Buying a home in a major milestone in anyone’s life. Their home is a place where they have peace, can plan for the future and of course raise their kids. Also, having a home of your own spares you the annual cost of paying rent which means paying down your own mortgage rather than paying someone elses! The thought of buying a home can be scary at first, especially when you take into account all you’ve heard from existing homeowners. The task of buying a home can be extra intimidating if this is your first ever home however, not all you hear about homebuying is true so now let me dispel 5 homebuying myths still so many people believe!
Myth #1: Working With A Real Estate Agent Is Expensive
As of 2019, an estimated 90% of homebuyers in America acquired their homes through the help of a real estate agent. If you’ve heard the myth that working with a professional realtor is expensive, then you may be wondering why so many home buyers still seek their services. It’s not unreasonable for us to want to save money, not just on homes, but on everything else we purchase. The truth is, there isn’t much to be saved if you decide to go home-hunting on your own. You could actually lose out if you end up with an undesirable property. So what’s the cost of hiring a realtor? Most realtor commissions sit at 6% of the home’s selling price. And this commission is shared between the agents of both the seller and the buyer.
This means both agents only receive a 3% share of the selling price. So if you’re purchasing a home at a price of $250,000, the 6% commission of $15,000 would be split two ways ($7,500 per agent). This may seem like a lot of money, but it’s not, when you consider all the work a realtor puts in to help you find a home that’s just right for you.
Among their duties include studying home listings that fit your tastes and budget, assessing market prices and facilitating contract negotiations, giving you information on the current market trends, scheduling home visits and acting as your representative throughout the whole purchasing process. All this work for just 3% of the total selling price is fair enough. If you were to perform all these duties on your own, chances are you would get fatigued along the line and may be forced to settle for a home that you really don’t want. Experience counts a great deal in real estate business, and if you have little to zero knowledge of the market, you may find yourself on the losing end. And just in case you didn’t know, it is the seller who usually covers the commission for both agents. This means you could actually enjoy the realtor’s services for free when buying a home which makes this cost a moot point until you go to sell yourself.
Myth #2: You Must Put 20% Down
This is another home buying myth that isn’t entirely true! The amount you put down as an initial payment is dependent on a few factors, including your current financial situation and the loan program you are using. In fact, there are loan programs that require a 0% down payment, surprised right? There are others that require as low as 3% down payment for a conventional loan.
While these percentages are low, you would most likely have to pay higher amounts in interest on the loan. This is because the lenders would do their best to mitigate their risks. I’m sure you can understand that. Paying more in a down payment will attract lower interest rates during the time of the loan, which is why paying 20% upfront seems like the more favorable option. But the myth that says you MUST pay that amount as a down payment is completely false. Your loan-to-value ratio is used to divide your loan amount by the value of the home, and it also determines the amount you can get from the lender.
For other types of conventional loans, lenders will need a down payment of between 5% to 15%. If you’re getting a conventional mortgage and you’re putting down an amount less than 20% of the home’s value, then you will need to get PMI or Private Mortgage Insurance. Factors that determine the monthly cost of PMI include the loan amount, the amount you’re making as a down payment, and of course your credit score. However, it is possible for lenders to skip PMI, but this would mean a higher charge in interest rates. Once again, this is for the sake of mitigating their risk.
Myth #3: A Particular Season Is Best For Buying
While it is generally believed that the late summer or fall is the best time to buy a home, this isn’t necessarily true. This is because buying a home isn’t the same as buying a winter coat or the new iPhone. It is a much more substantial investment that goes long term. A winter coat for instance would be cheaper during the summer period when the demand for it is very low. In the winter, you should expect to pay more for it. As for the new iPhone, well it’s going to be most expensive as it is released into the market, and not a year later.
Homes are a whole different ball game, this is because people need a place to live all year round and people buy and sell as they please, or as their unique situations require. Speaking of a home seller’s unique situation, the person in question may be in need of funds for a project and may decide to sell off his or her home at a certain price, and buy another one that costs less. It could also be that the seller has grown tired of the neighborhood where his or her home is located and has decided to move. Another instance is that the seller could be earning a lot more money or has a growing family and has decided to buy a bigger home.
