Tag: mortgagemyths

Mortgage News Matters

Unmasking Mortgage Myths: Debunking Common Misconceptions for Homebuyers

Applying for a mortgage can seem like a labyrinth of uncertainty, especially for first-time homebuyers navigating unfamiliar terrain. The realm of mortgage information often brims with confusing and conflicting notions, leaving potential borrowers hesitant to embark on this journey.

To provide much-needed clarity, we’re here to dispel six prevalent mortgage loan myths, unraveling the truths beneath the misconceptions.

1. The 20% Down Payment Dilemma Debunked

A pervasive myth suggests that every loan type mandates a hefty 20% down payment. This misleading belief deters many from even considering homeownership due to perceived financial limitations. The reality is different—borrowers lacking a 20% down payment can still secure a loan by opting for Private Mortgage Insurance (PMI). Though PMI entails an additional monthly expense, it safeguards lenders in case of borrower default. Certain Conventional or FHA loans allow down payments as low as 3-5%, presenting viable alternatives. Once you amass 20% home equity, you can bid adieu to PMI and continue making mortgage payments sans the extra burden.

2. Distinguishing Pre-Qualification from Pre-Approval

Clarity is imperative when understanding the distinction between pre-qualification and pre-approval. Pre-qualification provides an approximate borrowing estimate based on current finances and credit score, aiding in identifying suitable loan options. On the other hand, pre-approval delves deeper, encompassing a comprehensive financial evaluation, including credit checks. It culminates in a written commitment from the lender, specifying the maximum loan amount they can extend.

3. Demystifying Down Payments and Closing Costs

The notion that your down payment also covers closing costs is a common fallacy. While the down payment is a significant upfront expense, it exclusively caters to the home’s principal value. Closing costs, encompassing fees like appraisals and title insurance, remain a distinct financial aspect. Typically ranging between 3% to 6% of the loan balance, closing costs warrant separate consideration.

4. Imperfect Credit and Homeownership

Contrary to the myth of requiring flawless credit, aspiring homeowners with less-than-perfect credit have options. FHA loans, backed by the government, provide a viable avenue for those who don’t meet conventional loan requirements. Furthermore, proactive credit-building steps can pave the way for eligibility and improved loan terms.

5. The Temporal Impact of Mortgage Applications on Credit

Concerns about mortgage applications negatively affecting credit are valid, albeit temporary. Similar to applying for other lines of credit, a mortgage application may lead to a short-lived dip in your credit score. However, this effect typically surfaces after the pre-approval stage. For credit-conscious individuals, refraining from opening unnecessary lines of credit during this period is advisable.

6. Debt and Homeownership: Debunking Misconceptions

The belief that homeownership hinges on a debt-free existence is a misconception. Many Americans shoulder various forms of debt, be it student loans or car payments, without precluding homeownership. What matters is your debt-to-income ratio, revealing the proportion of your income allotted to debt payments. A lower ratio signifies a less risky borrower. Addressing debt through repayment strategies or increased income generation can enhance your eligibility and broaden homeownership prospects.

In conclusion, navigating the realm of mortgages demands a clear understanding untainted by myths. Armed with accurate information, potential homebuyers can make informed decisions, secure suitable loans, and realize their homeownership dreams.

Have questions about mortgage myths or seeking expert guidance? Contact us today for accurate insights tailored to your needs.

Mortgage News Matters

What’s the Difference Between Refinancing & Home Equity Loan?

One of the major benefits of owning your own home is that it can often be a major financial investment. In the long-term, real estate tends to increase in value over time due to the appreciation of the land it sits on and by building equity.

To determine the value of your property, let’s take a closer look at appreciation, how to build equity, and different ways to obtain a mortgage loan refinance.

What is Appreciation?

Appreciation represents the change in the value of your home over time. This change is typically due to the piece of land that the home sits on, rather than the structure itself which tends to lessen in value, due to typical wear and tear.

What is Equity?

A home’s equity represents the difference between the current market price of the home and the amount that is still owed on the mortgage. Equity grows as you pay down your mortgage. It is important to note that building equity takes time, as it takes a while to lower the principal balance owed on the mortgage loan.

Both appreciation and equity grow over time. This means the longer you own your home, the more valuable it becomes.

With this, homeowners who take out a mortgage to pay for their home can choose to access cash to cover events like unplanned emergencies, necessary repairs, and important updates by choosing to refinance their current mortgage loan.

Why would you want to Refinance?

The main reason homeowners choose to refinance is to lower the overall cost of their mortgage or obtain equity that has been built over time.

Borrowers can lower the overall cost of the mortgage loan by refinancing during a period of lower interest rates. Or, they can choose to access the equity they’ve built in their home get cash out to pay for upgrades, remodels, or other life expenses.

What types of Mortgage Loan Refinances are there?

The two most common forms of mortgage loan refinancing are rate-and-term refinancing, which is when a borrower exchanges their current loan for a new one, or by accessing equity in their home, which can be done by obtaining a cash-out refinance or home equity loan. Though these are the most popular forms of refinancing, there are many methods out there and it is important to understand each to assure that you are selecting the right one for your unique situation.

What is a rate-and-term refinance?

