Bigfoot. JFK and the grassy knoll. Area 51. All are urban legends and myths (to one degree or another) that get their share of “debunking,” yet continue to survive despite the skepticism. What about housing? What mortgage misconceptions are in need of a dose of reality? Before you start home shopping and begin your mortgage journey, take a moment and check out these five myths from the experts at Zillow.
Your lender will use the highest credit score: Two things to bear in mind here. First, your lender will almost always use the middle of your three credit scores (from TransUnion, Equifax, and Experian), not the highest. Second, if you are purchasing a house as a co-borrower, don’t be surprised if the lender ends up using the lower of the two “middle” scores. For instance, if your middle score is 720, but your co-borrower only sports a 680 score, the lender is likely to base your interest rate and terms on that lower score.
You’ll get your quoted rate: Until you “lock” your rate, the rate you are quoted by a lender is little more than an estimate. Since rates change daily and are tied to both the borrower and the property, you need to find that dream home before you can lock in your rate. One exception to this rule is a refinance – if you can provide your lender with enough information, you might be able to secure a rate early in the process.
A fixed-rate mortgage is always better than an adjustable-rate loan: During the financial crisis, the adjustable-rate mortgage (ARM) got a bad rap as a source of problems. Many borrowers were probably better served with a fixed-rate loan, thanks to its stability and safety. However, before writing it off altogether, ask yourself this question: how long do I plan to stay in this home? If the answer is five years or less, you might be better served with an ARM, which could save you hundreds each month.
Real estate agents are unbiased in the lenders they work with: While borrowers are free to choose any lender they want, real estate agents can recommend lenders they work with and whom they trust to handle any unique or local issues that can come up during the process.
Less than 20% down means you’ll have to pay mortgage insurance: No borrower wants to pay a monthly mortgage insurance premium if they can help it, so this is an important one to understand. In general, it is true that if your down payment is less than 20%, you’ll be faced with mortgage insurance to help cover the risk. However, a “piggyback” loan (first and second mortgage) can help avoid that scenario. A piggyback mortgage typically includes a first mortgage at 80% of the home’s value (there’s your 20%) and a second mortgage that covers the balance. Make sure to check with your lender to make sure this option is available and makes sense for you.