Buying a house is one of the most exciting things you’ll ever do in your life — and signing the mortgage for that house will probably be one of the most terrifying.
Since navigating the home loan process can be scary to do alone, many people might be tempted to seek out guidance from someone who’s been there, done that. But you should probably ignore everything your Uncle Bob says. (Sorry, Bob!) And Aunt Sue, while we’re at it. They may mean well, but let’s face it, they haven’t taken out a mortgage in 20 years. In fact, even a friend or family member who got a mortgage last year might lead you far astray (in a well-meaning way, of course), since the rules of home financing really do change on a dime.
Our two cents? For starters, beware these dusty pearls of wisdom below. They might have worked wonders back in 2018, but they don’t necessarily work for everyone right now. Here’s why, as well as some fresher, tastier alternatives.
Get a mortgage with a fixed interest rate
You’ve probably always assumed you’d get a 30-year mortgage with a fixed interest rate. Your parents had one … and isn’t that the only way to get payments you can afford? These days, you have many more choices, and reasons to try them out.
“People aren’t buying their forever home right out of the gate anymore, so the benefits of a 30-year mortgage aren’t necessarily there,” says real estate agent Heather Carbone with the Heather Carbone Team at Big River Properties in Boston. She explains that many first-time home buyers are buying starter homes, and that they plan to move on to something bigger and better after a few years. “Going with a five- or seven-year adjustable rate mortgage [ARM] could potentially save them a couple of hundred dollars off their monthly payment and ease the monthly payment burden a little bit, as they will most likely sell their home before the rates adjust,” she says. Here’s more on the pros and cons of ARMs vs. fixed-rate mortgages.
Make a 20% down payment
When you’re trying to come up with a down payment on a house, 20% sounds like a huge amount. So how do people come up with that kind of cash? Most of the time, they don’t. At least not anymore.
“I meet with lots of young buyers who have been instilled by their parents and others that the only way to buy a house is with a large, 20% down payment,” says Carbone. “In today’s market, that couldn’t be any further from the truth. Provided the buyer has a solid credit score, down payments as low as 3.5% are very much a reality today.”
Real estate agent Melissa Rubenstein, with KW Village Square Realty in Ridgewood, NJ, agrees. “While 20% has traditionally been a benchmark for what is acceptable, this no longer holds true in the market, she says. “With FHA loans requiring around 3%, and other traditional loans offering 10% down options or lower, it makes sense to explore different products with your lender. Don’t miss out on historically low interest rates while trying to stash away cash.”
Wait for interest rates to drop
It seems like interest rates could always be better, but according to Bruce Ailion, real estate agent with Re/Max Town and Country in Atlanta, that might not be true at the moment.
“For 2019, we are likely at the end of the low interest cycle, and interest rates are at their lowest,” he explains. “Today is the time to buy, if interest rates are the determining factor.”
You can always wait for them to go lower, but you might be sorry if you do.
Meet with your lender in person
In the past, the only way to talk with a lender was to walk into a bank, which often meant taking time off work and rearranging your whole day. In 2019, things are getting easier.
“Times are changing, and visiting a bank branch to meet with a lending officer is not the only route to getting a mortgage. Now, you can apply for a mortgage online,” says Kathy Cummings, senior vice president of Homeownership Solutions and Affordable Housing Programs at Bank of America in Charlotte, NC. “Research shows that 32% of Americans are comfortable applying for a mortgage digitally.”
This doesn’t mean human contact is obsolete. “When you have questions that you want to speak to an expert about—in person or by telephone—you have the option,” Cummings says. Consider it the best of both worlds.
Pay off your mortgage as fast as you can
If you have a 30-year mortgage, chances are you have a dream to pay it off in at least 20. Not only will it give you an extra 10 years without a monthly payment, but it’ll save you tons of money in interest. Right?
Not really. Jeff Chervenak, president of Guaranty Federal in Bloomfield, CT, says that’s not necessary anymore—and it probably won’t save you much money.
“Paying off your mortgage as a goal is as much emotional as financial. Because interest rates are, even now, so low, consider saving and investing with the money you would use to pay down your loan separately,” he explains. “Liquidity has a lot of value, and you could always use the lump sum accumulated to pay it down or off any time you wish.”
In case you haven’t figured it out yet, mortgages today are very different from they were just a few years ago. Do your homework before you make any decisions, and check with an expert you trust before you sign on the dotted line.
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