May 20th, 2013
In a Zillow blog post, “10 Mortgage Misconceptions,” Alison Paoli does a great job shedding light on some misconceptions people often have when it comes to mortgages, which can definitely cost them in the long run.
Your interest rate reflects the true cost of your mortgage. Your annual percentage rate (APR) actually the figure that represents the cost of your mortgage, as it factors in all fees that you will pay each month. As Paoli explains, “It is inclusive of your interest rate, points, mortgage insurance (when applicable) and other fees, including origination and underwriting fees. It does not include the cost of your homeowners insurance policy.”
Mortgage rates are released only once a day. As the stock market shifts throughout the day, sometimes drastically, so does the mortgage market. That’s why you hear the term “locked in rate” – the rate you actually get versus the rate you may have been quoted a day or even hours before.
All lenders must charge the same amount for appraisals and credit reports. This just isn’t true. Some lenders actually waive these fees for special deals or to be more competitive.
You have to get your mortgage through the same lender you were pre-approved with. Again, simply not true. You have no obligation to follow through with the pre-approval, nor does the lender have to follow through with the loan you were pre-approved for. A pre-approval shows sellers that you’ve been vetted and can afford and likely get approved for X amount. Always shop around for rates before proceeding.
You will almost always get the best mortgage rates at the bank where you have a checking account. While a bank may waive a fee for you if you bank with them, interest rates are based on the market and your qualifications as a borrower.
Lenders will look at your and your spouse’s credit reports equally when determining the interest rate you qualify for. Lenders will pull each of your credit scores from each of the three major credit reporting agencies: Experian, Equifax and TransUnion. “They’ll then take the middle score of each set and use the lower of the two to help determine your mortgage interest rate. This means that the least creditworthy borrower will have the greatest effect on your monthly payment. It does not matter who the primary or secondary borrowers are,” Paoli said.
You cannot get a home loan with less than a 5 percent down payment. There are mortgage that require as little as 3.5 percent down, such as through the Federal Housing Administration, which offers a popular loan option for those who may not have a large down payment or don’t have great credit.
If you go through a short sale or foreclosure, you must wait 7 years before getting another home loan. Rather than a set-in-stone timeline, the amount of time depends on how long it takes to fix your credit. In most cases, to buy a home after a short sale, you’ll typically only need to wait 2-4 years depending on your down payment and the loan type. The waiting period after a foreclosure is usually 3-7 years.
If you are underwater on your home loan, you are unable to refinance. The Home Affordable Refinance Program (HARP), is available to homeowners who have a loan backed by Fannie Mae or Freddie Mac, while the FHA Streamline Refinance is available for FHA loans.
You can only refinance your home loan once every 12 months. According to Paoli, with conforming loans backed by Fannie Mae or Freddie Mac (the vast majority of loans today), you can refinance as frequently as you’d like so long as you do not take cash out when you refinance and are just refinancing to lower the interest rate and/or term of your mortgage. Paoli says the rule of thumb is to wait until the difference between your current interest rate and the available interest rate would save you enough money each month to cover the costs of refinancing in 2 years.