With something as complex as mortgages, it’s not surprising there are numerous myths surrounding this financing tool.
Separate the fact from fiction by reviewing our list of 5 common myths and misconceptions about mortgages:
Myth #1: If you’re over 60 years old, you can’t get a 30-year mortgage
This is a very common misconception, and it’s just plain incorrect. Age is never a factor in a loan approval. In fact, it is illegal for lenders to discriminate against borrowers on that basis.
As long as you are legally considered an adult, you will have to demonstrate that you have sufficient income to obtain a mortgage. Liquid assets alone will not qualify for income. Some elderly people still earn paychecks or are self-employed. Others use non-employment sources of income, such as Social Security benefits, a corporate, government or military pension, capital gains from investments, interest income or property rents, to qualify.
Myth #2: Adjustable rate mortgages are risky
Like its name implies, an adjustable rate mortgage, or ARM, is one in which the rate adjusts on a specified scheduled after an initial “fixed” period. This fixed period can vary from1, 3, 5, 7 or 10 years.
Many people consider an ARM riskier than a fixed rate mortgage, and as a result automatically dismiss it. However, in some cases, an ARM may be a better option. For example, if you know that you will only be in the home for 5 years, you can get a 5-, 7- or 10-year ARM instead of a 30-year fixed mortgage. The benefit of an ARM is that it generally gives you a lower interest rate during the initial fixed period.
Make sure you discuss your homeownership plans with your lender to determine if an ARM is a viable option for you. If it is, it may just save you some money!
Myth #3: Pay off your mortgage as soon as possible.
While this has been a widely-held belief – especially among older generations – it’s not always true. To save money you would otherwise pay on interest is very tempting to make a large downpayment and making additional principal payments throughout the life of your loan. However, paying off debt is not the same as accumulating assets.
Every dollar you pay towards the loan is a dollar you did not invest. While paying off the mortgage will save you money in the long term, it denies you the opportunity to earn interest with that money in other investments. This is especially true if you do not intend to stay in your home for the length of your mortgage (i.e. 30 years).
For more information about how mortgage payments impact your overall financial health, consider reading “The New Rules of Money” by Ric Edelman.
Myth #4: You can’t purchase a home unless you have perfect credit.
While a strong credit history and credit score play an important role in securing a good interest rate for your mortgage, it’s not impossible to achieve the dream of homeownership if you have a few blemishes on your credit report. There are programs available that enable people with FICO scores as low as 600 or 620 to purchase a home.
Work with your mortgage lender to find out your credit score and determine ways you can improve it.
Myth #5: Once you receive loan approval, the home is practically yours.
This is another big myth among homebuyers. Before you go into closing, many lenders will pull another credit report to make sure there haven’t been any changes to your report that would impact the loan. If there are, it could impact your ability to close and own that home of your dreams.
As a result, make sure you maintain your credit score throughout the buying process, continue to pay your bills on time and don’t purchase any big-ticket items. New inquiries into your credit score will also affect your credit score.