Buying a home is a complicated financial transaction, so it’s no surprise that there are quite a few myths that surround homebuying.
Unfortunately, these common beliefs can be costly in the long run. They can cost you money or prevent you from getting a home.
Before starting house hunting, make sure you aren’t falling prey to the following misconceptions.
1. You need 20% down
You may have heard that you can’t buy a home without a down payment of 20% or more.
Not so. “There are plenty of loans out there that will allow you to purchase a home with less than 20% down,” says Money Talks News founder Stacy Johnson. He cites:
- FHA loans, requiring 3.5% down.
- VA loans, which might not require a down payment at all.
Also, banks and mortgage lenders offer conventional mortgages for 3% down or less, Spokane, Washington, mortgage broker Tony Byrne tells The Spokesman Review.
Paying less than 20% can get you into a home sooner, but just because you can get a home with less than 20% down doesn’t mean you should.
“Generally, if you don’t put 20% down, you’ll pay to insure the mortgage,” says Stacy. “If you borrow $200,0000, you could be paying an extra $2,000 a year to insure your mortgage.”
“The average annual cost of private mortgage insurance (PMI) typically ranges from 0.55% to 2.25% of the original loan amount,” according to NerdWallet, which cites information from the Urban Institute, Genworth Mortgage Insurance and Ginnie Mae.
Stacy points to other benefits of putting 20% down:
- You’ll have a lower mortgage payment.
- You’ll pay less in mortgage interest over the life of the loan.
2. Getting prequalified for a mortgage is better than getting preapproved
Don’t be fooled. Getting prequalified, despite how it sounds, won’t help you buy a home. It only shows that your lender gave you an estimate for a loan. It doesn’t prove you’ll get the funds.
Instead, get a preapproval letter. A preapproval letter is one of the best ways to save money on a mortgage. Your preapproval letter shows a seller you’re all set with the funds and can purchase immediately.
3. Your only buying cost is the mortgage
Homebuyers may be surprised to learn about closing costs, additional fees you’ll pay for services and products required to complete your mortgage transaction. Expect to pay 2% to 5% of your mortgage amount for closing costs, Stacy says.
It’s possible to roll these fees into your total mortgage amount. But that means borrowing a larger sum and paying more interest on that higher loan amount.
To get the best deal on closing costs, save up so you can pay for closing costs with cash.
4. Your only ongoing cost is the mortgage payment
When calculating homeownership costs, buyers may assume that the mortgage payment is their main expense and not worry beyond that.
Unfortunately, you’ll also encounter other, often unanticipated costs, including property taxes, homeowners insurance, repairs and ongoing maintenance. See “10 Hidden Homeowner Costs — and How You Can Slash Them.”
Saving for these ongoing costs is an important part of homeownership. Otherwise, you could end up avoiding needed repairs or running up a credit card — and paying even more in interest over time.
5. The lowest initial interest rate is always best
It’s true that a higher interest rate means a bigger monthly payment. But don’t base your mortgage decision solely on the interest rate, at least not on the initial rate.
Adjustable-rate mortgages (ARMs) often have lower initial rates than fixed-rate mortgages. But interest rates on these mortgages reset periodically. When that happens, your rate could rise, making your payments larger.
Adjustable-rate mortgages are sophisticated loans for borrowers who understand and can manage the risks, says The Washington Post. If you expect to sell the home or refinance before your interest rate resets, an ARM could be a good idea.
Otherwise, you’ll probably feel safer with a fixed-rate mortgage. Even if the interest rate is slightly higher, your payment and interest rate will remain the same for the life of your loan, with less risk of the payment becoming unaffordable. Selecting an adjustable mortgage based solely on the initial low interest rate can be a mortgage mistake.
6. An agent isn’t necessary when you’re buying a home
You might feel that an agent isn’t necessary, but in reality, an agent can help you reduce the time you spend looking and even guide you through the mortgage process.
A good buyer’s agent is legally required to help you, the buyer. Working with a home’s listing agent (the agent representing the home listing) could work against you. That’s because, as Realtor.com explains, “listing agents — the agent representing the home listing — have a fiduciary duty to the home seller.” In other words, their legal obligation is to the person selling the home, not to you.
With a buyer’s agent, you can be sure that your agent doesn’t have a conflict of interest from representing the seller.
Besides, using a buyer’s agent may cost you nothing. In many cases, the seller pays the commission for both the buyers’ and sellers’ agents. That way, you won’t need to pay a cent for first-class help. Using a buyer’s agent was one of the best decisions I made when buying my first home.
7. You don’t need to shop around for a mortgage
Unfortunately, many homebuyers don’t shop around for the best deal — and this for what could be the biggest purchase you’ll ever make.
Comparison shopping to get the lowest rate available on a mortgage can save you thousands of dollars in interest. In this example — from U.S. Consumer Financial Protection Bureau research — you’d save $9,000 over the life of the loan.
Follow this advice: Get an estimate from three to four lenders before deciding on a mortgage. Look for the best deal and reap the savings. Start here by comparing mortgage rates.
8. Buying is always better than renting
One of the biggest homebuying myths is the idea that renting is always “throwing money away,” and you should buy a home as soon as you can.
In reality, buying a house doesn’t automatically lead to greater wealth. Depending on your situation, renting sometimes makes better sense.
If you can get a good deal on a rental and you’re diligent about investing, you might be better off financially staying on Team Rent.
Would you add any myths to this list? Share in comments below or on the Money Talks News Facebook page.