The home-buying process can be difficult enough without mortgage myths getting in the way of your thinking. It is easy to find these myths disguised as conventional wisdom. Let’s take a look at six of the top mortgage myths that can lead you astray.
1. You Should Always Own Instead of Rent – Some people do not enjoy the responsibilities and obligations of home ownership. Others are in less stable job or life situations where they may be forced to relocate often, and still others simply cannot afford the house they want to buy. Renting may be the best choice for you at any given point in life.
Home ownership may be a goal of yours and eventually right for you, but just not right at the moment. Never buy a house just because you think you should, or because you are “tired of renting.” You will experience a new level of tired, not to mention stressed, if you buy before you are mentally and fiscally ready.
2. A Home is a Great Investment – Buying a home is fiscally superior to renting, since you are building equity — but it is not necessarily a great investment. Historically, housing prices just about keep up with inflation. If you were unfortunate enough to buy right before the housing crash, you have experienced a net decrease in the value of your home and perhaps have not recovered yet.
If you are looking at purely financial investments, stocks provide far greater returns (averaging around 6%-8% even including downturns) and bonds, CDs and money market funds are far more liquid. Think of your house as a conservative asset, and an investment in your family’s well-being and happiness instead of your overall wealth.
3. 30-Year Fixed-Rate Mortgages Can’t Be Beat – Sometimes this is true, as it is now with fixed rates still at near-historic lows. Eventually interest rates will rise — and when that time comes, they may go quickly. Adjustable-rate mortgages (ARMs) and hybrid mortgages can suffer from large adjustments during that period, depending on how they are capped.
However, if you are not planning to live in the house for a long period, and rates are favorable and unlikely to change rapidly during the adjustment period, an ARM or hybrid mortgage loan may be preferable.
4. All Mortgage Interest Can Be Written Off – Mortgage interest is deductible, but you have to be in a position to itemize your taxes to take advantage of it. If mortgage interest is the primary expense you have to write off, you may not have enough expenses to benefit over taking the standard deduction.
5. The Only Upfront Money Needed is The Down Payment – People tend to stretch their funds to cover the down payment and don’t think of the other upfront closing costs. Closing costs can be up to 2% or more of your mortgage, and while it is possible to finance some closing costs (and part of the down payment itself), it is not necessarily smart to do so.
It is wise to have sufficient money in hand for the down payment, all closing costs, and a cash reserve of several months’ mortgage payment. Keep in mind that you will also likely be spending money on new furnishings and other expenses to make over your new home — not to mention any surprise repairs that you may need to make. Underestimating the total cash needed to buy and live in the house for the first few months often causes people to stretch their goals and buy a larger house than they can really afford.
6. Always Make Extra Payments Against Principal if You Can – Making extra payment against principal can make a huge difference in the overall amount you pay for your home, especially in the early years. However, you have to balance that gain against other potential uses for your money.
For example, if you are running a large credit card balance, your money is best put toward eliminating that high-interest debt to keep it from spiraling. If the market is going well, you may be able to invest that extra payment and make more money long-term than you would save with the principal payment. Online calculators are available to help you calculate the savings in all of those scenarios.
The common thread in most mortgage myths is that they are true some of the time, for some homebuyers, and in some situations and markets — but they do not apply across the board. Do not be afraid to challenge any conventional wisdom with respect to mortgages. You either will have confirmation that the conventional wisdom is true, or will save yourself problems by following myth-based advice when it does not apply to your situation. Either way, you come out ahead.