If you’ve been thinking about buying your first home, you may have a few questions ― and a few misconceptions ― about how the process works.
Take a look at the following eight home-buying myths we’ve debunked:
1. Myth: A 30-year mortgage is always the best option.
When choosing between a 15- or 30-year mortgage, a 30-year may not always be your best option. While the loans are structured similarly, it all comes down to the length of the loan. A shorter term of 15 years means your monthly payments will be higher than a 30-year term, but you’ll pay less interest over the life of the loan. Why? When you first start to pay back a loan, the balance is high, and most of your payment goes toward interest. As your balance gets smaller, so do your interest payments, so more of your payment goes toward the principal. With a 30-year loan, the balance gets smaller more slowly (and you’re borrowing money for a longer period of time), so you ultimately pay more in interest. If you’d like to calculate the difference between a 15- and 30-year mortgage, try out our nifty mortgage calculator.
Tip: A 15-year mortgage isn’t for everyone. It’s important to speak with your banker to determine what you can afford. For example, are you going through a life change (such as having a baby, retiring, putting yourself through school) that will require you to allocate your funds elsewhere? Your banker can help you think through your budget and help you make the decision best for you and your family.
2. Myth: The lender with the lowest interest rate is always the best option.
You may be dealing with your lender for the length of your loan term (unless you refinance, sell, etc.) — so you want a company you can easily reach and get a response from, should questions or issues arise. The lowest rate isn’t necessarily a great deal if you’re stuck with nonexistent customer service.
3. Myth: You need a 20 percent down payment.
Putting down 20 percent of your home’s purchase price can lower your monthly mortgage and interest costs. But that’s not your only option. If you meet certain conditions to qualify, you may be able to put down less than 20 percent. The average down payment for Americans is actually 13.4 percent, according to a BMO Harris report. Speak to your lender about your options — a Federal Housing Authority loan or a Home Possible loan may prove to be a better alternative for you.
4. Myth: If you’ve saved enough for a down payment, you’re all set.
Not exactly. Among several additional costs, you’ll need to:
- Purchase homeowners insurance to protect the property and your belongings
- Pay closing costs
- Potentially hire an attorney to review the associated contracts
- Pay for an appraisal and inspection to confirm the selling price is fair and the home doesn’t have any structural or other issues
- Budget and pay your monthly mortgage payment, as well as utilities, property taxes, regular maintenance and repairs.
Check out these 8 additional costs as you prepare your home-buying budget.
5. Myth: The seller will pay for pretty much everything at closing, except your down payment.
In some instances, sellers may pay some of your closing costs1, due to state requirements or to sweeten the deal. Often, though, buyers and sellers split the costs. Your seller also may not have to fix each flaw you uncover during a home inspection because safety issue requirements vary by state. However, you may be able to negotiate to have the seller make certain repairs before the sale goes through, or reduce the home’s price.
6. Myth: You don’t need a real estate agent.
You can find information about available homes on a number of websites — but real estate agents offer several advantages. They may have access to properties that aren’t listed, as well as have experience negotiating, which can be particularly helpful when buying your first home.
Using one shouldn’t cost you anything ― the agent’s commission comes out of the sale proceeds. Just note that the seller has mostly likely factored the amount into the home price, so you won’t automatically save money doing everything yourself. Use these 5 tips to find the real estate agent who’s right for you.
7. Myth: You can’t buy a home without perfect credit.
A good credit score — generally 700 or higher — can potentially make it easier to get a loan with a lower interest rate. However, other factors are considered, too, including your credit history with the lender and your amount of debt and savings. To see where you stand, find out your credit score, and use FICO’s loan savings calculator to gauge how it’ll affect the loan interest you pay.
8. Myth: Renting is always cheaper.
Owning a home may be less expensive than renting in the U.S. Buying your first home with a fixed-rate mortgage can help you avoid unexpected annual increases because you’ll lock in a monthly amount for the life of the loan. Homeownership may also help you save at tax time. According to the IRS, under certain circumstances you can generally deduct the mortgage interest, mortgage insurance and property taxes you pay2. Essentially, buying a home may cost you less in the long run — and you’ll be building equity in the home.
Think you’re ready to start house hunting? Determine what type of home is best for you.
1The Consumer Financial Protection Bureau offers additional home buying resources. You may visit http://www.consumerfinance.gov/owning-a-home/loan-options/ for more information.
2This information is not intended to be tax or legal advice. This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. BMO Harris Bank N.A. and its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.