Buying a home is a big deal — it’s a huge financial commitment and a serious responsibility. But confusing and misleading information on the internet can throw curveballs in the research process.
Three pieces of information in particular about mortgages and the housing market have recently been floating around the internet that may confuse potential home buyers.
Here’s what they actually mean:
Half-truth No. 1: The government gave the OK to 40-year mortgages
In April, Google searches for “40-year mortgage rates” surged after people and some news outlets apparently misunderstood an announcement from the federal government that referred to 40-year mortgages. While a small share of lenders may offer a 40-year mortgage product, it’s far from the norm.
These longer-term mortgages are typically available to current homeowners who have Federal Housing Administration mortgages and need help because they’re in financial distress and have already defaulted on a loan.
A40 year loan modification (meaning, changing an existing shorter-term mortgage into a 40-year mortgage) can help these borrowers avoid foreclosure by extending the duration of their mortgage. This makes their monthly payments smaller and therefore a little more affordable and brings their loan back to current status, meaning that the borrower is making payments on time.
In the U.S., most people are familiar with the fixed rate 30-year mortgage, a conventional, tried-and-true financial product that gives people decades of stability in terms of their monthly housing expenses. Other common types of mortgages include 15-year fixed-rate mortgages as well as adjustable-rate mortgages, which can run for shorter terms, such as three, five or 10 years.
And, to be clear, there are some lenders who may offer you a 40-year mortgage. Make sure to read the fine print, because it’s not the typical fixed-rate mortgage that most Americans take on.
Half-truth No. 2: Buyers with higher credit scores will have to pay higher mortgage fees than those with lower scores
Also in April, media outlets reported that the federal government was changing the way it charged home-buying fees to borrowers, and in the process penalizing homebuyers with higher credit scores and lowering fees for those with poor credit scores.
Some fees related to the property-purchase process went up under the terms of a new federal rule, but it’s not the case that borrowers with higher credit scores are now being charged more so that lower-credit score borrowers can pay less.
A change in federal rules to fees that are known as loan-level price adjustments went into effect on May 1, and were initially interoperated as making mortgages more expensive for buyers with credit scores between 680 to 780 or higher, which are considered good to excellent. Buyers who put down 15% or 20% for their home were reportedly going to be hit with the biggest increase in fees.
There may be some partial truth here: Some fees related to the property-purchase process went up under the new rule, but it’s not the case that borrowers with higher credit scores are being charged more so that lower-credit score borrowers can pay less, as has been claimed, often for partisan political advantage.
The Federal Housing Finance Agency reacted to the misleading press coverage of the new rule with a statement called “Setting the Record Straight,” saying that “much of what has been reported advances a fundamental misunderstanding about the fees charged by [Fannie Mae and Freddie Mac], and why they were updated.”
“There’s a widespread myth that the updated fees punish home buyers with high credit scores to help buyers with low credit scores,” Holden Lewis, home and mortgage expert at NerdWallet, told MarketWatch. “But the truth is that home buyers with high credit scores will pay less for their mortgages than people with low credit scores.”
In its statement addressing “misconceptions” about the new rule, the FHFA said that “higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” and stressed that “the updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
The federal government did eliminate certain upfront homebuying fees for first-time buyers with lower incomes “who nonetheless have the financial capacity and creditworthiness to sustain a mortgage,” FHFA said. It also upped fees on products such as second-home loans and cash-out refinances, the statement read.
Half-truth No. 3: Home prices are about to crash
High home prices may have some would-be buyers hoping for a crash, but don’t hold your breath, Lewis advised. In a survey from January, NerdWallet found that two-thirds of respondents expected the housing market to crash in the next three years.
“There’s a lot of misinformation about home prices crashing,” Lewis said. “Home prices aren’t moving in the same direction nationwide. Home prices are falling in many markets on the West Coast, plus Boise, Las Vegas and Austin. But prices are rising in a lot of markets in the Midwest and the South.”
Cities like San Francisco; San Jose, Calif.; and Reno, Nev., saw home prices drop in the first quarter of this year by at least 10% on a year-over-year basis, the National Association of Realtors said on Tuesday. In Austin, the Texas capital, prices dropped in the first quarter on an annual basis by 13.5% and in Boise, Idaho, they fell by 10.3%, the NAR said.
Overall, the U.S. is facing a housing deficit, as there aren’t enough homes to meet demand.
While it may be tempting to speculate about a housing-market crash, one fact remains: People are still frustrated by how expensive it is to buy a home. In a separate survey by Fannie Mae, though respondents were more upbeat about falling mortgage rates, they said they expect home prices to go up in the coming 12 months.
by Aarthi Swaminathan