The Six Big Myths of Buying a Home
Everyone dreams of owning their own home. It is a basic part of the American
dream. The problem is that there a lot of myths about buying that home that
are circulating within this country. Do you know what they are? Read these
popular myths and see if you believed they were true.
Myth 1: It's Better to Buy than Rent
This isn't always true. Sure, you can fix your costs a little better when
buying than renting. But it doesn't make sense to get yourself into a home if
you can't stay there at least three to five years. This is how long it
typically takes to earn back your closing costs. It also may not make sense
to buy if interest rates are high or if it's a sellers' market. You need to
take a good look at the costs associated with buying a home versus renting.
This includes monthly mortgage costs, maintenance, utilities, insurance,
closing costs, etc. Sometimes staying in a rental unit makes more sense. Of
course, you need to consider the tax breaks too.
Myth 2: It Takes a Lot of Money to Buy
This is not the case. There are many first-time buyer incentives in the
market today. Federal law will even allow first-time buyers to use money from
an IRA for a down payment without penalty. First-timers can also find loans
with low down payments, often as low as three percent. The fact is that
buying a home doesn't have to mean a lot of money up front. In fact, most
American families can afford to buy a home. Those who fall into a lower
income bracket can qualify for special loans and programs to help them get
into their first home. It is possible. You don't have to be rich to buy.
Myth 3: Being a Homeowner is the Way to Beat Inflation
Not true. While there are some houses that will increase in value at a rate
higher than inflation, most tend to increase in value at a rate equal to
inflation. If interest rates are low, it is unlikely that your home would
Myth 4: It's 20% or No Deal
While a 20% down payment is standard, it isn't the only game in town. You can
find lower down payments out there and you don't have to be a first-time
buyer either, although that does help. Military veterans can qualify for no
down payment loans. First-time buyers can find loans with as low as three
percent down. And there is always seller financing. If you look hard enough,
you can find alternatives to the standard deal. They are out there. It helps
if you have good credit or a hook like being a first-time buyer.
Myth 5: Committed for 30 Years, That's the Only Way
True, 30-year mortgages are still the norm, but they are not the only way.
The length of your mortgage term will be determined by a number of factors,
the least of which is tradition. Some shorter-term mortgages may save you
thousands in interest payments over the years. The key is to carefully
investigate your options. See how much you can afford per month. Factor in
interest over the years and the tax deductions you will be taking. You will
need to do some math to find the best deal for you. But you are not locked
into a 30-year mortgage if you don't want one. There are many types of
mortgage loans from which you can choose. Be sure to know all your options
before selecting one. In most cases, your choice of financing for your home
will be your single largest financial decision and your home will be your
single largest asset. Take time to consider your options.
Myth 6: Prepay If You Can
Many people believe that it really pays to prepay a mortgage. Paying an
additional $25 or $50 per month toward principal could save you thousands.
But it may make more sense to invest that money in a high-earning IRA or
other financial outlet. You need to compare the benefits and potential
financial gain from alternate investments before you unequivocally decide
that prepaying is the best decision. It may be. It may not be. The best thing
to do is to research your options. The lower the interest rate is on the loan
and the higher the tax bracket you are in, the less prepaying makes sense. Be
sure to check on any penalties for an early payoff of the loan too. You have
to make sure that traditional wisdom (prepaying, in this case) is the best
option for your situation.
Source: Based on information gathered from USA Today Magazine.