A rate-and-term refinance is when a borrower replaces their current mortgage with a new one, typically with a better interest rate. No money is exchanged in this type of refinancing, other than any costs associated with closing or funds from the new loan to pay off the existing one.

What is the difference between a cash-out refinance and a home equity loan?

A cash-out refinance pays the homeowner a portion of their home’s equity in cash. This method results in a new mortgage loan for the homeowner at a larger amount than was owed on the previous loan, giving owners cash in hand. Compared to a rate-and-term refinance, a cash-out refinance will typically result in borrowers paying a higher interest rate or more points.

A home equity loan gives homeowner’s cash in exchange for the equity they’ve built up in their property as a separate loan. They typically carry a lower interest rate than personal loans because, when you get

Home equity loans are often structured as lines of credit with variable interest rates and payments which make them less predictable. Borrowers should consider obtaining a copy of their credit report before going through the process of applying for either loan, to be sure it is the right decision for them.

What are the benefits of refinancing?

Refinancing can be beneficial to homeowners in many ways. Whether you are looking to lower your mortgage payments or access equity in your home to pay for necessary upgrades, a child’s education, or collect some extra cash for the upcoming holiday season, a refinance can help you access cash quickly.

Visit our blog post on the Top 5 Reasons to Refinance here.

To learn more about the different methods of mortgage loan refinancing and to determine which one is right for you, contact a VanDyk Loan Originator today!

Mortgage News Matters

6 Common Mortgage Loan Myths

Applying for a Mortgage can often feel overwhelming, especially for first-time homebuyers who are completely new to the process. Confusing and conflicting information can leave many borrowers reluctant to even start the process at all.

In efforts to provide more clarity, we’ve debunked 6 common mortgage loan myths below!

  1. 20% down payment required. It is a common belief of many potential homebuyers, that no matter the type of loan you are applying for, you will be required to put up a 20% down payment. This information is harmful because it is not true and can deter a lot of people from even considering applying for a mortgage, who are sure they don’t have the appropriate amount of funds.

    Borrowers who are unable to come up with a 20% down payment can still be eligible for a loan when they get Private Mortgage Insurance or PMI. An added expense on your monthly payments, PMI provides protection to the lender in the case that the borrower defaults on his or her loan.  

    This type of insurance is a common requirement for some Conventional or FHA loans with down payments as low as 3-5%. Keep in mind that once you own 20% equity in your home, you can cancel your private mortgage insurance and continue to make your mortgage payments without the extra expense.
  2. Pre-qualification is the same thing as pre-approval. This common misconception is important to clear up, as both pre-qualification and pre-approval are extremely helpful to the home-buying process and both play an important role.

    Pre-qualification is an estimation of the amount of money you can borrow, based on your current finances and credit score. It provides insight as to which loan option is best for you.

    Pre-approval is a more in-depth examination of your finances, including a credit check, that results in a written commitment from your lender of the maximum amount of money they can lend you.

    For more on the benefits of getting pre-approved along with our pre-approval document checklist, visit our pre-qualification vs. pre-approval page here.
  3. Your down payment covers the closing costs. The down payment is usually one of the first expenses that a potential homebuyer will begin saving for. This makes sense because it is usually one of the largest upfront expenses you will have. However, when saving for your down payment, it is important to keep in mind that it does not cover your closing costs.

    Closing costs are a separate expense that covers your processing fees, like the appraisal and title insurance, and usually range between 3% – 6% of the total balance of your loan.

    For more information on Costs to Consider, refer to our article here.
  4. You must have perfect credit. Many people are under the impression that your credit must be perfect before even considering purchasing a new home. Though lenders are looking for borrowers with good credit scores, there are many options for those who have less than perfect credit.

    One option for borrowers who find themselves in this category is to consider applying for an FHA loan. Insured by the government, this type of loan is perfect for those who may not meet the qualification factors required for a traditional conventional loan program.

    It is also important to keep in mind that there are many steps you can take to work towards building good credit. For more on this, reference our guide on Credit Clean Up Tips.
  5. Applying for a mortgage will hurt your credit. While it is true that applying for any new type of loan or line of credit will harm your credit, it will only do so temporarily. This is the same in the case of applying for a mortgage. However, it is likely that you won’t see this temporary hit to your credit until after you’ve already been pre-approved.

    If you are trying to avoid any harm to your credit during this time, it is a good idea to refrain from opening any unnecessary lines of credit.
  6. You can’t be in debt and buy a home. If this myth were true, most homeowners would not be in their homes today. Debt, in many forms, is common amongst many Americans, whether they are in the process of paying off a student loan or currently making payments on a car. And neither of these things should stop you from owning a home.

    The important number to consider here is your debt-to-income ratio. This number shows the percentage of your monthly income that goes towards debt payments and reoccurring expenses. The higher your debt-to-income ratio, the riskier you are as a borrower. Therefore, you want a low debt-to-income ratio when applying for a mortgage loan.

    If you find yourself in a higher debt-to-income ratio category, consider paying down your debt or finding a way to generate more income. Both of these solutions will help you get started on a path towards a lower debt-to-income ratio and open more opportunities for you to buy a home.