Top 10 Mortgage and Home-Buying Myths & Truths
Buying a home is one of the most important and expensive decisions you’ll ever make. For that reason alone, you need to use the best, most accurate information you can find when making it. Unfortunately, there’s a lot of bad information out there, often repeated by people with the best of intentions.
This incorrect information and uninformed opinions have developed into widely held myths around buying a home. These mortgage myths need to be corrected. Once you find out the real story behind these myths, you’ll be set up for success in your quest to buy a home.
Read through the myths below, and then start the process by applying for a mortgage pre-approval today!
Top 10 mortgage & homebuying myths
- 20% down payment is necessary
- It’s cheaper to rent than own
- It’s cheaper to buy a fixer upper
- You need to be debt-free first
- All lenders are the same
- Spring is the best time to buy
- You should find a home before applying for a loan
- 30-year fixed mortgage is the only way to go
- You should always go with the lowest interest rate
- Once your offer is accepted, the deal is done
1. 20% down payment is necessary
The idea of paying 20% of the purchase price upfront as a down payment, and then financing the rest of the price with a mortgage, goes all the way back to the end of Great Depression.
Why 20%? No one seems to know or remember why, strangely enough.
However, 20% became the norm for decades from the ‘50s on, but it’s just not the case anymore. The truth is that in 2019, the average down payment for a first-time homebuyer was 6% of the purchase price and 16% for a repeat homebuyer.
Today, you may be able to get a mortgage on a home with options requiring as little as 3% down payment, if you qualify. It’s important to note, though, that if you put less then 20% down, you’ll likely be required to pay for private mortgage insurance (PMI). This is a premium that you’ll pay each month to your lender to mitigate the risk they take on by accepting less than 20% in down payment.
If you’re like most people and are unsure if you’ll be able to pay 20% of the purchase price upfront, talk to your lender about down payment assistance programs that may be available.
2. It’s cheaper to rent than own
When looking at your monthly expenses, it may seem like renting is cheaper than buying. Taking into account how much you have to pay in down payment, on top of your monthly mortgage payment, your monthly rent check probably looks small in comparison.
But when you look at all of the benefits of owning a home, you’ll see that owning your home makes much more financial sense. First off, instead of giving your rent money to your landlord, you are investing it into your home’s equity. And with rental prices surging throughout 2022, your monthly rent payment may be higher than what you were expecting.
Typically, if you plan on living in the same area for more than a couple of years, it’s smarter to buy your home. Try out our Rent vs. Buy Calculator for a simplified way to obtain a detailed look at the differences in cost between the two.
3. It’s cheaper to buy a fixer upper
If you’ve seen any of the popular home improvement shows, you may have an idea that buying a home that needs a lot of work is a smarter, cheaper way to your dream home.
The truth is, buying a fixer upper may be a cheaper way to become a homeowner, but renovating it can often push your overall price tag into the same range as buying a move-in-ready home. Even with a renovation loan to help you finance your dream home plans, the costs can add up quickly.
4. You need to be debt-free first
A common concern for first-time homebuyers is that they have more student debt than previous generations of homebuyers. They’re worried that these large amounts of unpaid loans will make them unable to qualify for a mortgage, and it keeps many from buying their first home. But large amounts of debt don’t necessarily disqualify anyone from buying a home.
The good news is that lenders don’t look specifically at the amount of debt you have, but rather at your ability to afford your home payments in your monthly budget. That’s where your DTI, or debt-to-income, ratio comes in. Your DTI ratio is the percentage of your monthly gross income that you spend paying down recurring debt.
A lender looks at the amount of debt you are obligated to pay off and compares it to the amount of money you earn when deciding to finance your loan. So long as you are keeping your debt in line with your income—and even better, paying it off—your student loan, car loan or any other debt, by itself, won’t keep you from buying a home.
5. All lenders are the same
Many homebuyers compare rates when choosing which lender to work with, but that’s not the only consideration you should look at. There are many differences between lenders beyond the rate they are willing to quote you. These differences could significantly affect your homebuying experience.
- You may work with a loan officer, a mortgage broker or get a loan entirely online. Learn more about how these roles are different and figure out which would work best for you.
- Your lender’s technology platform (or lack thereof) can make a huge difference in the experience of financing your home. The most technologically-advanced lenders can help simplify the process of applying, uploading documentation and even closing your loan. Guaranteed Rate’ Digital Mortgage is designed to make the process as smooth, fast and efficient as possible.
6. Spring is the best time to buy
Traditionally, spring has been known as the “Spring Selling Season” in real estate. Homeowners put their homes on the market in spring, so that they can close a sale and make their own move in the summer, and be in their new home in time for school to start in the fall.
But the effect of this is that spring is also when more buyers are in the market, driving up home prices. So, buying outside of the traditional hot season can work to your advantage.
7. You should find a home before applying for a loan
Some homebuyers start by just browsing their area, getting an idea of what’s available and what they’re looking for. Almost inevitably, these shoppers find a home that they fall in love with and want to make an offer. What comes next is predictably disappointing:
- They lose out on the home as they have to spend time getting their financing in place.
- They overestimate how much they can afford, and their lender tells them that the home is out of their price range.
That’s why everyone shopping for a home, no matter how serious they are, should get preapproved at the beginning of the process. This will allow you to put a serious offer in as soon as you find the home you want, and a strong preapproval from Guaranteed Rate, as opposed to a prequalification, will help set you apart from other bidders.
8. 30-year fixed mortgage is the only way to go
While a 30-year mortgage with a fixed rate is one of the more popular options for homebuyers, there are several other options to consider. Lowering the number of years of your mortgage term results in paying less in interest and owning your home outright quicker.
A 15-year mortgage term may result in a higher payment will be higher, but the overall cost of the loan will be lower over the life of the loan—usually a lot less.
- Generally, a 15-year mortgage has a lower interest rate
- You’ll build equity in your home faster
- You’ll pay off your mortgage in half the time of a 30-year mortgage
9. You should always go with the lowest interest rate
A lender could offer a low interest rate, then charge higher fees that don’t show up in the rate they quote you. That’s why you should take a look at the annual percentage rate (APR) of your loan. APR reflects the actual cost of getting a loan and includes things like closing costs, origination fees, PMI and more.
Also, you may be able to pay down the interest rate by purchasing points from your lender. Points are fees borrowers may pay to the lender. One point is equal to one percent of the principal amount of a home loan. Speak to your lender about the possibility of purchasing points to lower your interest rate.
10. Once your offer is accepted, the deal is done
This mortgage myth is often the most surprising, and the most stressful, when it turns out to be busted. Getting an offer accepted is a great reason to celebrate. However, it doesn’t represent the end of the process, or even the end of the negotiations.
After your offer is accepted, you’ll find yourself in one of two different statuses. It's either contingent or pending.
Contingent means the seller has accepted the buyer’s offer with requirements for the sale to proceed. If one of the parties fails to check these boxes, the other party can back out of the deal. Common contingencies include:
- Home inspection – which could uncover issues with the house that may need to be repaired, and require negotiations with the seller over who should pay for them
- Appraisal – which could tell your lender that the purchase price is different than the value of the property as assigned by an independent appraiser, and can affect your financing
- Financing – which gives the buyer time to obtain a loan to finance the purchase, which is different than a preapproval
- Clear title – which ensures that the seller can deliver a title that is free of liens or any other problems
How can I start the mortgage process?
Have your fears around these common mortgage myths been busted? You can start the homebuying process by applying for pre-approval, and show real estate agents and sellers that you're ready to get serious.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
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