Home Buying Myths

Living in one's own home is a basic part of the American dream. Yet, many people hold misconceptions about the financial aspects of buying and owning a home. According to the Institute of Certified Financial Planners, Denver, Colorado, here are a few of those myths, with analyses: Myth: It's better to buy than rent a home. Buying a home often is a good way to fix the long-term costs of shelter. On the other hand, renting may make sense if you don't plan to live in the house for more than three to four years (you won't likely earn back your closing costs); interest rates are high or rising (making it difficult to handle the higher payments) or are high relative to price appreciation; you can invest the down payment and the difference between the monthly cost of renting and buying for a higher rate of return than what the home would earn; you can't afford regular maintenance and repairs, or rising real estate taxes or insurance costs; or you are in and expect to remain in a lower income-tax bracket (making the tax breaks less beneficial to you). Myth: Homeowning beats inflation. In certain fast-growing markets, prices may outpace inflation. However, most homes in most markets generally will stay even with inflation, say housing experts, especially as long as interest rates stay low. Myth: You need a lot of money to buy a home. While certainly not everyone can afford to buy and maintain a home, the majority of American families can. Lower-income home buyers can start out with a modestly priced home, apply for a state low-income program for first-time buyers, or rent to own through the Federal Home Mortgage Corp. Myth: You need 20% for a down payment. That's standard, but you can arrange lower down payments. The Federal Housing Administration requires as little as three percent down, depending on the price of the home. Military veterans often can get a Veterans Administration loan for zero down. The seller may be willing to carry the mortgage with a smaller down payment, or you may be able to swing a combination -- 80% from the bank, a 10% carry by the seller (preferably for only five or 10 years), and 10% down. Myth: A 30-year fixed mortgage almost always is best. The choice of mortgage depends a lot on your personal financial circumstances. An adjustable rate mortgage may be a better choice if interest rates currently are high or you need the lower rate initially so you can afford the payments, but anticipate increased income as the interest rates rise. Or a shorter-term mortgage such as 15 or 20 years may make sense because you can save thousands of dollars in interest charges. Myth: It pays to prepay a mortgage. Paying extra principal each month -- even as little as $25 or $50 -- can save thousands of dollars in interest charges. On the other hand, you may come out ahead by putting that extra principal into a high-earning retirement account. Also, prepaying is of less benefit the lower the interest rate on the mortgage and the higher the tax bracket you are in. < Prev