Myths About Mortgages

Let's face it, homes are expensive. Even the "fixer-upper" ones seem to cost hundreds of thousands of dollars. It's not like people have that kind of money just lying around somewhere, ready to be put toward buying a home. If that were the case, very few people would be able to afford a home.

In order for more people to be able to buy a home, homeowners can take out a loan to buy a house. This type of loan is called a mortgage. A mortgage is a financial product used to help pay for the price of the home over a set period of years using either a fixed or variable interest rate payment model.

Now, instead of rolling up to the closing table with a suitcase full of one hundred dollar bills, you can actually bring much less money to the closing table. In fact, you don't have to come up with hundreds of thousands of dollars to buy a home today. In some cases, you don't even have to come up with tens of thousands of dollars. (And is some special cases, you don't have to come up with any money at all!)

There are a lot of myths out there about buying a home, and how much money it actually takes to do so. So we're here to set the record straight on just how much money it is going to take for you to buy your home.

Myth #1: You need 20% of the purchase price of the home to put toward your down payment.
Fact: You can put as little as 3.5% of the purchase price of the home toward your down payment.

Why have you heard about this 20% down payment number so many times before? This 20% ratio is the amount of equity the banks deem is an acceptable amount for the homeowner not to have to pay mortgage insurance.

If you're a homeowner and put less than 20% down on your home purchase, you may be on the hook to pay a monthly mortgage insurance payment. This annual mortgage insurance premium is usually around 1% of the mortgage amount, and is meant to protect the mortgage provider in case you fail to pay your mortgage. 

In most cases, first time home buyers have a steady job that allows them to make affordable monthly payments, including the monthly payment on your mortgage insurance premium. But, first time home buyers might not always have the cash on hand to put toward a down payment. In cases like this, you don't have to worry. There are lots of mortgages out there that require as little as 3.5% of the purchase price to be put toward a down payment.

Myth #2: You can only get a mortgage from your bank.
Fact: You should shop around several different places to get the right mortgage.

A mortgage is a product, just like a car or a toaster is a product. Each mortgage provider - whether that's your big bank, local credit union, or a friendly neighborhood mortgage loan originator - can offer different financing options for you depending on your particular financial background.

Start with your current bank to see what type of programs and discounts they can offer you on your mortgage. Since you're already banking with them, they might have some of your documents on file and they might be able to get you pretty competitive rates. But often times, big banks have pretty slow customer service.

Check out some local credit unions, and talk with your Realtor about connections in the mortgage space. More often than not, you'll get just as good of an interest rate with much better service and fewer costs when you go with a local mortgage provider.

Myth #3: Every mortgage is a 30-year, fixed-rate mortgage.
Fact: You'll save money in the long run by going with a shorter term mortgage.

Just like all the different varieties of washing machines, mortgages come in different varieties as well. The most common type is the 30-year, fixed-rate mortgage. That's because it has the most reasonable monthly payment amount, and you know that your mortgage payment won't go up or down over time.

Other common types of mortgages are the 15-year mortgage, which will have a lower interest rate than the 30-year mortgage. Your monthly payment might be larger than with a 30-year mortgage, but you will pay off your loan much faster, and you'll accumulate more equity in your home faster this way too.

There's also the adjustable interest rate mortgage which means that your monthly payment will fluctuate with the changes in market conditions. This is a great option to get when you think that mortgage interest rates have peaked and are on their way down (like in 2007.) But, in times when interest rates are low (e.g. right now), it is best to get locked into a long-term, fixed rate mortgage.

Myth #4: Down payments and closing costs are the same thing.
Fact: Closing costs are in addition to your down payment, and they can get costly.

As a homebuyer coming to the closing table, you'll need to either bring a cashier's check or send a wire transfer to a title company with the amount equal to your down payment plus any additional closing cost. These closing costs are separate from your down payment, in that they are usually payments associated with fees or services provided to you to help you close on your home. Things like the appraisal fee, underwriting fee, courier fee, etc. are all part of the closing costs associated with buying a home.

Before you even write an offer to buy a home, check with your Realtor to make sure they negotiate from the seller getting you some discounts on the closing costs. 

Myth #5: I can get a mortgage without showing any paperwork.
Fact: That's ridiculous. Whoever told you that was an idiot.

To qualify for a mortgage, you'll have to submit to your mortgage provider a long list of documents including items like your W-2's, bank statements, student loan debts, tax records authorizations, and so much more. Be prepared to submit lots of paperwork, and sign lots of paperwork.

So there you have it. A rundown of some of the most common myths about mortgages and buying a home. Now that you have a better understanding of what it takes to buy your first home, talk to one of the Teammates at Hohman Homes to see how we can help you buy your first place.

Nico Hohman

Nico Hohman is the broker/owner of Hohman Homes, a residential real estate brokerage based in Tampa, Fla. Nico is also a contributing author to Realtor Magazine and Inman News, the innovative news source for the real estate industry. Nico has contributed his time and talents to better the standards of the real estate industry and the local community by leading and serving on committees at Greater Tampa Realtors, Emerge Tampa Bay, the University of Florida School of Construction Management Alumni Council, Toastmasters International, Nativity Catholic School, and Johns Hopkins All Children's Hospital Guild. Plus, every fall, Coach Hohman is the Head Golf Coach at Jesuit High School of Tampa.

 

Since he began practicing full time in the residential real estate in the fall of 2014, Nico has been involved in the transaction and management of over 100 properties with a total value of nearly $20,000,000.

 

With a degree in Construction Management from the University of Florida and past experience in the home building and remodeling industries, Nico focuses on helping homebuyers find and purchase new construction homes. He also helps home sellers looking to sell their properties that also require significant renovation.