Austin Mortgage Myths

Mortgage Myths

When it comes to mortgages and real estate, there is a lot of misinformation being spread by “so called experts”. Hopefully this page will help to dispell some of the incorrect information floating around.

Myth: You never have to pay principal on an interest only loan.
Fact: The interest only payment on any interest only loan is limited to a certain time period. Then the loan is fully amortized over the remaining loan period. If the loan is interest only for 10 years, then at that point, the full principal and interest payment will become due, amortized over the remaining 20 years, instead of 30. This can result in “payment shock” in the year the interest only period ends. However, if you are only planning on staying in the property a limited amount of time & you put a large down payment on the property, this type of loan can be a great way to minimize your monthly housing expense.

Myth: Apply for a loan with your bank, becuase you will get a prefered rate and less hassle.
Fact: Many banks have a separate mortgage subsidiary which may or may not give special consideration to bank customers. One thing is for certain; banks like all other lenders must build the same type of documentation in their file to meet secondary market requirements. It’s best to find a lender that you are comfortable with and that can provide prompt and accurate answers to your questions, as well as a mortgage program that meets your needs.

Myth: All lenders follow the same guidelines.
Fact: While lenders strive to meet the same secondary market requirements, a good lender will develop a borrower’s documentation in different ways to meet those requirements. Each lender has the opportunity to be unique in how they present a borrower to an underwriter. Recognizing positive compensating factors to strengthen or offset a weakness is just one difference. A good lender must recognize that making a credit decision is an art not a science!

Myth: A fixed rate loan is best
Fact: This is not always true. When you take out a 30 year fixed rate mortgage, you pay very little toward the principal for the first 7 years. If you plan to be in a home for less than 10 years, an ARM may make very good sense. There are many factors that affect what type of mortgage you should consider. Consult with your loan officer or Realtor for more advice.

Myth: Credit checks reduce your credit rating
Fact: This is true to a certain extent. When you are shopping for a mortgage or car loan, the credit bureaus know that you may shop around. If another lender pulls your credit again within 14 days, it should not affect your credit score at all. The initial credit check will probably reduce your score, but only slightly. If you request your own credit report and score, it does not affect your score at all. Credit card companies conducting unsolicited inquiries in order to make credit card offers do not count against you either.

Myth: Mortgage insurance pays off your house if you die.
Fact: Mortgage insurance, commonly know as PMI (private mortgage insurance) is insurance against the borrower defaulting on the loan. In most cases you pay the premium and the lender is the benificiary. Mortgage Insurance does not benefit you at all. If you default on the loan, the lender will still foreclose on your home. Once you have more than 20% equity in your home, you can petition the bank to drop the mortgage insurance. However, FHA & VA loans require you to pay mortgage insurance over the entire life of the loan. There are mortgage life insurance policies available that will pay off your home in case you die. These policies are usually offered by a third party insurance company not associated with the bank or lender.