Top Mortgage Misconceptions
The world of mortgages can be confusing, especially when mortgage misconceptions run rampant. At Freedom Mortgage, we’ve made a list of the top mortgage misconceptions to help you discover the truth behind them.
Myth #1: Your Interest Rate Reflects the Cost of Your Mortgage
It isn’t the interest rate, but the annual percentage rate (APR) that reflects the true cost of your mortgage. Your APR encompasses your interest rate, points, mortgage insurance (when applicable) and other fees like origination or underwriting. However, your APR does not include your homeowner’s insurance policy cost.
Your APR is usually higher than your interest rate, since it includes the rates and fees that your interest rate leaves out. It is best to compare loans based on APR rather than interest rate, since it gives you a better sense of the total cost of a given loan over its entire life.
Myth #2: You Get the Best Mortgage Interest Rates at the Bank Where You Have a Checking Account
Some banks offer customers special discounts, but it is unlikely that your bank will offer you the best interest rate available – especially if you’re not looking anywhere else. Get competitive mortgage rates and terms by seeking quotes from multiple lenders, both in person and online. Then, pick the best mortgage rate that fits your lifestyle.
Myth #3: You Must Wait Seven Years before Getting a Home Loan if You Went Through a Short Sale or Foreclosure
Depending on the down payment you can make and the type of loan you select, you only need to wait 2-4 years to apply for a home loan after a short sale. After a foreclosure, you typically need to wait 3-7 years before getting a home loan. Of course, to be approved for a mortgage loan you’ll need a good credit score, which can be hard to rebuild after a foreclosure or in just a few short years. That said, unique circumstances can lead to unexpected outcomes, so it’s important to check with a few lenders to learn more about your specific situation and options.
Myth #4: You Can Only Refinance Once a Year
Today, most conforming loans are backed by Fannie Mae or Freddie Mac, which allow you to refinance as often as you’d like – provided you’re not taking cash out against your loan and simply want to refinance to lower the interest rate or term of your mortgage. Other kinds of loans like “no cost” mortgages and refis may include harsh prepayment penalties should you refinance again too soon, so you always want to check the specific terms of your loan.
Usually, you’ll want to recoup the cost of refinancing within two years with the savings you’ll make changing from your current interest rate to the new available rate. Be sure to consider the amount of time that you plan on being in your home when making your decision, along with any closing costs involved in refinancing. Use our refinance calculator to determine how much you might be able to save each month by refinancing.
Myth #5: Renting is Cheaper
When it comes to costs over time, inflation is actually on the homebuyer’s side. Monthly costs typically remain the same throughout the time you live in your home. Refinancing can even lower your monthly payments. Unlike renters, you don’t have to worry about a landlord upping costs every month.
Myth #6: Pre-Qualification = Pre-Approval
These two stages in the mortgage process are not the same. Pre-qualification is the first step you take when searching for a mortgage, since it gives you an informal estimate of how big a mortgage you can afford based on your financial history. You supply your banker or lender with your financial information, including debt, income and assets. After evaluation, the lender can provide a general estimate of the mortgage amount you might qualify for, as well as what type of mortgage might be best for your situation.
Pre-approval is a completely separate, more comprehensive process. During pre-approval, you complete an official mortgage application and supply your lender with all the documents necessary to perform an extensive check on your financial background, evaluate your credit score and prove your financial standing. The information you provide lets your lender identify the specific mortgage amount you are actually approved for at the time, rather than a simple estimate.
Myth #7: Poor Credit = No Home Loan
Bad credit isn’t always cause for loan denial. People can receive an FHA loan on a credit score of just 500, and there are ways to improve your credit to qualify for better loan terms in the future. For more information on what loans you might qualify for, visit Freedom Mortgage.