I ran across this on a Yahoo page today and it reminded me that home buyers, especially first time home buyers around Columbus and Central Ohio, need to read these type of things often to be better armed to buy that house. All too often, I believe, Realtors take for granted a certain level of sophistication in their buyers knowledge of both the process of buying a home and the process of getting the financing.
For years I've always had a goal of having my home paid off before I was forty years old. Now, (and it's not just because that birthday is only a few years away) I understand that I'm better off using the equity in my home to make more money, continuing to have that mortgage interest written off on my taxes and keeping my extra principal payments with me as opposed to giving it to the bank. Everyone's situation is different though and I can tell you that there is a financing option available to almost every single possible circumstance.
Do you believe that you can't borrow money to buy a house if you have some dings on your credit? Do you think it's always best to pay off the mortgage early, if you can? If so, you subscribe to mortgage myths that can cost you money. Here are six common myths.
Myth 1: A 30-year fixed is always the best way to go.
Adjustable-rate mortgages, or ARMs, constitute one-third of home loans these days. Yet rates on 15- and 30-year fixed-rate mortgages are very low by historical standards. ARM rates are even lower, but they could rise when it's time for them to adjust.
"You're going to hear a lot of financial journalists who say these ARMs are dangerous, you're putting your house at risk, you're crazy to take an ARM at this time of historic lows," says Bob Walters, senior vice president for Quicken Loans. "There's a lot of emotion involved. As with any emotional argument, there's some truth in it."
It's true, Walters says, that a long-term, fixed-rate mortgage is the right loan "if somebody says, 'I'm going to be in that house forever.' That's an automatic 30-year fixed."
But the average homeowner stays in the house about nine years. First-time home buyers, who usually are young and have expanding families and growing incomes, are likely to remain in their starter homes for just a few years before moving on and up.
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 calls "upwardly mobile people, people who are transient, people for whom a payment increase wouldn't be the end of the world."
Myth 2: Pay off that mortgage as soon as possible.
Accelerating mortgage payments is another area where emotion often trumps reason, Walters says. "We're not talking about finances; we're talking about psychology, or at least where the two meet," he says.
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 way people deal with money and risk is often irrational, and they put much more of a premium on security and safety than they do on getting a return," Walters says.
It's perfectly fine to pay off a mortgage early if doing so satisfies a long-term financial goal. Doug Perry, senior vice president of Countrywide Home Loans, says a lot of aging baby boomers want to eliminate their mortgage debt so they can retire debt-free. That makes sense, especially for retirees who won't exceed the standard deduction on their income taxes and therefore won't be able to deduct their mortgage interest.
Myth 3: You need a down payment of 20 percent or at least 10 percent.
"The perception out there -- that you need 10 percent down at least, maybe 20 -- that's completely incorrect," Perry says. 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.
"A lot of people are caught in a cycle where they're paying a lot every month for rent and are paying bills on time, and they don't have a lot of money to save," Perry says. "They think they're trapped in the renting cycle with no way out, but they have several options." That takes us to the next myth.
Myth 4: 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, senior vice president for E-Loan. A piggyback loan lets you avoid paying for mortgage insurance.
Piggyback financing consists of two loans. The first is for 80 percent of the purchase price. Then there's a second "piggyback" loan for the rest of the purchase price, minus the down payment. An 80-10-10 mortgage has a 10 percent down payment and a 10 percent piggyback loan; an 80-15-5 has a 5 percent down payment and a 15 percent piggyback loan; and an 80-20 doesn't have a down payment at all.
The piggyback loan has a higher rate than the primary mortgage for 80 percent of the price. But for people with good credit, piggyback financing usually costs less than getting one mortgage for more than 80 percent of the price and then paying for mortgage insurance.
Bonnikson favors piggyback loans because "one, they can maximize the house that they can buy, but two, they also maximize the tax deduction." That's because the mortgage interest on the piggyback loan is tax deductible, whereas mortgage insurance premiums are not. (An attempt this year to extend the tax deduction to mortgage insurance failed in Congress.)
Walters says: "There's two reasons why some lenders would push people to take PMI" -- private mortgage insurance. The first reason is that the lender doesn't offer piggyback loan programs, "so limited options make for clear choices." Other lenders have investments in mortgage insurance companies, so they profit from increased business, he says.
Myth 5: You can't get a mortgage if you have blemishes on your credit.
"This is a country that believes in redemption," Bonnikson says. "More and more lenders are finding ways to lend to people" with flawed credit histories.
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.
One or two 30-day-late credit card payments won't push you into subprime territory, but bankruptcy, foreclosure, repossession, a habit of paying bills late, and even eviction from an apartment can turn you into a subprime customer. A short, sparse credit history -- a recent immigrant or a college grad -- might be counted as subprime, too.
"Most people start out with prime credit and something goes awry and they're considered a subprime candidate," Herpers says. "Many of the customers we deal with today are subprime and they know they're subprime and they're seeking a subprime lender today."
About one-quarter to one-third of Amerisave's customers fall into the subprime category, and the company's goal is to increase that share to more than half of its business in 2005. There is a benefit to applying for a loan from a company that does prime and subprime loans: You're less likely to be steered into a mortgage with a higher rate than you deserve to pay.
When a consumer applies at Herpers's company and acknowledges having credit problems, "we will pull their credit and analyze their credit, and if they can be approved for prime, we will approve them for prime," Herpers says. And someone with several late credit card payments will get a better mortgage rate than someone with a recent bankruptcy.
Bonnikson says, "Lenders are looking for ways to help people who have had financial difficulties. If you have damaged credit, there are a lot of lenders who are willing to help you. My advice is you really need to do your homework and you need to talk to several lenders."
Myth 6: 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.
Take the example of someone who got a 30-year mortgage in 1998 and wants to refinance in 2004 at a lower rate. It's a simple matter to ask the lender to amortize the payments so the new loan will be paid off in 2028, when the original loan would have been retired.
"Your payment will be lower than it was before, and you'll save monthly -- and over the same period of time," Walters says.
