It’s a buyer’s housing market right now, and many young families that were stuck in the rental cycle are finally investing in their first home. While shopping for the home of your dreams may be fun and exciting, the prospect of obtaining a home loan is more likely intimidating.
To get you started, here are four basic myths about home loans that you can shrug off, and a little about why they’re untrue.
1. If you can’t get a 30-year fixed rate mortgage, forget it
Once upon a time, when families tended to stay in one place for at least one or two generations, 30-year fixed-rate mortgages were the best plan of action. They offered low rates and stability. Nowadays, however, the average family only stays in their starter home a few years; the national average for homebuyers is nine years in a home.
That’s a lot of moving, which is why, for the modern family, an adjustable-rate mortgage can actually be a smarter choice. These rates start out lower, accepting the risk of increase over time, but many also promise low introductory rates for an initial period ranging from three to ten years.
For upwardly mobile, expanding young families, these adjustable-rate mortgages are the superior fit.
2. Without perfect credit, you’ll never get a mortgage
Now we’ve landed in some sticky territory. For a while there, just before the economy took an extreme nosedive, banks were going wild issuing so-called “subprime” loans to families whose credit histories had serious problems.
Since the crash, banks have become more cautious (particularly because many were accused of issuing loans they knew would default — on purpose), but that caution doesn’t spell “impossible.”
What happens with subprime loans is simple. The interest rates are higher (just like with a credit card when your history isn’t perfect) to balance the risk the lending institution perceives based on a low credit rating.
Nearly a third of US households are subprime households, so there’s no shame in receiving a subprime loan, and there are plenty of places to get one from. Just be sharp and don’t get in over your head. That interest builds up, and if you don’t budget properly, you can end up owing the bank more money than your property is worth.
3. The mortgage terms are written in stone, not on paper
This misconception can cost you a bundle, so listen closely: Regardless of the term length on your original loan, you can refinance without having to tack another 30 years on to a loan you’ve already been paying off for ten.
The process is called amortization, and it consists of adjusting the payments of the refinanced loan so it will be satisfied at the same time the original loan would have expired. This is totally easy, and any bank will be happy to go over the process in more detail.
4. If you can’t afford a 20-percent down payment, better stick to renting
This is an old heartbreaker. Many young families can’t afford a down payment as large as 20 percent — or even 10 percent. Luckily, there is a variety of options and programs that accommodate individuals who can afford only 5 percent or less as a down payment.
Some cover as low as zero down, and individuals worried about mortgage insurance should look into the possibility of piggybacking loans. The most important part about any home loan is which company you lend from. Finding a reputable program isn’t easy, but doing your homework will pay off in the end.