A lot of work goes into applying for a mortgage — from rounding up your financial records to making sure your credit score is in tiptop shape. Another important item for your to do list: looking out for misinformation and bad advice.
There are plenty of myths surrounding home loans. Believing them can cost you both time and money. We’ve rounded up some of the more common misconceptions and explained what you really need to know.
Pre-Qualified Means The Same Thing as Pre-Approved
Fact: While the phrases sound similar, they are different. A pre-qualification is an estimate of how much money you may be approved to borrow for a home loan; you do not have to provide financial proof of income and debt. Pre-approval means you’ve supplied financial information such as credit, employment, and income, and the lender has verified this information and given you a letter stating your approved loan amount. A pre-qualification helps provide a basic idea of what you may be qualified to borrow as you begin searching for your dream home.
High-Interest Rate Myth
Most people think high-interest rates will increase the monthly EMI causing severe financial burdens for them. Many loans with high-interest rates offered by top-notch banks do not have other hidden costs and have a short tenure. The loan gets completed quickly, and the total amount paid in all the years is less than long-term loans with easy EMI. The interest rate varies depending upon the type of the property and its current market value.
Other factors like the mortgage payer’s ability to repay the loan, employment status, and financial background play a crucial role in determining interest. The banks are willing to negotiate the interest rate if they are rest assured the mortgage payer will not default on the loan amount. Evernest, Timberline, and Home365 are the top companies managing rentals in Colorado Springs, which help you understand high-interest rates are not always a bad option.
Low-Interest Rate Myth
Several banks offer loans with meager interest rates, making the mortgage payers believe it is the best scheme. But, they charge several hidden fees for various things, from legal valuation to high missed payment fees and prepayment penalties. Some banks with low-interest rates charge very high processing fees and do not offer any bonuses. Most banks forego the last few EMIs at the end of the tenure, which the low-interest bank loans fail to do.
It is better to calculate the final amount you will end up paying finally after a decade or two instead of worrying about the interest rate. Choosing mortgages with the correct interest rate helps you easily save thousands of dollars at the end of your loan tenure, which can get used for insurance or home repair. Read the print carefully, consult a contract attorney if necessary and compare various loans before selecting the best one.
Floating Interest Rates
Mortgage owners are often confused between fixed interest rate loans and floating interest rate loans. In reality, all the fixed interest rate loans change after some time based on the type and value of your property. The amount will be adjusted while collecting yearly payments, or the bank will reset the interest rate after six or seven years. They regularly evaluate the property to determine its value and make the interest rate flexible to achieve maximum profit.
It is better to select floating interest rate loans from the beginning and be ready to accept changes in the interest rate after a few years. Improving the financial situation to meet the growing demands or interest rates is necessary. A higher interest rate is not necessarily a bad sign as it means the value of your property keeps soaring.
Fear About Penalty Charges
Many mortgage payers think pre-closure of loans is bad because of the high penalty charges. It is a huge myth because banks do not charge more than 2 to 3% for pre-closure and often welcome regular principal payments. Several banks charge high only if the mortgage owner is trying to re-finance through another bank or a financial institution.
Some banks allow up to 25% prepayment of an entire loan in a fiscal year without any penalty or charge. They charge a nominal amount if the customer wants to complete the loan entirely in a single year. Generally, there are no pre-payment charges if the loan is closed within the first five years of availing the mortgage. Also, there are penalty reductions if the mortgage payment gets finished in the last three to five years of the tenure in most banks.
Credit Score Influence
Having a good credit score alone does not guarantee a good mortgage with low-interest rates and reduced insurance premiums. Maintain an excellent financial profile, and impress the manager with your employment status and career growth to get a good loan. According to a trusted source, credit scores influence mortgage approval by less than 5%. The background checks and the permanent employment of the mortgage payer are the two main factors influencing most loans.
Banks often prefer to give loans to younger people who are starting a family and have a high potential to earn for a long time. Their application gets considered first preference rather than other applicants who have many commitments like grown-up children, college fee payments, etc. People with more obligations are often sidelined for home loans, even if they have an excellent credit score. Banks also think twice about funding small entrepreneurs and business owners for home loans fearing loan default unless they borrow on another property.