By Lisa Johnson Mandell |
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Getting a mortgage is a daunting prospect, which explains why so many people seem eager to pat your hand and say, “Let me give you a little advice.” Sure, those pearls of wisdom may come from an ocean of good intentions, but the suggestions might not necessarily be right for you. In fact, they could be dead wrong.
So before you take some friendly outside counsel as gospel, be sure to check it against our list of the worst mortgage advice people often give.
‘Don’t bother getting pre-approved for a mortgage’
Why you might hear this: Hey, you’ve barely begun shopping for a home! There’s no need to get all serious about mortgages just yet. And besides, a mortgage pre-approval isn’t real anyway— your application isn’t reviewed by an underwriter, so it’s no guarantee you’ll get approved for a mortgage later. So why bother?
Why it’s bad advice: While a pre-approval might not be “official,” it will help you avoid major problems down the road.
“Getting pre-approved by a bank is one way to avoid the heartbreak that comes from falling in love with a house you can never buy,” says Maryalene LaPonsie of MoneyTalks. “It may also give you an edge if there are multiple offers for the same property. A seller will feel more confident selecting a bid from someone with a mortgage pre-approval rather than a person who hasn’t even begun the process.”
‘Get your mortgage from the bank where you already have an account’
Why you might hear this: When it comes to convenience, you just can’t beat the bank you’re already using. Plus, since you have an existing relationship with it, it’ll give you the best rates, right?
Why it’s bad advice: You already know to shop around for a home. You need to do the same with your loan.
“Even though the big bank where I keep my checking and savings accounts claims they’ll give me better service and an easier application process, that may not always be true,” says Albert Tumpson, a banking and real estate attorney who owns several properties and refinances them every couple of years. “I’ve found more favorable terms with other venues. Always go with the most favorable terms.”
‘Don’t bother reading the fine print’
Why you might hear this: Because actually perusing all that mortgage paperwork will drive you insane! And besides, this is the standard contract that everyone gets. Just sign here, here, and here—and you’ll save yourself a ton of headaches.
Why it’s bad advice: Because that fine print contains some clauses that could cost you serious money!
“Take your time and go over every last word with a fine-toothed comb,” says Jamie, a homeowner who purchased her second home two years ago. She was astounded when her lender asked her to sign a mortgage contract involving hundreds of thousands of dollars without “bothering” to read the details. Jamie ended up taking several hours to go over the contract and found several items to dispute. So what if the process took a little longer? It was well worth the wait.
‘Always go with the lowest interest rate’
Why you might hear this: A lower interest rate means lower monthly payments. Duh.
Why it’s bad advice: Lower interest rates can have all sorts of strings attached—often in the form of an adjustable-rate mortgage.
ARMs are not always a bad thing, but just be on the alert when someone suggests an interest-only ARM, says Shant Khatchadourian, president of SKR Capital Group. “Interest-only ARMs can result in significant payment shock, especially if rates increase down the line and amortization kicks in.”
In the past, as interest rates were dropping and home values were rising rapidly, interest-only ARMs worked well for some people—especially those who didn’t plan to stay in the home beyond the length of the loan’s first term. But although interest rates are low, they’re likely to rise soon, so beware.
‘Borrow as much as you’re approved for, even if you don’t need it’
Why you might hear this: Who doesn’t want a bigger and better house? Besides, a bank wouldn’t approve you for all that money unless you could afford to pay it back, right? Right?
Why it’s bad advice: It’s always wise to live slightly below your means, since you never know when life might pitch you a financial curveball, such as a layoff or medical problem.“You can qualify for monthly payments up to 50% of your income these days,” says Khatchadourian. “But half of your gross income seems like quite a bit for most people, especially when they factor in taxes and insurance.”
So be sure to make a budget, decide what monthly payment you’re comfortable with, and stick to it.