Outdated Mortgage Advice You Should Ignore
If you are home shopping, chances are you are getting a lot of advice from a lot of different people. For younger, first-time buyers, some of that advice may be coming from parents and grandparents who have lived through very different mortgage and housing experiences.
The reality is that, in today’s environment, yesterday’s advice may not be the best option for everyone. Every situation is different, and you need to weigh the advice you are given against the realities of today’s market and your personal financial situation.
Here are some examples of mortgage advice that may be obsolete in current current mortgage environment.
Go for the Fixed Rate Mortgage
Buyers 20-30 years ago may have been advised by their parents that the 30-year fixed rate mortgage was the best way to go. It certainly can lower monthly payments vs a 15-year mortgage, and it was a very effective tool for making homes affordable. Adjustable rate mortgages also have a bad reputation, especially for Baby Boomers who remember when rates soared to 12% and people with adjustable mortgages suffered financial setbacks because of it.
However, the reality is that today, most people do not stay in their homes for more than 5-7 years. So getting a 30-year mortgage is really no advantage. The 5-year and 7-year ARMs will lock in a low rate for the initial term, and then will either turn into a balloon payment that you can refinance or will turn into an adjustable rate mortgage. But, if you are like most people, you will sell the house and move to your next dream home before the rates adjust.
You Need a 20% Down Payment
The 20% down payment rule really has more to do with avoiding the Private Mortgage Insurance (PMI), than it does with actual mortgage qualification. If you put less than 20% down, the mortgage company may require PMI, which makes your monthly payment bigger. Also, the more you put down, the lower your payment at the outset. So larger payments down payments certainly can be beneficial.
However, 20% down is not a mandatory requirement to qualify for a mortgage. There are programs, such as FHA, that will accept as little as 3-5%, and VA loans may go as low as 0% down. There are also community programs that provide down payment assistance for qualified individuals. So don’t assume that you can ‘t buy a house if you haven’t socked away $50K in a savings account.
You Need Perfect Credit to Buy a House
Many people assume that you need a credit score of 750 in order to buy a house. There is some truth in that a conventional mortgage will require a fairly decent score, but you don’t have to approach perfection. The better the score, the better rate and terms you can get, but many conventional mortgage lenders will consider scores down to 680 or even 620.
Buyers with scores as low as 580 could qualify for FHA and other government programs. You may not get the best terms, but it’s not impossible, if you have stable income and other positive factors.
Go for the Lowest Interest Rates
Obviously, you want the lowest rate possible, as it also lowers your monthly payment and the interest you pay over the life of the loan. However, waiting in the current environment of rising rates could mean that rates will go UP on you, rather than down. Rates are still low, compared to historical rates of 20-30 years ago. So waiting to lock in that perfect rate could cost you more in the long run, if you miss the window and end up with a higher rate.
Pay Off Your Mortgage ASAP
In years gone by, the conventional wisdom was that you should pay off your mortgage as quickly as possible. Double up on payments if you can, or do extra payments at the end of the year.
That was great advice, and may still be good advice if you plan to stay put for 20 years. However, for those who will move in 5-7 years, putting all your extra cash into paying off your mortgage will likely not have as great of an impact. Rising home values will help you build equity, and low interest rates don’t require a great deal of urgency. You may be better off socking away extra cash into a tax deferred retirement fund or investing in a diversified portfolio. You can benefit from the growth of your assets over time, rather than putting all your eggs in one basket (your home).
As previously stated, every situation is different, so what is good advice for one family may not be the best for another. If you have concerns, talk with a mortgage lender or financial advisor regarding the best options for you. We can provide referrals to high-quality providers if you need them. Whether you are buying or selling in Fountain Hills, Susan Pellegrini and Karen DeGeorge are ready to put their care and expertise to work for you. Buying or selling, our first-class service comes with a wealth of experience and eye for detail, ready to focus on you. Visit our website to learn more and contact us or give us a call at (480)- 315-1575, we’re here for you.
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