When it comes to making a decision as important as purchasing a home, be sure to base your decision on facts—not myths. Here are a few myths debunked.
Myth #1: It’s always better to own than to rent.
Not necessarily. When people say owning a home is an investment while renting just throws your money away, they’re overlooking some pretty important issues. Like, how long do you plan to stick around and how much flexibility do you need?
Home ownership is a big responsibility and a big financial investment, and last year, tax laws changed to make home ownership a little less financially attractive. First, write offs were limited to a combined total of $10,000 for state income tax and non-investment real estate; and second, the standard deduction dramatically increased, taking away the advantage of itemizing deductions for many people. If you don’t itemize deductions, you can’t write off home mortgage interest.
Given these tax considerations, the idea of renting becomes a bit more appealing. However, if you plan to stay put for several years and can afford to buy a home without a lot of financial stress, home ownership is a great investment.
Myth #2: Interest Rate and Annual Percentage Rate (APR) are Identical.
Not so! The interest rate on your mortgage helps you calculate monthly payments, but the APR allows you to compare various mortgage options because it considers all the expenses associated with the loan. For example, using APR can help you figure out whether you should take the 4.5 percent interest rate with 1 point or the 4.75 percent interest rate with no points, or maybe the 5 percent interest rate with a 1 point rebate.
If you are most concerned about keeping your monthly payments low, you may choose one loan; whereas, if you need a bit more cash to close the transaction, you may choose another. Talk to your lender and be up front about your short-term and long-term needs. I recommend Ginny Richards at Stearns Lending. She is really good at helping clients find just the right loan.
Myth #3: You can afford the loan you are approved for.
Maybe, maybe not. When lenders tell you how much they will allow you to borrow, they are not recommending that amount as the ideal sum. You need to consider your financial situation. Is your job secure? Can you reasonably expect a raise in the coming months or years? Do you have other expenses to consider: Junior’s college tuition, your daughter’s wedding, annual vacations?
Myth #4: Once you’re pre-approved for a loan, your worries are over.
Nope. Getting pre-approved for a loan is the beginning—not the end—of the process. You’ll need to answer a long list of questions and gather documentation that proves everything you say. Also, you’ll have to keep your spending in check until escrow closes—don’t take on new car payments or run up your credit card balance buying furnishings for your new home.
Myth #5: You must have a 20 percent down payment.
It’s helpful, sure, but a big down payment is not necessarily required. As a rule, the larger the down payment, the lower the interest rate. Also, you can often qualify to purchase a more expensive home. However, there are plenty of loans that only require a 5 percent down payment, and some that require no down payment at all.
Myth #6: If you can, you should pay off your mortgage early.
Not these days. Figuring out whether and which loans to pay off is always a matter of alternatives: what else could you do with that money? Interest rates are still at historic lows, so may be better off investing your money or putting it toward retirement.
Your Realtor can help you with these and other questions about real estate.
If you have questions about real estate or property management, please contact me at email@example.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.