Newbie Mistakes: Common and Costly Myths About US Home Buying

Buying a home is a complex financial transaction, so it is not surprising that there are many myths associated with purchasing real estate. Unfortunately, these common beliefs can come at a cost in the long run. They can cost you money or prevent you from owning your dream home. Writes about this MoneyTalksNews.

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Before starting your house hunt, make sure you don't fall prey to the following misconceptions.

1. Down payment of 20%

You may have heard that you cannot buy a house without a down payment of 20% or more.

It is not.

“There are many loans that will allow you to purchase a home for less than 20% down,” says Money Talks News founder Stacy Johnson. For example:

• FHA loans requiring a 3,5% payment;
  VA loans that may not require a down payment at all.

In addition, banks and lenders are offering conventional mortgages at 3% or less, according to Spokane, Washington-based mortgage broker Tony Byrne.

By paying less than 20%, you can get into the house faster, but just because it is possible, you are not obligated to choose this option.

“Typically, if you don’t put down 20%, you pay for mortgage insurance,” Stacy says. “If you take out a $200 loan, you could pay an extra $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,” NerdWallet reports, citing information from the Urban Institute, Genworth Mortgage Insurance and Ginnie Mae.

Stacy points out the benefits of a 20% down payment:

• you will have a lower mortgage payment amount;
• you will pay less interest on your mortgage over the life of the loan.

2. Preliminary assessment is better than approval

Did someone tell you that a prequalified mortgage is better than a preapproved? Don't be fooled. A preliminary estimate, however it may sound, will not help you buy a home. It only shows that your lender has given you a loan estimate. This does not prove that you will get money.

Get pre-approval instead. A pre-approval letter is one of the best ways to save on your mortgage. In it, the seller shows that you have everything ready and can make a purchase immediately.

3. The only cost of the purchase is the mortgage.

Home buyers may be surprised to learn about the additional fees they will have to pay for the services and products needed to complete a mortgage. According to Stacy, be prepared to pay between 2% and 5% of the mortgage to cover such costs.

These fees can be included in the total mortgage loan amount. But this means that you need to borrow a large amount and pay more interest on this larger amount of the loan. To get the best deal on closing costs, save to pay cash costs.

On the subject: 19 million Americans can save money: mortgage refinancing has never been more profitable

4. The only ongoing expenses are mortgage payments.

When calculating the cost of home ownership, buyers can assume that paying off the mortgage is their main expense and not worry about anything other than that.

Unfortunately, you'll also face other, often unexpected, costs, including property taxes, homeowners insurance, repairs and ongoing maintenance. Saving on these ongoing expenses is an important part of home ownership. Otherwise, you may end up paying even more over time.

5. The lowest starting interest rate is always better

A higher interest rate means a higher monthly payment. But don't base your mortgage decision solely on the interest rate, at least not on the initial rate.

Adjustable rate mortgages (ARM) often have lower starting rates than fixed rate mortgages. But the interest rates on these mortgages change periodically. When this happens, your rate may rise, leading to an increase in your payments.

Adjustable rate mortgages are complex loans for borrowers who understand and can manage the risks. If you're planning on selling your home or refinancing before the interest rate resets, this might be a good idea.

On the other hand, you are likely to feel more secure with a fixed rate mortgage. Even if it is slightly higher, your payment and interest rate will remain the same throughout the life of the loan, with less risk that the payment will become unavailable. Therefore, choosing an adjustable mortgage based solely on the initial low interest rate can be a mistake.

6. When buying a house, an agent is not needed

You might think that you don't need an agent, but in fact, one can help you cut down on the time you spend searching and even walk you through the process of getting your mortgage.

Working with a listing agent can work against you. As Realtor.com explains, “Listing agents 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 confident that your agent has no conflict of interest because of the seller.

Plus, using a buyer's agent may cost you nothing. In many cases, the seller pays a commission to both the sellers 'and buyers' agents. This way, you don't have to pay a cent for first-class assistance.

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7. You don't need to look for a mortgage

Unfortunately, many home buyers don't shop around for the best deal - and it could be the biggest purchase you'll ever make.

Comparing offers to get the lowest mortgage rate available can save you thousands of dollars in interest. Get an assessment from three to four lenders before deciding on a mortgage. Look for the best deal and get savings.

8. Buying is always better than renting

One of the most common myths about home buying is the idea that renting is always a waste of money, so you should buy a house as soon as possible.

In fact, buying a home does not automatically lead to more wealth. Depending on the situation, renting sometimes makes sense. If you can get a good rental deal and are investing diligently, you may be better off financially staying among the tenants.

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