Debunking Mortgage Myths
There are many myths circulating about mortgages today. A lot of them are perpetuated by Loan Officers eager to win business or friends and family members unknowingly offering false advice. But whether these myths are spread out of greed or ignorance is irrelevant because the result is the same; applicants are left misinformed.
People should be given every possible tool when deciding whether or not to take out a new mortgage. Myths and falsehoods create confusion. And they can have dire repercussions. For example, they can steer someone away from a good program, lead them into a bad program, and even wrongly convince them to refinance or not refinance.
Meridian Home Mortgage is dedicated to debunking these mortgage myths. Today we address three of the most common myths.
Myth #1: All Mortgage Insurance is Tax Deductable
Generally speaking, mortgage insurance has been tax deductible since 2007. Lawmakers have extended this tax break again through 2011 due to the still-sputtering economy.
This is important as more loans than ever are now carrying mortgage insurance. Values are lower and Loan-to-values (LTV) are higher. If a loan amount is more than 80% on conventional loans, the borrower is required to pay mortgage insurance. And, almost all FHA loans require monthly mortgage insurance. Unlike years past, paying mortgage insurance actually makes sense in a lot of scenarios today.
Borrowers who might be reluctant to pay mortgage insurance may be enticed to move forward knowing that it is tax deductible. But they should know that not all mortgage insurance is tax deductible. It all depends on their income.
Homeowners whose household Adjusted Gross Income (AGI) is between $100,000 and $109,000 or $50,000 and $54,000 for married borrowers filing separately will be able to deduct only a fraction of their MI. And a Homeowner whose AGI is $109,000 or $54,000 for married borrowers filing separately will not be able to deduct any of it.
Also, the tax break only affects loans originated between 2007 and 2011. If the tax break is not extended after 2011, those loans originated afterwards will not be able to deduct mortgage insurance at all.
Myth #2: APR is Always the Best Way to Compare Loan Offers
Annual Percentage Rate (APR)is a number that the government created to help borrowers make an "apples-to-apples" comparison between competing loan offers. APR is supposed to represent the total cost of a loan including loan size, costs, and interest. It calculates the total cost over the life of the loan.
A lower APR is supposed to equate to a better loan. But there are a few holes in this theory.
First, APR can easily be manipulated. Lenders can low-ball their fees in order to win business. They can also unintentionally misrepresent third-party fees. For example, estimated title fees and title insurance can often be inexact in the beginning of the process. This can lead to borrowers making decisions based off of inaccurate APRs.
APR also assumes that a borrower will never refinance or sell their house. This is often a false assumption because the average life of a mortgage is under 10 years.
Unless the loan is carried for it's full term, the APR is skewed. Consider this scenario:
A borrower chooses a higher-fee/lower-rate loan over one that has a lower-fee/slightly higher-rate because the APR is lower. But if they don't carry the loan for a specific period of time, they might not break-even on the higher fees they will pay. It might actually be cheaper to take the slightly higher rate and pay lower fees even though the APR is higher on that option.
Finally, the new mortgage compensation law that began April 2011 can seriously warp an APR calculation. The law basically states that a broker can only earn their fee from either the borrower (borrower-paid) or from the lender (lender-paid) not both.
There is typically money built into a mortgage interest rate. This is what lenders use to pay brokers on lender-paid loans. On borrower-paid loans, any money built into the rate has to be credited back to the borrower.
While the APR calculates the total origination fee charged to the borrower, it doesn't calculate the credit that the lender pays back to the borrower. Therefore, the APR on borrower-paid loans can reflect higher costs than what the borrower is actually paying.
Myth #3: Do Not Refinance Unless Your Rate Drops by a Certain Percentage
A very popular myth is that a homeowner should never refinance unless they lower their rate by at least 2 percent. This statement is false on many levels. Here are just some of the many cases where this theory doesn't always apply:
- When the purpose of the loan is to cash-out
- Debt consolidation
- Home Improvement
- When the purpose of the loan is to change the term
- Increase to a larger term to reduce payments
- Decrease to a lower term to pay-off the loan quicker
- Fix an Adjustable rate mortgage (ARM)
- When the purpose of the loan is to eliminate Mortgage Insurance
- When the purpose of the loan is to remove or add a borrower to the mortgage (e.g. divorce)
It's smart to seek advice when thinking about obtaining a new mortgage. Validating that advice can be tricky, though. The Meridian Home Mortgage Blog will continue to address the many myths that continue to circulate today. Be sure to check back often.