Getting a mortgage is an intimated process, which explains why so many people readily accept advice from others. Sure, those pearls of wisdom may come from 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. Also, a pre-qualification letter strengthen your offer and give you an advantage over other offers in a multiple offers situation.
- ‘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. The application process may be more convenient by going with the same bank that you have an account with, but the terms are not always favorable. You want to get quotes from at least 2 other lenders and compare all the terms to get 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! Many borrowers missed the pre-payment penalty clauses and ended up paying a hefty penalty when they need to sell or re-financed their loans.
- ‘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 be on the alert when someone suggests an interest-only ARM, 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, But half of your gross income may not work for most people, especially when they factor in taxes and insurance.
So be sure to set a realistic budget and decide what monthly payment you’re comfortable with, and stick to it.