Mortgage Myths | MortgageFlex

Mortgage Myths

1. I can pay my mortgage off faster if I switch to bi-weekly payments. This is not true unless an imprtant distinction is made. If you change to bi-weekly accelerated payments, then you will pay off your mortgage 3 to 4 years faster. If you change to bi-weekly regular payments, then you will not pay your mortgage off any faster.

Here is the difference. Let's assume that your mortgage payment is $1000 a month.

If you switch to bi-weekly regular payments, then your payments would be $462 a month. (That is $1000 times 12 months divided by 26 weeks.) You will not pay your mortgage off faster by doing this.

If you switch to bi-weekly accelerated payments, then your payments would be $500 a month. (That is $1000 times 13 months divided by 26 weeks). This means that you really pay one extra monthly payment per year. Because it is bi-weekly, you will make 26 payments instead of 12. So there will be two months during each year where you will have to make 3 bi-weekly payments. This will help you pay off your mortgage faster.

Don't let any bank employee tell you that a bi-weekly payment will pay your mortgage off faster unless they tell you it is accelerated.

2. If I have to pay a penalty to get out of my mortgage, then I should wait until my mortgage term is up. While this is sometimes true, it very often is not true. Banks love to tell you this myth so that they will keep getting their money from you.

The thing to remember is this: the amount of the penalty is not the important number. The important number is the amount of the savings.

Here is a perfect example. A person came in with a mortgage amount owing of $250,000, and 3 years left on his mortgage. His early payout penalty was about $8000. Some people would have stopped there and just waited the 3 years so that they don't have to pay the penalty.

Here is the truth though. We were able to get him a 3 year mortgage, which saved him a total of $13,500, and we were able to lower his mortgage payment.

What this client finally realized is that whether he got a new mortgage or not, he was paying the penalty. If he stayed with his bank, he was paying that penalty a little bit each month. If he refinanced, he had to take that penalty amount and add it into his mortgage.

After 3 years though, he owed $5,500 less on his mortgage because he refinanced it. The numbers don't lie. It is just plain math.

3. My bank is fair to me. Here is a scenario to help you see what fair means. If you go into your bank, and you walk out with a mortgage rate of say 5%, and your neighbor is at the same bank, with a similar situation as yours, and she walks out with a rate of 4%. Is that fair?

Banks have been doing this for years. Different clients get different rates. The employees are paid a higher bonus if they "sell you" on a higher mortgage rate.

MortgageFlex has access to wholesale rates. We give you the best rate up front.

4. A HELOC (Home Equity Line Of Credit) is not a mortgage. Again, not true. Financial planners go around telling people that they can pay off their mortgage by getting a HELOC. All they are really doing is trading one type of mortgage for another.

If you think that your HELOC is not a mortgage, just pull a copy of your property title. Your HELOC is shown there as a mortgage.

5. HELOC is better than a regular amortized mortgage. This could be true or false depending on what you are doing with the money.

If you are using the money for something short term (usually less than a year) and then you would be paying it off, then a HELOC is a good option. It allows you to pay it off in full without penalty.

However, if you are doing long term investing, or anything else long term, then there are better options. A HELOC is usually at 1% higher than prime. An adjustable rate mortgage is always below prime. The interest on a HELOC is compounded monthly. The interest on an adjustabel rate mortgage is compounded semi-annually.

One client came into our office with a HELOC, and thought that he had the lowest rate and best options on the market. I showed him how we could lower his interest expenses by $325 a month without hardly chaning a thing.

6. My financial advisor will help me choose a mortgage well. That is about as true as saying that your dentist will give you good advice about cancer. They just aren't trained for that.

Financial advisors are good for investing and insurance. They are not licensed to deal in mortgages. Trust the training of a professional who is trained to answer all of your mortgage questions.