Buying a home is probably the single most expensive purchase a person will make during his or her lifetime. Homeownership is often viewed as a sign of success in America, and the homeownership rate in the U.S. stood at 63.5%. This figure represents the fulfillment of many American dreams.
However, the American dream of homeownership can easily become a nightmare if you happen to fall victim to one of the numerous pervasive mortgage myths. Not understanding the various facets of your mortgage options or the buying process could wind up costing you dearly if you aren't careful. Following up from last week, here are mortgage myths 5-9 that you'll want to pay particularly close attention to.
Myth No. 5: 30-year mortgages are always the best way to go
Though 30-year mortgages are among the most popular options when taking out a loan to buy a home, they certainly aren't the only option available.
Generally speaking, lenders are willing to offer consumers a better rate based on the length of their loan. Longer loans bear more risk to the lender and thusly higher interest rates, while shorter-term loans have more favorable lending rates. If you can comfortably afford to do so, taking out a 15-year loan instead of 30-year could save you a lot of money over the life of the loan (assuming you make only the minimum payment).
Myth No. 6: Your interest rate perfectly reflects the costs of your mortgage
Prospective homebuyers also should be aware that the mortgage interest rate they'll pay is only part of the total mortgage costs. If your lender is offering a 4% mortgage rate, it doesn't mean 4% is the true cost of your home loan.
As an example, origination fees are usually rolled into the cost of your mortgage and, according to industry experts, can vary from 0.5% to 1.5% of the total loan. Experts strongly suggest paying attention to the annual percentage rate, or APR, when analyzing your true mortgage loan cost. This is why it's particularly important when comparing lenders to focus on the APR and not get too caught up with the front-facing interest rate attached to the loan.
Myth No. 7: Renting is cheaper than owning a home
One of the most common mortgage myths you'll hear is that it's going to be cheaper to rent than buy a home. While this is true in rarer instances where a person moves often, buying a home is usually cheaper over the long run than renting.
To begin with, buying a home allows you to build up equity in the property, whereas the money you pay for rent doesn't lead to any equity. Every cent you paid during your lease is gone once your term is up.
Additionally, maintenance costs will generally be lower if you purchase a home and are financially prepared to cover the costs of repairs. Even though a landlord is responsible for covering the cost of repairs, renters are paying a premium that's included in their monthly rental price that covers the possibility of repairs. Homeowner repair costs are almost always lower than the premium factored into the cost of rent.
Myth No. 8: You should always pay off your mortgage as quickly as possible
Does paying off your mortgage as quickly as possible sound like a great idea? For some homeowners, that is indeed the case as it'll relieve a monthly payment burden. However, rushing to pay off your mortgage may not be the best idea for a majority of homeowners.
Keep in mind that a mortgage is an installment loan. This means that paying extra doesn't lower the amount you'll owe each month. It'll just reduce the principal amount of the loan and shorten the life of the loan. You might be better off investing the extra money you're considering putting toward your principal if you can earn a higher rate than the APR of your loan. As an added bonus, mortgage interest can be deductible, which can help lower your tax liability.
Myth No. 9: Buying a house is a great investment
The last myth that needs debunking is the idea that a primary residence is a great investment. It's true that buying a home will allow you to build equity, and that over time, home prices tend to rise. But what homeowners often confuse is the difference between nominal price appreciation and real price appreciation.
Nominal price appreciation simply accounts for how much your home is worth in the future compared to what it's worth when you purchased it. If your home doubles in value over 25 years, you're liable to be dancing in the streets with happiness thinking that you've made a stellar investment.
Real price appreciation factors in the effects of inflation on your home over time. According to Robert Shiller in his book Irrational Exuberance, home prices between 1890 and 1997 only outpaced inflation by an average of 0.21% per year. That sort of appreciation isn't something you should be counting on for your retirement. A home can be considered a store of value in most instances, but it's not a particularly good investment.
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