Mortgage Myth Buster Guide

Mortgages are complicated debt instruments that can sometimes confuse prospective homeowners. Myths surrounding mortgage loans abound, some of them understandable since these misconceptions are based on apparently solid math.  

We interviewed Williamsport mortgage broker D. Shane Whitteker, owner and chief broker of Williamsport mortgage company Principle Home Mortgage, to help bust some common mortgage myths.   

MYTH: A 15 Year Mortgage Is Better Than 30 

For an equal loan amount, a 15-year mortgage will have a lower interest rate but it is offset by a higher monthly payment. Note that if this higher payment is not met in full every month, extra fees and penalties can apply and whittle down the rate advantage that made the 15-year loan more attractive in the first place.  

With a lower monthly payment given by a 30-year mortgage, if there is no prepayment penalty, a homebuyer can make extra payments to "simulate" a 15-year payment plan without the obligation to do so. This flexibility is often times worth the slightly higher 30-year interest rate compared to a 15-year rate for the same borrowed amount.  

According to Whitteker, the choice between a 15 or a 30 year mortgage really comes down to each individual’s unique circumstances. 

“This really depends on your objectives as a borrower,” Whitteker says.  “A 15 year mortgage will have a lower interest rate typically and will have a lower interest payout over the life of the loan, but comes with a significantly higher payment. So this really comes down to whether or not you have the ability or the interest in making a 15 year mortgage payment.” 

MYTH: My Financial Future Is Better If I Rent 

Note that “flexibility of renting" glosses over necessity of renting again. It may be easier to move since there is no hassle associated with selling or renting out your house, but you inevitably have to land in a new residence, one with perhaps higher starting rent or steeper annual rent increases.

The flexibility of renting has to be weighed against what a renter vs. owner is walking away with. Though homeowners are not promised a higher selling price if they choose to sell, they will certainly get back something, even selling at a loss. Renting does not offer even this modest financial consolation.

Lastly, no-cost or very low-cost repairs and maintenance can be a draw for renting; however, cost of ownership can be substantially reduced with some DIY repair and training.  

In Whitteker’s opinion, home ownership comes with a host of benefits - extending far into your financial future.  

“I would disagree with the idea that someone’s financial future is better if they rent for a number of reasons,” Whitteker says. “Although owning a home comes with responsibility it comes with freedom as well. Your financial future is typically far better when you own a home. You experience property value growth and your monthly payment goes towards interest but also principle. With each payment you have a little bit more equity in your home. This really adds up over time and helps to allow for future acquisitions or savings.” 

MYTH: Lowest-Rate Option Is Best 

This assumption works if everything else stays constant. Realistically, the interest rate is not only consideration of total homeowner cost. Consider taxes, association fee, likely repairs. Also, the lowest rate can hide variable and large risks, as with ARMs that go up with overall interest rates as well as the large payments due at the conclusion of low-rate balloon mortgages. Not to mention that a lower rate may come with stricter terms and higher fees for late payments.  

In general though, Whitteker says go with the lower rate - but be careful about paying points if you plan to move soon.  

“For any given mortgage term, i.e. 30,25,20,15,10 years, the lower rate is in general desirable,” Whitteker says. “However the lowest rate available will come with a cost and a higher rate may come with a lender credit towards closing costs.  So expense really plays a large roll in what interest rate you end up with.  If you have the ability to pay points you may end up in a better situation in the long run.  This really comes down to how much your rate goes down by paying points and how long you will own your home.  If you intend to move in five years you are most likely better off not paying points to buy the rate down.” 
 

MYTH: Pre-Approval is a Shopping Spree Green Light 

Pre-approval is great but it is not a slam-dunk. Pre-approvals will be limited to the maximum amount specified. The prospective homebuyer has to find a residence within the pre-approved budget, keeping in mind that other expenses such as inspections and closing costs can boost total cost of a home above the advertised price.  

Whitteker says to keep in mind the limits set during your qualification.  

“The type of home may play a role in qualification and there are typically limits set for a maximum purchase price of the home you intend to buy,” Whitteker says. “For example, a double wide manufactured home may have different pre-approval requirements than a stick built home.  Another example would be a multi-unit house compared to a single family residence.” 

Another key factor to consider is time: pre-approvals are typically valid for 30-90 days since lenders reason that beyond such timeframes it is unlikely that the borrower's assets, debt, income, and overall risk profile will stay the same. On that note, a borrower's debt profile, income, credit score, or other assets can disqualify them from a mortgage even after pre-approval if the lender notices significant negative financial actions. For example, sharply reduced income combined with much higher credit card debt can negate the pre-approval upon the prospective borrower's final loan application. 
 

MYTH: VA Loan Eligibility From Veteran Parents 

If you’re thinking about getting a home mortgage, and wonder if your parent’s military service makes you eligible for a VA loan - it doesn’t. According to Whitteker, VA loans - which are guaranteed by the US Department of Veterans Affairs - have very strict eligibility guidelines. 

“You must be a veteran yourself in order to qualify for a VA mortgage,” Whitteker says. “Under limited circumstances a surviving spouse of a veteran may qualify for VA financing.”  

Bankruptcy and Qualifying for a Mortgage 

In the short term, a bankruptcy will make mortgages or other types of borrowing difficult, no doubt about it. However, after a few years of consistent repayment of any remaining debt and general fiscal responsibility, there are options that will begin to open up for you.  

“There are different time frames to wait based on the type of mortgage being applied for and the type of bankruptcy that was filed,” Whitteker says. “You will qualify more quickly potentially if you filed a chapter 13 BK vs a chapter 7 BK.  FHA allows for a more recent timeframe for both a chapter 13 or 7 compared to conventional financing.  The waiting periods per loan type are as follows.  Conventional is 4 years from discharge for a chapter 7 and 2 to 4 years for a chapter 13 depending on circumstances.  For FHA you need two years from the discharge of a chapter 7 or 12 months from the beginning of the payment schedule on a chapter 13 as long as payments were made on time.  VA is the same time frame as FHA with slightly different extenuating circumstance requirements.  USDA requires 3 years from the discharge date of a chapter 7 and one year from the discharge of a chapter 13.” 

Summary 

It is understandable that mortgage myths pop up. Mortgages and home buying/selling is not a simple process. Involved professionals help buyers and sellers iron out the details and keep everything in line with rules and regulations.  

To learn more about mortgages of all types, contact Williamsport mortgage company Principle Home Mortgage at (814) 308-0959.