These Mortgage Myths Could Come Back to Haunt You

Don't buy into these glaring misconceptions.

If you're a first-time home buyer and mortgage applicant, you may be spending a lot of time on the internet learning about the steps involved in getting a home loan. But unfortunately, there's a lot of bad information out there, making it hard to find what you need to know about mortgages. Here are three myths you shouldn't believe.

1. You can only buy a home if you have a 20% down payment

The more money you put down at closing, the less expensive a mortgage you'll need to take out. And if you put down at least 20% on a conventional mortgage, you'll avoid private mortgage insurance, a premium that makes owning your home more expensive.

But that doesn't mean you can't buy a home with less than 20% down. Some conventional mortgage lenders will accept as little as 5% down, and many will agree to 10%. Also, there are specific loan programs that cater to people with low down payment funds. These include:

• FHA loans -- require 3.5% down
• VA loans -- require no down payment
• USDA loans -- require no down payment

2. If you get pre-approved for a mortgage, you're guaranteed a home loan

Getting pre-approved for a mortgage is a smart move to make. It sends the message to sellers that you're a serious buyer, and it also gives you a price range to work with when looking for homes.

But don't assume that getting pre-approved for a mortgage is the same thing as actual approval. If circumstances change between when you get pre-approved and when you want to sign a mortgage, such as if you lose your job or your credit score takes a hit, you may be denied a home loan.

3. Paying off your mortgage early is always a smart idea

Many people strive to pay off their mortgages ahead of schedule. Doing so saves money on interest and helps people enjoy the mental benefits of shedding that debt sooner. In some cases, paying off a mortgage early is a wise move. But don't assume that's always the case.

These days, mortgage rates are extremely low. If you manage to lock in an affordable rate, it could pay to hang on to your mortgage, enjoy the tax benefits involved, and use your extra money to buy stocks. This could generate a much higher return than what you'll save by paying off your mortgage early.

Buying stocks, for example, might give you a 7% annual return, which is a few percentage points below the market's average. If you lock in a 3% mortgage, you're better off earning 7% a year than saving 3%.

Also, paying off a mortgage early means tying up more cash in your home, which is a relatively illiquid investment. That means it's not easy to instantly turn a home into cash in your pocket.

If you manage to snag a competitive mortgage rate, then it could pay to just stick to your original repayment schedule. And to be clear, anything under 4% is considered very competitive, historically speaking.

Getting a mortgage can be overwhelming when you're new to the process, but it's important to be strategic when applying for and managing that loan. Getting to the bottom of these myths puts you in a better position to purchase a home and manage your mortgage.