First Time Home Buyer Myths

January 11, 2014

With recent improvements in the housing and mortgage market, more and more renters are giving serious consideration to the prospect of owning a home. Low mortgage rates, appreciating home values and flexible options for financing have all helped Americans retain the idea that homeownership is valuable. However, some would-be homeowners may still be put off by the idea, due to the perceived expense, lack of faith in their local market, or because they feel certain that they would not be able to secure a loan. Naturally, every individual will have a different set of circumstances, but in this post we will go over some of the most common first time home buyer myths and hopefully help readers overcome their trepidation. After all, homeownership is still regarded as a cornerstone of The American Dream and can likely be a valuable asset for many years.

Of course, homeownership may not be for everyone. There are some instances in which renting may make more sense. But the key is education – know the options and know the opportunities, but also know when to disregard the hype and clever sales pitches. Only after carefully examining your own situation and being thorough in your home buying research will you be able to decide whether buying a home is right for you. To help you on that path, here are some of the most common first time buyer myths:

1. You have to have at least 20% saved for the down payment.

While this is true for some types of mortgages, there are other home loan programs that will allow a borrower to secure financing with far less than the traditional 20 percent down payment. Take for instance the FHA loan, which currently allows borrowers to put 3.5 percent down. FHA loans are highly popular with first time buyers for just that reason. Then there is the VA loan for qualified military borrowers, and the USDA Rural Housing loan for homes located in rural areas – both of these loans require zero money down.

If you’re considering your first home purchase and are concerned about the down payment, don’t throw in the towel if you can’t afford the typical 20 percent. Talk to a mortgage lender and explore the options. You may be surprised at just how many different programs are available for people in your situation.

2. You need to have perfect credit in order to get a good rate.

Not necessarily. Having stellar credit will naturally boost your chances of locking in a low mortgage rate; however, there are still options available for people with less than perfect credit histories. Although the interest rate you qualify for may be slightly higher than what you would get with a perfect score, nowadays rates are pretty low across the board, making now a great time to secure home financing – even if your credit has a few dings.

3. Renting is cheaper.

The validity of this claim depends on a few factors. One of them is location. If you’re living in Manhattan, San Francisco, or any other major urban metro where property is at a premium, renting may very well be cheaper – at least on a month-to-month basis. However, you also have to consider that when you rent, you aren’t building equity.

Building equity is like paying into a savings or retirement account – like having “money in the bank” as they say. For instance, if you buy a home for $150,000 and in five years you’ve paid it down to $125,000, you’ll have $25,000 in equity. This equity could be tapped into later on to help pay for other major expenses, or it could be used to refinance your home if interest rates get lower. Or, you could continue to let the equity build and then when you sell the home, you will have more profit from the sale since you owe less on the mortgage.

Here’s an example: Let’s say you waited until your equity hit $100,000. At this point, the amount owed on your mortgage is only $50,000. And let’s say you’re able to sell the house for $175,000. That’s a profit of $125,000 (minus any fees or real estate agent commissions).

4. Homes aren’t appreciating in value anymore.

We know what you might be thinking. “But homes don’t always appreciate in value.” Unfortunately, this is true. If we’ve learned anything from the housing crisis it’s that home values can drop when the market creates a bubble. However, as prices balance out and mortgage rates remain affordable, the likelihood of a housing bubble on the same scale as before is pretty low. Naturally there are no guarantees, but there are a few ways you can wisely avoid getting into a negative equity situation.

First, be realistic when it comes to what you can afford. Don’t get in over your head with a huge mortgage payment. Even if your home does decrease in value at some point, as long as your payments are affordable you will be less likely to need to refinance.
Second, you can try to make additional payments when you can to lower your principal balance sooner. Just make sure your mortgage does not penalize you for prepayments.
Finally, you can look into shorter term mortgages such as 20 or 15 year fixed rate loans. These not only save you money in total interest, they help you build equity faster and pay off your loan sooner.
Any other way you can reduce your principal balance will help you avoid a negative equity situation. This can mean making a higher down payment if possible, always making your mortgage payment on time and not missing any payments.

5. I can’t handle the upkeep of owning a home.

Homeownership isn’t just a state of owning property; it’s also a lifestyle. Owning a home means not only paying the mortgage, property taxes, and insurance – it means replacing shingles, cleaning out gutters, mowing the lawn, fixing heat pumps, and so on. It’s a lot of work, and it’s not for everyone. But even if you’re not up for the high maintenance lifestyle of owning a house, there are still ways you can enjoy the benefits of homeownership.

Condo ownership is quite popular among buyers who want to own their home but prefer a low maintenance lifestyle. The same goes for townhouses and co-ops. In these types of communities, the homeowners association typically handles regular maintenance of outdoor areas such as landscaping, lawns, community areas, etc. They also generally handle the repair and maintenance of the home’s exterior structures such as cleaning gutters, roof maintenance, replacing siding and so on. The homeowners pay dues to the HOA for these services.

Homeowners in these housing types aren’t free from all home maintenance. Anything that needs attention within the home itself, such as painting interior walls, plumbing issues, fireplace cleaning, and so on, falls under the homeowner’s responsibility. Still, the burden is usually much lighter, which is why condo ownership is popular among homeowners who are older, single, or whose lifestyles are so busy they don’t have as much free time to devote to the upkeep of a house.