We hear a lot of things – both good and bad – about buying a home. Some of them are true, but some of them are also inaccurate.
As you continue your home search, many insiders, pros and even well-meaning friends and relatives will typically offer up some advice. Here are some common myths we hear regularly, along with the inside scoop on what will impact your buying experience and what’s just chatter.
MYTH: Bigger is better when down payments are concerned…It makes sense—put more down now and you’ll borrow less, be able to forego a PMI policy and have lower monthly mortgage payments, not to mention all the interest saved. That’s great if you’ve got access to 20% down which, in this area, can easily top $200,000 or more. But if you don’t have that kind of cash on reserve, there are plenty of perks to putting down less. Borrowers with mortgage insurance may be able to secure lower interest rates than those who make larger down payments, as the policy covers any potential defaults. What’s more, with rates relatively low right now, waiting to save tens of thousands of dollars could mean ultimately securing a less advantageous mortgage down the road, eliminating any potential savings.
MYTH: A 30-year fixed mortgage is the best choice If you plan to stay in your home for 30 years or more than, yes, this is typically the right plan of action. But if you’re looking for a “starter home” or plan to upgrade in 5-7 years, a shorter fixed rate term could be a better option. The longer your fixed rate, the higher your interest rate will be—if you’re planning to sell your home you’ll have paid a higher rate for nothing. In that case, consider a hybrid ARM that combines both adjustable and fixed rate mortgage aspects—these can have 3, 5, 7 or 10-year fixed interest rate periods.
MYTH: If your total debt payments are less than 36%, your mortgage will be manageable Only you know what your personal finances look like, and what impact taking on a mortgage will have. The 36% rule is common among banks and lenders, but true affordability is another story. Track your spending for 90 days and see how much more you have to allocate to housing, maintenance, property taxes and other homeowner inevitabilities. If it winds up being 36% of your income, great! If not, readjust your percentages accordingly—and be prepared to make a case to your financial institution if you plan to go above that threshold.
MYTH: Mortgage interest is tax deductible Most homeowners can write off the interest they pay on their mortgage as a tax deduction—however, that deduction is calculated based on the amount it exceeds your standard deduction which, in 2013, was $12,200 for married couples filing jointly. For a larger loan balance—say $850,000 at 4.5%—the value would exceed the standard deduction by more than $26,000. As the balance drops, though, the tax deduction does as well. In the U.S. the average home loan balance is under $150,000—at a 4.5% rate, the interest is well below the standard deduction level.