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EQUAL HOUSING
OPPORTUNITY
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Mortgage Myths That Can Cost You Money
1. A 30-year fixed is always the best way to go. It is if you plan to stay in the house forever. But the people typically stay in a home 5 -7 years. Young couples with growing families and increasing incomes, stay only a couple years. Adjustable-Rate (ARMs) mortgages, especially the popular hybrid that carry an introductory rate that lasts three, five, seven or 10 years, are beneficial for those who are upwardly mobile, looking for a low start rate or for those that thier situation will be changing.
2. You should never pay points. In general, you can knock off about 1/4 to 1/8 of a percent off your interest rate for each point you pay. Example: on a $250,000 loan, if you take a 30 year fixed rate of 6% with no points or 5.625% with 1 point, your monthly savings will be about $60 by paying 1 point. However, you cannot simply take the cost of the points and divide it by the monthly payment savings because that does not take into consideration the monthly interest savings and the allocation of principal and interest. In this case, the break even point is just about 32 months. If you plan to own the property longer than that then you will be better off by paying the point.
3. Pay off the mortgage as soon as possible. Instead of paying extra principal on a mortgage, it makes more sense to pay down higher-interest debt, such as for credit cards and auto loans, or to invest the money where it can earn a return greater than the mortgage interest rate after taxes.
4. Avoid mortgage insurance. Private Mortgage Insurance (PMI) is not always a bad feature. In an
appreciating market it is usually quicker and less expensive to get rid of the MI than to pay off a
second mortgage or refinance the 1st and 2nd mortgage.
5. Don't refinance if you have 20 years or less left. You may be reluctant to refinance because you
don't want to “reset” the clock on a loan that's due to be paid off in 20 years. But you can amortize the payments so the new loan will be paid when the original loan would have been due. Your payment could be lower than it was before, but your loan will be paid over the same period of time. You could also pay bi-weekly and retire the loan early. And if you are not planning to stay in the home and pay it off, it is a mute point anyway.
6. Only the "cash poor" or desperate senior citizens can benefit from a Reverse Mortgage. Even though some seniors may have a greater need than others for either cash or a monthly income, a Reverse Mortgage can be an excellent financial or estate planning tool.
7. You should only refinance when interest rates are at their lowest. Even when rates are not at record “lows” refinancing makes good financial sense if you can pay off high-interest credit card debts and lower your total monthly payments.
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