Buying a home is one of the most significant financial decisions you will make in your life. It’s a complex process that can often be daunting, primarily due to numerous misconceptions about homebuying. Here, we debunk eight common myths that can cost you money or even obstruct your path to homeownership.
1. Myth: You need 20% down
Contrary to popular belief, you don’t need a 20% down payment to buy a home. There are multiple loan options, such as FHA loans, which only require a 3.5% down payment, and VA loans that might not need a down payment at all. Plus, many banks and mortgage lenders offer conventional mortgages for less than 20% down.
However, there’s a caveat to consider: Although paying less than 20% can get you into a home sooner, it also means you may end up paying insurance on your mortgage. For instance, a $200,000 mortgage could incur an additional $2,000 per year in insurance costs. Besides, a 20% down payment lowers your monthly mortgage payment and the overall mortgage interest over the life of the loan.
2. Myth: Getting prequalified for a mortgage is better than getting preapproved
Many people confuse prequalification with preapproval. Prequalification merely provides an estimate of the loan you might qualify for and doesn’t guarantee you’ll get the funds. In contrast, a preapproval letter demonstrates to the seller that you are a serious buyer with the funds ready to purchase, increasing your bargaining power.
3. Myth: Your only buying cost is the mortgage
Another widespread myth is overlooking closing costs, which are additional fees required to complete your mortgage transaction. These can account for 2% to 5% of your mortgage amount, increasing your overall borrowing sum and subsequent interest. Therefore, it’s advisable to save up and pay for these costs with cash, reducing your loan amount and interest.
4. Myth: Your only ongoing cost is the mortgage payment
Thinking that the mortgage payment is your sole ongoing cost is a costly misconception. Homeownership comes with other expenses, such as property taxes, homeowners insurance, repairs, and maintenance. Without adequate savings for these ongoing costs, you may resort to using credit, leading to higher interest costs over time.
5. Myth: The lowest initial interest rate is always best
While a lower interest rate implies a smaller monthly payment, basing your mortgage decision solely on the initial rate is unwise. Adjustable-rate mortgages (ARMs), for example, may offer lower initial rates than fixed-rate mortgages but can become more costly in the long run. ARMs reset periodically, which could result in higher interest rates and larger payments. If you’re not planning to sell or refinance before your interest rate resets, a fixed-rate mortgage might be a safer choice.
6. Myth: An agent isn’t necessary when you’re buying a home
Some homebuyers might believe that an agent isn’t necessary. However, a good buyer’s agent can save you time and guide you through the mortgage process. More importantly, a buyer’s agent owes you a fiduciary duty and can represent your interests without conflicts. Typically, the seller pays the commission for both agents, meaning you can avail of professional assistance without additional cost.
7. Myth: You don’t need to shop around for a mortgage
For a financial commitment as significant as a home mortgage, it’s surprising how many buyers don’t shop around. Doing so can save you thousands in interest over the life of the loan. It’s recommended to get estimates from at least three to four lenders before deciding on a mortgage.
8. Myth: Buying is always better than renting
The age-old adage “renting is throwing money away” is a myth that pushes many into buying homes before they’re ready. While homeownership can be a sound investment, it doesn’t automatically equate to greater wealth. Depending on your financial situation, lifestyle preferences, and the local housing market, renting might be a better choice.
In conclusion, before embarking on your homebuying journey, familiarize yourself with the process, dispel the myths, and make informed decisions based on your financial situation and long-term goals. It’s the key to successful homeownership without unnecessary financial burdens.
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