Buying a home is a complicated financial transaction, so it’s no surprise that there are quite a few myths that surround homebuying.
Unfortunately, these common beliefs can be costly in the long run. They can cost you money or prevent you from getting a home.
Before starting house hunting, make sure you aren’t falling prey to the following misconceptions.
1. You need 20% down
You may have heard that you can’t buy a home without a down payment of 20% or more.
Not so. “There are plenty of loans out there that will allow you to purchase a home with less than 20% down,” says Money Talks News founder Stacy Johnson. He cites:
- FHA loans, requiring 3.5% down.
- VA loans, which might not require a down payment at all.
Also, banks and mortgage lenders offer conventional mortgages for 3% down or less, Spokane, Washington, mortgage broker Tony Byrne tells The Spokesman Review.
Paying less than 20% can get you into a home sooner, but just because you can get a home with less than 20% down doesn’t mean you should.
“Generally, if you don’t put 20% down, you’ll pay to insure the mortgage,” says Stacy. “If you borrow $200,0000, you could be paying an extra $2,000 a year to insure your mortgage.”
“The average annual cost of private mortgage insurance (PMI) typically ranges from 0.55% to 2.25% of the original loan amount,” according to NerdWallet, which cites information from the Urban Institute, Genworth Mortgage Insurance and Ginnie Mae.
Stacy points to other benefits of putting 20% down:
- You’ll have a lower mortgage payment.
- You’ll pay less in mortgage interest over the life of the loan.
2. Getting prequalified for a mortgage is better than getting preapproved
Don’t be fooled. Getting prequalified, despite how it sounds, won’t help you buy a home. It only shows that your lender gave you an estimate for a loan. It doesn’t prove you’ll get the funds.
Instead, get a preapproval letter. A preapproval letter is one of the best ways to save money on a mortgage. Your preapproval letter shows a seller you’re all set with the funds and can purchase immediately.
3. Your only buying cost is the mortgage
Homebuyers may be surprised to learn about closing costs, additional fees you’ll pay for services and products required to complete your mortgage transaction. Expect to pay 2% to 5% of your mortgage amount for closing costs, Stacy says.
It’s possible to roll these fees into your total mortgage amount. But that means borrowing a larger sum and paying more interest on that higher loan amount.
To get the best deal on closing costs, save up so you can pay for closing costs with cash.
4. Your only ongoing cost is the mortgage payment
When calculating homeownership costs, buyers may assume that the mortgage payment is their main expense and not worry beyond that.
Unfortunately, you’ll also encounter other, often unanticipated costs, including property taxes, homeowners insurance, repairs and ongoing maintenance. See “10 Hidden Homeowner Costs — and How You Can Slash Them.”
Saving for these ongoing costs is an important part of homeownership. Otherwise, you could end up avoiding needed repairs or running up a credit card — and paying even more in interest over time.