinance your mortgage just a month or two after you took out the original loan.
Now it would obviously need to make sense to do this, and the loan originator who helped with your original loan could lose their commission if you refinance too quickly.
Loan officers and mortgage brokers often need to sign early pay-off (EPO) agreements that result in commission clawback if a loan is paid off within 180 days.
This is why you’re often told to wait at least six months after the first loan closes. But if you got a bad deal, or rates simply got way better, waiting may not be fair to you either.
Only Refi If the Rate Is 1% (or More) Lower
Staying in the refinance realm, some financial pundits may tell you to only refinance if X happens.
A common one might be to only refinance if the new rate is 1% lower (or more). But these supposed refinance rules of thumb aren’t all they’re cracked up to be.
Really, they’re just blanket rules that can’t possibly apply to all homeowners.
We all have different loan amounts, various mortgage rates, investment paths, real estate plans, and so on.
As such, a single rule just doesn’t work for everyone. And there are many reasons to refinance that don’t have anything to do with the mortgage rate itself.
This isn’t an invitation to serially refinance your mortgage, but take the time to do the math instead of buying into some magical rule.
Adjustable-Rate Mortgage Should Be Avoided
Mortgage myths apply to loan types too. So should ARM be avoided?
Not necessarily; they’re just one of many loan programs available to you. Any loan can be good or bad depending on the situation.
Even the revered 30-year fixed can be an awful loan choice and cost you money because it has the highest mortgage rate.
That being said, adjustable-rate mortgages aren’t for everyone, and they do come with risks, namely an adjustment higher.
But they can also save you a ton of money if utilized properly, with a safety net in place if you don’t sell or refi before the loan becomes adjustable.
If you’ve already got a foot out of the door, but refinance rates are a lot lower on ARMs, one could make perfect sense versus more expensive fixed-rate options.
Just know what you’re getting into. And make sure the discount justifies the risk.
Mortgages Are Mostly Interest
Last but not least, one of my favorites. The oft-repeated myth that mortgages are mostly interest.
But how can that be if the interest rate is a mere 2-4%? Well, it’s nonsense, of course.
While home loans are front-loaded with interest due to how they’re amortized, you don’t pay mostly interest.
If you hold a loan until maturity, you’ll pay a portion of principal and a portion of interest.
The principal (the amount you borrowed) should exceed the total interest paid through the life of the loan.
For example, if you took out a 30-year fixed set at 2.75% with a $250,000 loan amount, you’d pay $117,416.00 in interest.
That’s less than half the amount borrowed from the bank at the outset.
Of course, interest rates have increased quite a bit lately so it’s now possible to pay more interest than principal. But that’s where paying off the mortgage early can come in handy.
Another issue is many homeowners don’t keep their mortgages for the full loan term, so they may wind up paying more interest than principal.
But if you keep your low-rate loan for 10+ years, you’ll often find that the principal paid back surpasses the interest. And it’ll happen even faster on a 15-year fixed.
Regardless, a mortgage is the best debt you can have because the interest rate is so low relative to other options. And is often tax deductible to boot.
For this reason, investing your money elsewhere can often be a better move than prepaying your mortgage ahead of schedule.
(photo: Michael Coghlan)
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