Five Mortgage Myths Homebuyers Should Know

When you decide it’s time to jump into homeownership, you will be working with a lender to get everything squared away. This means you will have the ability to buy a home, but it could also mean you fall for one of the mortgage myths out there.

Sometimes, potential homebuyers fall for these myths and it keeps them from buying a home. Don’t allow this to happen to you. Here are five mortgage myths all homebuyers should know.

Owning a Home is Always Better than Renting

This has been a myth for a very long time and it’s simply not true. While homeownership is a great thing, not everybody is in a situation where buying makes sense. Owning a home is an investment, while many see renting as throwing money away. However, owning a home isn’t a sure bet.

When you buy a home, it comes with many advantages, such as the ability to grow equity and claim tax deductions. However, it can also cause financial challenges renters don’t have to worry about.

As a homeowner, you’re responsible for the maintenance, property taxes and you’ll have less flexibility to move if you need to. Some of the recent tax law changes have made it harder to take advantage of the mortgage-related deductions, as well.

While homeownership is great, it’s important to make sure you’re ready for it. Make sure your credit is in order and you have plenty of savings before taking the plunge. Until that time comes, renting is just fine.

Your Pre-Approval Amount is What You Can Afford

While it may seem like a bank or lender would never allow you to borrow more than you can afford, this is simply not true. You need to be the one in charge of what you can and cannot afford, not the bank.

Lenders don’t care about many things you probably add to your monthly budget, such as retirement savings, college savings, paying or private school and even utilities. Often, these are not factored into their debt-to-income ratio. They really only care about whether or not you can pay back the mortgage loan.

When you jump into homeownership, you need to take responsibility for what you can afford. Just because you were pre-approved for up to $400K doesn’t mean you should take out this size of a mortgage. Look at your budget and determine what you can afford. Don’t forget to factor in homeowner’s insurance, utilities, property taxes, and maintenance.

You Must Put 20% Down

The reason this myth exists is simply because of private mortgage insurance. Many potential homeowners don’t think they can buy until they save 20% down, which is $20K per $100,000 of home. This could take you forever to save, especially if you don’t have at least a six-figure salary.

While it’s great to put this much down, you don’t have to if you want to buy a home. However, without 20% down, you will pay private mortgage insurance, at least until you build up some equity in the home.

APR and Interest Rate are the Same Thing

This is simply false and it’s a trap many potential homeowners have fallen for. When you compare mortgage quotes, make sure you compare interest rate to interest rate and not to APR. The lowest rate is the key as even 1% can make a huge difference and save you tens of thousands of dollars on your mortgage.

APR is a vital measurement with a mortgage, as well. The interest rate will determine your monthly payment, but the APR will show you what fees are included in the loan and the aggregated cost of the loan over time.

Pre-Approval is all you Need

Getting a pre-approval from a lender is a great thing and makes the buying process easier. However, just because you were pre-approved doesn’t mean you’re done and ready to buy.

Things can change and impact your ability to get financed. If you switch jobs, take out a loan for something else or anything changes on your credit score, your pre-approval could be gone quickly. Even if you can get approved again, it could be a nightmare to deal with.

It’s best to make sure you don’t change anything about your financial situation while going through the home buying process. Once you’re pre-approved, avoid using credit for anything and don’t switch jobs. Make sure everything remains the same until you’ve moved into your new home and you’ll have fewer headaches.

When you want to buy a home, it’s important to understand the mortgage process. These five myths will help you know what you’re getting and how it really works with lenders.