Financing your home can sometimes seem like a difficult and confusing
task, but it doesn’t have to be. When it comes time to investigate your
financing options, take a deep breath and do a little research before
you make any long-term investment decisions. Fortuntately in today’s
market there are many options available to people in all kinds of
financial situations. Chances are that no matter what your personal
situation is, you’ll find a mortgage that is right for you.
There
are, however, some financing myths that many people believe. Many of
these myths are based on mis-information or a lack of understanding
about the process of mortgage financing. The following is a brief list
of some of those myths. Keep these in mind when you begin the search for
a mortgage.
1. All lenders and mortgage companies are the same and are required to adhere to the same standards.
Mortgage
approvals are often based on many different types of ‘generic’
guidelines or ‘rules’. These rules are used by lenders as a foundation
for evaluating a particular loan. You may have already heard of the
most frequently used guidelines such as FHA, VA, Fannie Mae, and Freddie
Mac. Though many lenders use these guidelines as baseline, they do
change frequently and lenders do deviate from them to obtain a
competitive advantage for your loan.
2. You need 20% down to purchase a home.
In
today’s market with the wealth of financing options available, you do
not need to put a full 20% down on your home. There are many options
available that will allow you put as little as 5% down. However, buyer
beware. Very often you may be required to roll your property taxes into
the loan and also be required to pay Private Mortgage Insurance, or PMI
which can sometimes run you a couple of hundred dollars extra a month.
This of course leads us to the next myth.
3. You must avoid Private Mortgage Insurance, or PMI.
Private
Mortgage Insurance is required for most loans that exceed a
loan-to-value of 80 percent. Private Mortgage Insurance insures the
lender in the event that you default on your mortgage payment and the
lender is forced to sell your property at a loss.
Fortuntately over
the years, the cost of mortgage insurance has declined. When evaluating
whether or not to carry PMI by putting less than 20% down on your home
will depend on whether or not you want to liquidate some assets to amass
additional down payment (to avoid the cost of mortgage insurance). You
should evaluate what you lose by liquidating those assets. You may
also find that paying other debts is better than applying additional
cash toward the down payment. Paying off credit cards and car loans may
improve cash flow more than avoiding Private Mortgage Insurance.
Most
of the time, however, it is more profitable to keep your money working
for you in investments other than your home. Your cash when property
invested in some growth or income-oriented fund will earn significantly
more than the offsetting expense of mortgage insurance. However if you
get PMI and feel that the value of your home will increase in such a way
that you will be able to refinance to get rid of PMI, then PMI is not
always the worst option. Be sure to talk to your lender about your
options so that you can make a well-informed, educated decision based on
your specific financial situation.
4. The best type of program is a fixed rate loan. You should get a fifteen year loan if you can afford it.
As
always, you should sit down with your financial planner or lender who
can help you comb through the differences in these loan programs and
what they mean to you both in the short term and the long term. Both
fixed rate thirty year and fifteen year loan programs have their own
series of special benefits for you and your specific financial
situation. Depending upon your personal situation, you may find that a
fixed rate, 30 year mortgage is best for you. However, if you can
afford the payments and would like the added benefits of extra cash flow
once your home is paid off, you may want to opt for the fifteen year
route. Keep in mind that there are also several different types of
adjustable rate, balloon and jumbo mortgages available. Each program
has pros and cons, so be sure to sit down with an expert to determine
which one is right for you.
5. If my credit is bad, I won't qualify for a mortgage.
It
is true that lenders do not want high risk when it comes to loaning
money, and your credit score is an indicator of how responsible you are
with your income. However, you do not have to have pristine credit to
qualify for your home. Very often lenders will work with you to get you
qualified. You may have to pay higher interest rates or put more money
down, but in a couple of years you can refinance and get a better rate
after you have established a good credit rating with your lender.
