7 common mortgage myths
The mortgage process—with its many steps and decisions—can feel overwhelming, especially for first-time homebuyers. As you make your way from prequalification to closing, you may encounter certain myths and misconceptions. We address seven common ones below.
Myth No. 1: If you prequalify for a mortgage, you definitely get the loan
The facts: The mortgage prequalification process is designed to give you an idea of how much you qualify to borrow based on your credit and your debt-to-income ratio. However, it is not a binding agreement, and the lender will likely need additional documentation from you before agreeing to issue the loan. Even if a lender or mortgage broker says you are prequalified for a mortgage, chances are you will need to provide more information before you are fully approved.
Myth No. 2: You need to have perfect credit to get a mortgage
The facts: Credit scores range from 300 to 850, and anything above 670 is typically considered good. But lenders consider additional factors when reviewing mortgage applications. If they are satisfied with your overall financial situation, you may still qualify for a loan. Make sure you provide accurate information and keep working to improve your credit score, since a higher score can help you get a lower interest rate on your loan.
Myth No. 3: Your mortgage payment should be exactly 28 percent of your income
The facts: A simple percentage doesn’t always cover all the variables involved in this big financial decision. When determining the monthly mortgage payment you can afford, consider factors such as your regular monthly expenses, how much debt you already have and your savings goals. You can estimate what you can comfortably pay with Bank of America’s affordability tool.
Myth No. 4: You must make a 20 percent down payment to buy a home
The facts: It’s generally smart to pay as much up front for your home as you can comfortably afford, since that reduces your monthly payment and the amount of interest you pay overall on your loan. But depending on your income and your credit, you may qualify for a loan that requires a down payment that is less than 20 percent of the home’s purchase price. Federal Housing Administration (FHA) loans allow qualified buyers to make a down payment of 3.5 percent,1 and Department of Veterans Affairs (VA) loans require no down payment from qualified applicants.2 Other homebuyers who don’t have enough savings for a large down payment may have additional options. For example, the Bank of America Affordable Loan Solution® mortgage3 offers qualified low- and moderate-income borrowers a fixed-rate loan with a down payment as low as 3 percent.
It’s important to note that if your down payment is less than 20 percent, you may need to pay private mortgage insurance (PMI). Make sure you know how much this costs and factor that into your monthly home payment budget. Bank of America’s Affordable Loan Solution mortgage does not require borrowers to purchase PMI.
Myth No. 5: 30-year mortgages are the best option
The facts: 30-year mortgages typically offer the lowest monthly payments, but they’re not necessarily best for everyone. If you can afford the higher payments associated with a 15-year mortgage, you wind up saving a lot in interest over the life of the loan. Another option is an adjustable-rate mortgage, which has an interest rate that changes periodically based on market conditions. If your rate goes up, so does your monthly payment amount. If your rate goes down, your payment amount falls too. Compare the pros and cons of shorter versus longer terms and fixed- versus adjustable-rate mortgages before you make your decision.
Myth No. 6: You can compare mortgages based on their advertised rates
The facts: If one advertisement touts a 3.5 percent interest rate and another promotes a 3.6 percent annual percentage rate (APR), you might assume that the first one is a better deal. However, an APR may include estimated fees, other charges and, possibly, mortgage points. These points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate, which can lower your monthly mortgage payments. Since all mortgages have fees and costs (either paid at closing or rolled into the loan amount, or a combination of both), it’s better to compare APRs, which lenders must advertise alongside mortgage interest rates. Be sure you are comparing apples to apples.
Myth No. 7: It’s always better to own a home rather than rent
The facts: Homeownership can offer many advantages. For example, your home’s value may appreciate, and typically you can deduct mortgage interest from your taxes,4 while rent payments are not tax-deductible. But the decision about renting versus owning isn’t always simple. Unlike renting, homeownership also brings maintenance costs and may make it tougher to move to a new location if, say, you’re offered a great job in another city. Sometimes it’s better to concentrate on improving your credit or saving for a bigger down payment before you make the leap to buy.
Just because you can get a mortgage doesn’t mean you should. Consider your personal situation carefully before making your decision.
- Monthly Mortgage Insurance Premiums (MIP) and Upfront Mortgage Insurance Premiums (UFMIP) apply. Maximum loan amounts vary by county.
- VA funding fee applies, except as may be exempted by VA guidelines. The fee is higher with a zero down payment, and maximum loan limits vary by county. If a down payment of 5% or more is made, the fee is reduced. The VA funding fee is non-refundable. Ask for details about eligibility, documentation and other requirements.
- Available for fixed-rate purchase loans with terms of 25 or 30 years and on primary residences only. Certain property types are ineligible. Borrower(s) must not have an individual or joint ownership interest in any other residential property at time of closing. Maximum purchase loan-to-value is 97% and maximum combined purchase loan-to-value is 103%. For loan-to-values >95% any secondary financing must be from an approved Community Second Program; ask for details. Homebuyer education may be required. Restrictions apply regarding co-borrowers. Maximum income and loan amount limits apply.
- Please consult your tax advisor regarding interest deductibility.