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Owning a home is part of the North American Dream and is incredibly important to families from all backgrounds. However, one thing is certain, mortgages are complex financial instruments and our home is the biggest investment most of us make in a lifetime. That being said, mortgages are confusing, legally binding contracts that can significantly effect one’s financial and general future. Many myths about mortgages abound and need to be put straight.
What follows are five of the most common myths about mortgages, debunked.
Mortgage Myth #1: Pre-Approval and Pre-Qualification: Two Terms for the Same Concept
Many people choose to get pre-qualified for a home before seriously beginning their search. A pre-qualification will give a potential home buyer an idea of what types of homes they will qualify for and what their price range will be. This, however, is not to be confused with a pre-approval. This process is an informal process that is designed to provide information only.
A pre-approval process is an in-depth, involved application process. All one’s financial details and other information will be double checked. This is a great thing to have as it shows lending institutions and sellers that one is really serious about buying a home, but it is also important to note that being pre-approved does not mean one has been extended a mortgage.
Mortgage Myth #2: 20% Down is the Norm for a Mortgage Down Payment
This is an old fashioned notion about mortgages. It was, at one time, the traditional means by which one got a mortgage, but these days, this is not necessarily the case. The amount of a down payment will be dependent on a number of factors from the type of mortgage, the price of the home, one’s financial standing and more.
Mortgage Myth #3: A Mortgage Offer and Pre-Approval Are the Same Thing
Pre-approval is one step closer to a mortgage offer, but it is NOT the same thing. Pre-approval does speed up the process, but when an offer for a home is tendered, credit and other financial information must be checked once again before a mortgage can be issued.
Mortgage Myth #4: Adjustable Rate Mortgages Are a Good Idea
There is pretty much no case where an adjustable rate mortgage makes financial sense. The overall amount paid during the term of loan is almost always significantly inflated. These mortgages have also gotten people into trouble by leaving them with the assumption that they were able to handle the debt load such a mortgage entailed.
Mortgage Myth #5: Income Alone Determines Loan Amount
While a higher income will generally mean a higher loan amount, this is not the direct deciding factor. What really comes into play, more than anything, is the income to debt ratio. Potential home buyers with a high income, but also a high debt load, will qualify for a smaller mortgage than might be expected. Income alone is not a determining factor in the amount one will be approved for.
Understanding the basics of a mortgage and not falling prey to the many mortgage myths will help make the process of purchasing a home as simple as possible. Armed with knowledge, common sense and the determination to follow the process correctly, buying a home can be a joy, not a headache-inducing experience.
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Author Bio Box:
Donnie Anfuso is a mortgage broker located in northern New Jersey. When he is not blogging, he enjoys offering people mortgage tips, real estate advice, and offers news on the current state of the mortgage market.
