There is a lot to know and understand about mortgage loans when you're a first-time homebuyer. There also are a lot of mortgage misconceptions, but the following are four of the more common myths about getting a home loan Massachusetts homebuyers should know.
1. Mortgage Insurance is Always Required with Less Than a 20 Percent Down Payment
Mortgage insurance, commonly referred to as MI or PMI, is insurance that protects your lender in the case of a default. If you're putting down less than a 20 percent down payment, you might need to pay monthly mortgage insurance; however, there are loan programs that help you avoid mortgage insurance even with a down payment of less than 20 percent.
There is lender paid mortgage insurance, typically referred to as LPMI. With a LPMI option, a borrower's mortgage lender pays the mortgage insurance premium upfront in a lump sum and passes on the cost to the borrower in the form of a higher interest rate. The borrower then does not have to make monthly mortgage insurance payments. Even with the slightly higher interest rate that comes with an LPMI loan, the monthly mortgage payment is lower than what the payment would be with the standard monthly mortgage insurance cost in many cases. Mortgage insurance, both regular and lender-paid, gets more expensive with higher loan-to-value ratios or lower credit scores.
Massachusetts homebuyers also have the No MI MassHousing Mortgage and the One Mortgage. Both programs offer home loans with as little as a 3 percent down payment. Both programs have income limits, and the One Mortgage is only available to first-time homebuyers. The One Mortgage also has much stricter income guidelines.
Mortgage insurance may cost some homebuyers hundreds of dollars each month, so a slightly higher interest rate to eliminate the mortgage insurance may lower monthly payments. Borrowers should ask loan officers a lot of questions in order to learn about their financing options.
2. The Rate Quoted is Always the Rate You'll Get
The mortgage interest rate that lenders quote or otherwise reference when you receive your pre-qualification letter is not necessarily the same rate you will get at the time of closing. Mortgage interest rates change daily, sometimes there are even intraday changes.
By the time you find a home, make an offer and have it accepted, interest rates might have increased and decrease several times. You are not guaranteed a rate until your loan officer locks in the rate, and the rate will not be locked in until a homebuyer has an offer accepted by a seller and there is a scheduled closing deadline. Also, what interest rate you are offered depends on a number of factors, so a lender likely will need additional information. Once certain information is provided to a lender, the lender will provide you with a loan estimate.
Typically a mortgage interest rate is locked in for 30, 45 or 60 days. Locking in a rate is free in the sense that there isn't a fee associated with locking in a rate; however, it is not unusual for the interest rate for a 60-day rate lock to be slightly higher than a 45-day rate lock and a 45-day rate lock slightly higher than a 30-day rate lock. Potential borrowers should ask their loan officer if there is a different rate for a different rate-lock period.
Once your rate is locked, you are protected if interest rates increase; however, you will not benefit from a decrease in interest rates.
3. The Best Mortgage is the One with the Lowest Interest Rate
Although the mortgage interest rate that you lock into is important because it is factor in how much money you will owe each month, there are other costs involved that will affect the overall cost of borrowing. Other favorable terms might make a loan with a slightly higher interest rate more attractive.
For example, FHA loans typically offer good interest rates; however, FHA loans have other fees that make the overall cost of borrowing more expensive. First, borrowers must pay mortgage insurance on FHA loans even after the equity in the home exceeds 20 percent. Second, FHA borrowers must pay what is referred to as upfront PMI at closing in the amount of 1.75 percent of the loan. For homebuyers with a decent credit score, there usually are better options than a FHA loan.
Some loan programs, such as the No MI MassHousing Mortgage described above, will have a higher interest rate, but possibly a lower monthly mortgage payment because of the elimination of the mortgage insurance.
Homebuyers should ask Massachusetts lenders for detailed breakdowns about the total cost of borrowing. How long you anticipate living in a home also will factor into which type of home loan you choose.
4. Your Lender Will Use Your Highest Credit Score
Your lender will typically access your credit scores from the three major credit reporting bureaus (Equifax, Experian and TransUnion). If all three credit scores are different, a lender typically will use the middle score. Lenders do not average the scores.
It is also important to understand that the credit score you were told you had when you purchased a car, for instance, is not the same score mortgage lenders will use to determine your financial ability to purchase a home. A Massachusetts mortgage lender may use a different credit scoring model than an auto or some other lender because each places importance on different scoring factors.