Any one of the above-mentioned instances can occur at any time of the year and can prompt a sale, regardless of whether it is summer, winter, or spring. You may be lucky enough to find such homes for sale slightly below the market value. Once again, depending on the seller’s unique situation. This is why the seasonal myth for home buying holds no weight. If you’re working with a real estate agent, they will surely sniff out such offers if they are listed, and you can get your dream home any time of the year.
Truth be told, the perfect time for you to buy a home is when you are ready financially. It doesn’t matter the time of the year or the season. As long as you have the funds available for a down payment, and you are able to pay off your loan, then you are good to go!
Myth #4: You Should Get The Longest Mortgage Possible
As far as loans are concerned, the sooner you pay them off the better off you will be. This is because the longer the loan extends, the more you would have to pay in interest. For this reason, the myth states that getting the longest mortgage possible is absolutely ill-advised. Surprisingly, there are a lot of home buyers going for long term mortgages. As of 2007, an estimated 16% of first-time homebuyers opted for a 35-year mortgage term. This figure rose in 2015, as 26% of buyers went for the same mortgage term of 35 years. Why, you may wonder? If a long term mortgage was that bad, then why are more people opting for it? Well, there are a lot of lenders who would gladly accept long term applications, because as I have pointed out earlier, this will attract more interest income for them over the course of the mortgage’s life.
Another factor lenders consider when issuing long term loans is the age of the borrower. There is hardly a lender out there that would want mortgages to extend into the borrower’s retirement age, and for this reason, they set a limit to the age a borrower should be by the expiration of the mortgage term. Most banks set their limit to the age of 65 (which is the average retirement age). However, some lenders will extend this age limit to 75 years old. So, if you’re 40 years old right now and you’re looking to get a mortgage of about 40 years, you may need to reconsider. This is because you will be 80 years old by the end of the term and well into retirement.
There is only one major advantage to taking a 35-year mortgage, and that is in the area of monthly repayments. The longer the loan term, the lower the monthly repayments, but the more interest you will pay at the end of the loan term. If you were borrowing say, $200,000 for a 25-year mortgage at a 3% rate, it means you would be paying back $948 on a monthly basis. If you opted for a 35-year mortgage, then that figure would drop to about $770 payment per month. The repayment figure drops even further if you are on a 40-year term. It will amount to $716 monthly.
Going by these figures and the high cost of purchasing a home, we can understand why a lot of first time home buyers would go for long term mortgages. But as I mentioned already, a longer-term will amount to paying more interest over time. This is because you would have to pay interest on the borrowed amount for a much longer period. If you’re paying a 3% monthly interest on a 25-year mortgage, you would pay interest of about $84,500 at the end of the term. For a 35-year mortgage, you would end up spending as much as $123,000 in interest. This is a significant $38,000 more than the former. For a 40-year loan term, you would have spent $144,000 in interest. This is almost $60,000 higher than a 25-year loan term. $60,000 is a whole lot of money, and I’m sure you would agree that such an amount can be used to fund other endeavors that would improve the quality of your life, both in the short and long term.
Myth #5: Your Credit Must Be Perfect To Buy A Home
Last but not least of the 5 myths regarding home buying is the perception that you need to have a perfect credit score to buy a home. This is also false! Don’t get me wrong, a good credit score is very important when it comes to accessing favourable loans. This is because the higher your credit score, the higher the loan amount you can get. It also means you will pay lower interest rates. While a low credit score hurts your chances of securing your desired loan amount, it doesn’t mean you cannot get a loan at all.
In case you are wondering what a credit score or credit rating is, it simply means an assessment of how well or poorly you have managed your money in the past, with regards to loans, on-time payments, missed payments, and how much of your credit you use. All these taken into account will be used to calculate your credit score. There is no fixed credit score needed when it comes to buying a home, as it varies among lenders. The minimum credit score and the amount you are eligible for would be determined solely by the individual lender.
So there you have it — 5 homebuying myths dispelled forever (or at least for the moment).