With mortgage rates in decline, more Americans will try to land a new home at a great deal or refinance an existing one. Along the way, watch out for these “mortgage myths.”
The average 30-year fixed mortgage rate stands at 3.55 percent in mid-May. That’s an interest rate that should grab the attention of any American house hunting or planning to refinance and lower monthly payments.
At first blush, getting a good deal on a mortgage right now seems highly doable. But as always, it depends on your financial situation.
“Due to low interest rates, mortgage applications are flooding in, and mortgage companies are working around the clock to process and close home loans,” said Tim Higgins, regional sales executive at Embrace Home Loans, in Rockville, Md.
However, due to the coronavirus pandemic and worsening economic conditions, mortgage lenders are much more cautious these days.
“Credit standards are tightening and loan program standards are becoming more restrictive, making it harder to obtain a mortgage,” Higgins noted. “The trend of low interest rates with tighter credit requirements and program standards should continue until economic conditions shift back to their healthier pre-pandemic state.”
Common mortgage myths debunked
If you’re in the market for a new mortgage right now, do your homework and start kicking some tires on mortgage loan deals. One aspect of that due diligence is to understand — and avoid — mortgage myths that might lead to financial mistakes better left alone.
What mortgage myths are the most onerous to borrowers? Financial experts say these “loan legends” are at the top of the list.
Myth #1 - You need a 700 credit score and a 20 percent down payment to land a mortgage
“That’s not true,” said Higgins. “There are plenty of lenders out there who still offer loans to borrowers with lower credit scores and less money down.” At Embrace Home Loans, for example, borrowers can get a mortgage with a credit score as low as 640, and a down-payment as low as 3.5 percent.
See how much house you can afford with Credible's easy online tool, which allows you to compare multiple lenders at once to get a competitive rate (with no impact on your credit).
WHAT CREDIT SCORE DO YOU NEED TO BUY A HOUSE?
Myth #2 - You should always get a 30-year fixed mortgage
Again, that’s not the case, mortgage experts say. The trade-off is that a 30-year fixed mortgage loan comes with a higher interest rate compared to a 15-year fixed or an adjustable-rate mortgage.
“The trade-off has a price,” said Caleb Liu, owner of House Simply Sold, a southern California-based home flipping firm. “Most people won't even stay in their home for 30 years. If you're planning on moving after five-to-seven years, go with a 5/1 or 7/1 adjustable-rate mortgage (that offers a fixed-loan percentage over the first five or seven years, and a variable rate after) and pocket the savings.
HOW YOU CAN BENEFIT FROM ADJUSTABLE-RATE MORTGAGES
Myth #3 - Pre-qualification is the same as getting preapproved
Not necessarily, Liu said.
“A pre-qualification letter is a simple and quick process,” he noted. “A pre-approval is a much more lengthy process and requires multiple rounds of documents to be submitted. As you might expect, the pre-approval letter carries much more weight in a multiple offer situation.
Homebuyers can get pre-approved for a mortgage through Credible — just fill out some of your financial information and request prequalified rates and fees from multiple mortgage lenders within just three minutes.
GETTING PREAPPROVED FOR A MORTGAGE: WHAT YOU NEED TO KNOW
Myth #4 - Refinancing when mortgage rates are lower is always the right choice
Hold the phone on low mortgage rates — at least until you get the full story, experts say.
“Borrowers need to take into the account the cost of refinancing (i.e. fees that can average 1 percent of the new loan amount) as well as how long they expect to stay in the property,” said Chris Oliver, a partner at Hauseit, a mortgage services platform based in New York City. “Then, compare the savings from a lower interest rate versus refinancing fees paid upfront.”
MORTGAGE RATES HIT NEW RECORD LOW — HOW REFINANCING NOW COULD SAVE YOU MONEY
Myth #5 - The mortgage refinance book is already over
People seem to think refinancing window has closed, but industry insiders say that’s premature.
“The reality is that as rates for a 30-year fixed-rate inch closer to 3.00 percent, it is likely that we could see another wave of refinances,” said Joe Tyrrell, chief operating officer at Ellie Mae, a mortgage technology service provider. “In 2019, over 75 percent of all loans closed on our platform had an interest rate of 3.75% or higher, which means as current rates continue to lower, there are still a large number of consumers who can take advantage of those rates and make a meaningful reduction in their current mortgage payment.”
Myth #6: Forbearance won’t impact future mortgage buying or refinancing a home
Many Americans have taken advantage of the recent Coronavirus Aid, Relief, and Economic Security (CARES) Act by entering into a mortgage forbearance on a current mortgage. Many also believe doing so won’t impact their ability to obtain a new mortgage.
“This is not true,” Higgins said. “While there isn’t much guidance currently on how a mortgage 'forbearance' will impact your credit report or your credit score, most lenders will not move forward with a new mortgage for a customer who is currently in forbearance on any mortgages.”