By: Jeff Tompkins
Hercules, dragons, unicorns and Bigfoot. What do these all have in common? They are myths, things that have grown out of stories that are passed down through time, that somehow became something more imaginary than real by the time it filtered down. As in every industry, the business of home loans is beset by many myths that borrowers cling to as reality that can sometimes be damaging to them. Lets look at a few of those myths, and the truths behind them.
Myth #1: "My broker is giving me a sweet deal, a no points, no cost loan!!"
Truth: There is no such thing as a "no cost loan". Yes, your broker may not be charging you an origination fee, and he might be absorbing your closing costs, but he is going to get paid somehow, and isn't going to dip into his company coffers to pay for your loan. On those types of loans, the broker is normally giving you a higher rate, so that the yield paid by the lender provides his profit and covers your closing costs. So rather than paying those one time closing costs, you will be paying more interest every month for as long as you have the loan. It's creative financing, but its not "no cost". Remember the old adage, "if its too good to be true, it probably isn't." Very few brokers are going to give customers no points, no cost, and the lowest rate available�even if they are family.
Myth #2: "My house is my biggest asset."
Truth: Your house is also your biggest debt. Yes, a house is an asset, and can increase in value just like a stock or bond can. The difference between a house and other assets is in ownership. When I purchase a stock, its mine�the issuing company can't snatch it back because I didn't vote at the board meetings. With your home, you are third in line as far as ownership. First, if you have a mortgage, the lender is the real owner, because if you stop paying, guess who is taking that house? Second, what if you stop paying your property taxes? Think Uncle Sam will say, "oh that's ok, it's your house, if you don't want to pay taxes on it, you don't have to." I wish. No, Sam will slap a tax lien on your property. Granted, for most people the interest they are paying on their home is much less than any credit card, car loan, etc and it makes sense to pay off the higher rates first. I am a big proponent of paying off your mortgage as aggressively as you can though�so that you can get the most of it as an asset.
Myth #3: "I need to have a mortgage on the home so I can take advantage of the tax savings."
Truth: The federal government does give tax breaks for the interest you pay on your mortgage, but that doesn't mean you should take out a mortgage just for the sake of getting the tax break. Unless you are putting the mortgage proceeds into something that earns a higher rate of interest than the interest rate you are paying out on the mortgage, it makes no sense. For example, if you take $100,000 out of your home equity on a refinance, at a rate of 6%, you need to put that money into an investment that earns over 6% to make it worthwhile. If the IRS was crediting you every dollar of interest you paid, then it might make sense, but only a fraction of your interest is deductible. It never makes sense to get a mortgage for the sole purpose of getting a tax credit.
Jeff Tompkins is owner and president of Teacher's Funding Group, LLC, a Colorado mortgage broker that specializes in providing home financing to those in the education industry and all those who need it. Visit Teacher's Funding for more information.