Are you dreaming of buying a new house this year but feel like this dream will never be a reality? Are there too many obstacles standing in the way of purchasing a new home? Some myths about purchasing a home continue to deter homebuyers who can actually afford to take the leap into homeownership. Let’s break down the three most common myths of buying a home.
The Down Payment Myth
A 20% down payment on a home mortgage was once a widely accepted standard. The number comes from the early days of home mortgage lending. After the Great Depression, when so many homes were foreclosed and seized by banks, the government stepped in to help provide some protection for homeowners. The Federal Housing Authority began backing the loans but required a 20% down payment from buyers. This stood as reassurance to the banks that they would gain the 20% upfront, and should the homeowner default on the loan, still be able to sell the property even at a depressed price and not lose money. The 20% down payment ingrained itself into the mortgage-lending culture and many would-be homebuyers today still believe they need this much of a down payment to purchase their own home.
However, the 21st century has seen a drop in the amount of down payment necessary to secure a loan. The average homebuyer now pays 7% down on the purchase of a home. This average is a little misleading as it depends on the type of loan you get. An FHA loan now only requires a 3.5% down payment, and a Veteran’s Assistance loan can require even less.
For those receiving a conventional mortgage loan, the down payment can be negotiated, though 7% to 10% is far more common than the old standard. If you can pay 20% down, it will lower your mortgage payments and give you a better interest rate, but that isn’t a reason to delay buying your home. Paying a smaller down payment and purchasing your home sooner will allow your house to appreciate in value while you own the home instead of waiting many years to save 20% of the home’s value.
Bottom Line: It’s worth it to explore your options for a smaller down payment with your mortgage lender if it allows you to purchase your home more quickly.
The Myth of Being Stuck
In a generation that values flexibility and mobility, the myth of purchasing a home and then being stuck with it is persistent and should be considered carefully. When you purchase a home, if you have a standard mortgage and pay 7% to 10% down on your home, the reality is you need to own your home an average of five years to be able to accrue enough value to essentially break even if you choose to sell. If you sell your home under the five-year mark, you do risk losing some money, since your home may not have had enough time to increase in market value to cover your original costs. However, home values have risen over time since 1963, with a few exceptions, and the trend looks to continue.
If you decide to sell within a few years of purchase, carefully evaluate the predicted growth of your home. If you’re in a high-growth area, it may be possible to sell sooner and still receive full value for your home. You also have other options if you don’t want to live in the home but retain ownership. After 12 months, you can rent your home and still keep your existing mortgage in place, subject to potential conditions set by your bank.
Bottom Line: The reality is homeownership still offers you some flexibility and, more importantly, it allows you to earn on your investment while you’re living in the home. Talk with your mortgage lender and Realtor about the prices and growth of homes in your area to make the most informed decision before purchasing your home.
The Myth of Unaffordable Monthly Payments
This myth might be the one that scares would-be homebuyers the most. Nobody wants to be saddled with high monthly payments that might mean defaulting on a loan and losing a home. However, your monthly loan payments are likely to be equal to or even less than what you pay in rent if you’re currently renting a home or apartment. Additionally, with a fixed-rate mortgage, your payment will never go up. This means that, over time, inflation works in your favor, making your payment less and less each year. If you rent, your landlords will continue to raise the rent throughout the years so that they themselves can keep up with inflation. Let inflation work for you by purchasing your home.
The best way to avoid an unaffordable monthly payment is to know your budget as you begin your search for a home. Most mortgage lenders recommend 28% of your monthly budget be allotted to your mortgage payments, or less if possible. However, the average American homeowner spends 33% of their monthly income on their home mortgage payment. This 5% difference is enough to make your monthly payments too high and increase your risk of defaulting on your loan.
Bottom Line: Stick to the 28% rule or less and your monthly mortgage payments should be manageable. Meanwhile, you can watch your home value increase while your monthly payments “decrease” over time as inflation rises.
While there are some risks involved in purchasing and maintaining a home, the biggest ones are actually myths. With the knowledge of how much you can realistically afford to put down as a down payment, an idea of your personal goals for your near future, and a solid budget in place, you can find a home and a mortgage that will work for you.
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