Bankers hear all kinds of questions about mortgages. Here are a few of the most common misconceptions and flat-out myths, and the truth behind them.
“It’s always best to get the lowest rate.” Not true! Unit pricing signs at supermarkets are there to give you a way to compare apples to apples. The “unit pricing sign” for a mortgage is the annual percentage rate (APR). APRs have the finance fees and charges folded in, which makes them a more accurate indication of what you will be paying for your loan. So be sure to compare APRs to APRs, notrates to rates.
Also, if you see an APR that’s noticeably higher than the rate, it probably means there are a lot of fees folded in! That’s a sign that you should ask probing questions about what those fees are and be prepared to apply for your loan elsewhere.
“My lender doesn’t want me to pay off my mortgage early.” Not true! Reputable lenders have no problem with you paying off your loan early. Those are funds they can easily lend to another borrower. If you have the money and paying off your loan early fits in with your financial plans, do it!
“I have to keep my mortgage because of the mortgage deduction.” Probably not true! If you have the opportunity to pay off your mortgage but are concerned about losing the mortgage deduction, talk to a CPA who can run the numbers. In many/most cases, paying off the loan early, saving the money you would have paid in interest and “losing” the deduction is absolutely the right way to go.
“I’ll have this mortgage for the next 30 years.” Probably not true! The average length of a mortgage today is about seven years. Some go longer, some much less. But very few people who take a 30-year mortgage have that same loan 30 years later. People refinance. They move. They think they won’t, but they do.
Keep that reality in mind when you’re thinking about how many years it will take for you to re-coup fees and closing costs. A number that might be reasonable if you’re sure you’ll have the loan for, say, 15 years, might look not-so-good if you only have it for seven years.
“If you can save even half a percent, it’s worth it to refinance.” Probably not true! If your current rate and the refinance rate are that close, refinancing most likely won’t save you enough to be worth it after fees, expenses and the time involved are added in. It pays to check, but that’s what many people have discovered.
“It’s always good to have a mortgage payment.” Not true! Having paid-up assets and fewer monthly checks to write — that’s what gives most people options and financial security. No doubt about it that should be your goal. Actively look for ways to use your income to build your savings, not for paying back debt.
Of course, for some people, having a mortgage or even a reverse mortgage can be a wise financial decision. Because then it is part of a plan. And that’s the biggest part of successful money management — having a plan. We’ll be covering how to plan in depth in the next “Smart About Money.”
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to info@cantoncoopbank.com.