Many borrowers are misinformed about the process of finding and qualifying for a loan. Learn about the top misconceptions about mortgages and how to counteract them
Feeling clueless about how to qualify for and find the best mortgage for you? You’re in good company, according to a recent survey by real estate listing site Zillow of more than 1,000 current and prospective homeowners. The survey found that one-third of those polled are unprepared to obtain a mortgage, and many are misinformed about rates, lender terms and down payments.
Many of these problems stem from misleading advertising tactics that lead to bad assumptions. The survey results show that 24 percent of respondents assume that their current bank always will offer the most favorable interest rates and fees, and 34 percent believe all lenders are obligated to charge the same fees for appraisals and credit reports.
“[Borrowers] also fail to seek out information on their own, and their lack of curiosity can be their worst enemy,” says Randrea Majors-Graham, lending/credit program manager with Family Services, Inc. in North Charleston, S.C.
For instance, one in three first-time buyers believe a 5-percent down payment is always required; 26 percent believe they’re required to close their loan with the lender that preapproved them; and one in five indicate that underwater borrowers are ineligible for refinancing. All of these are untrue.
Austin Lampson, senior mortgage consultant with Santa Barbara, Calif.-based OnQ Financial, says the responsibility for mortgage miseducation falls on the shoulders of lenders and the media as well as borrowers.
“Many lenders don’t take the time to sit down with their clients to review the loan process, and many clients feel they are too busy to ensure this time is carved out on their schedule,” he says.
This lack of knowledge means that there are many prevailing mortgage myths that are untrue, says T.J. Freeborn, mortgage professional with Discover Financial Services in Riverwoods, Ill. Here are the top five mortgage myths that Freeborn encounters:
1. An interest rate is the only thing that impacts your monthly payment. “Most monthly mortgage payments consist of principal, interest, taxes and insurance,” Freeborn says.
2. A pre-qualification is the same as a pre-approval. A pre-qualification is when “a potential borrower provides high-level financial information to the lender to get an estimate of how much house the buyer can afford and how much money a lender is willing to loan,” Freeborn says. Pre-approval, on the other hand, doesn’t happen until the borrower’s credit score, income and assets are verified by the lender. “The lender can then provide a specific mortgage amount to use when looking for a home,” she adds.
3. Choosing a mortgage banker at a retail bank where you have accounts is best. Instead, research your lender options carefully by asking for referrals from family, friends, a tax adviser or real estate professional, Freeborn recommends.
4. All mortgages are created equal. Rates actually can vary widely from one lender to another, as can closing costs and other fees that can amount to thousands of dollars. “Find a lender you can trust to guide you through the process,” Freeborn says.
5. Owning a home is more expensive than renting one. Actually, owning a home can prove to be a sound investment when the home’s value also increases, and “owning can add financial security and provide a sense of freedom and pride,” Freeborn says. “Many homeowners benefit from tax deductions, and money paid monthly on a loan is applied toward the principal, increasing your equity over time.”
To get up to speed on mortgages and make better decisions on loans, borrowers need to do their homework, says Brian Koss, executive vice president, Mortgage Network, Danvers, Mass.
“Take home buyers classes in your area, read articles about mortgages, get pre-approved for a loan and question everything you hear or read,” Koss says, especially if it doesn’t make total sense to you.
It’s also essential to see out loans “from at least two different sources, such as a national bank, mortgage broker, local bank and regional mortgage lender,” he adds.