For any renter who aspires to become a homeowner, the process can be an intimidating one. Between assessing whether you’re both financially and mentally prepared for the journey ahead, there will be a dozen other smaller considerations to take into account. Among these will be a few misconceptions and myths about homeownership that could stop you in your tracks. Below, we’ve listed five of the most common ones.
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Buying a home means taking on heavy debt.Buying a home means taking on heavy debt.
The prospect of taking on a mortgage can be pretty scary, especially if you’ve never taken out a large loan before. Memories of the subprime mortgage crisis in 2008, and the resulting recession, left many millennials with bitter feelings about the risks of borrowing large sums of money. Many would argue that it’s better to continue renting rather than risk-taking on a lot of debt. But becoming a homeowner comes with a lot of advantages that you would otherwise miss out on.
So long as you have job security and are careful in what mortgage terms you accept, a conventional 20-30-year mortgage is not as intimidating as it looks. With extra bi-monthly or yearly payments, you can even shave off as much as seven years from the length of the loan. Look at it this way; You can either continue paying a monthly rent that goes entirely into your landlords’ pocket, or you can pay a similar amount each month that builds equity in your new home.
By building equity, you are paying down your loan and creating a valuable asset for the future. When the time comes, you can sell that asset to pay off the rest of the loan or buy a new home. With mortgage interest rates currently being at a historic low, there’s never been a better time to take on a mortgage.
You need at least a 20% down payment to buy a home.You need at least a 20% down payment to buy a home.
While a 20% down payment is considered the sweet spot, it’s not a strict requirement to buy a home. There are several loan options with low down payment requirements that you can take advantage of instead. This ranges from Veterans Affairs loans that are as low as 0% to conventional and FHA loans of 3-3.5%. The main reason why most buyers assume you need a minimum of 20% is that anything less than that means having to take out a private mortgage insurance (PMI). This adds a further cost to your monthly mortgage payments.
Fortunately, once a buyer has reached 20% equity, they can eliminate PMI. This is usually done by refinancing their loan, which lowers their original payment that included PMI. When shopping for a mortgage, buyers should take some time to choose the right program that suits their needs before buying. There are also numerous programs available in NYC to help first-time buyers make the transition to homeownership.
It would be best if you had a perfect credit score.It would be best if you had a perfect credit score.
As with the common belief that you need 20% down before you can even consider buying, many buyers also believe you also need a perfect credit score. A high credit score means a higher borrowing limit and a lower interest rate. Although the ranges differ depending on the scoring model, anything at or above 670 is generally considered “good” by most lenders. A better score is anything from 740 to 799, while the best scores are anything at or above 800.
However, a score of less than 670 is not the end of the road. There are several loan options available for those with a less than ideal credit score. One of these is the government-backed loan through the Federal Housing Administration (FHA). These loans also come with the advantage of low down payment requirements. Depending on the state of your financials, a loan officer can work with you to raise your credit score and obtain a loan more suitable for your needs.
Every hopeful buyer should devote time to raising their credit score as high as possible. It’s also good practice for when you do become a homeowner. But don’t think that it has to be perfect. While credit scores are an important facet when applying for a mortgage, they’re not the only thing that loan officers consider.
It’s a bad time to buy now.It’s a bad time to buy now.
A common discussion among buyers is whether now is a good time to buy or not? There’s no denying that choosing the right time to enter the market is important. Ideally, you’ll want to wait until you hear the words “buyer’s market.” This is when there are more sellers than buyers, which leads to competitive pricing. But don’t make the mistake of thinking that you can’t also find a good deal at other times. The fear of “buying at the wrong time” stops many people in their tracks, when, if only they would look, they would see that good deals can be had at “bad times.”
The market is a fickle beast, and however much we think we can predict its moves, events can transpire the next day that throw all our forecasts by the wayside. As a buyer, you should focus your efforts on finding a home that is priced within your means. Understanding current market values will be important in determining what a “fair price” is, but don’t get too caught up in the technicalities of market prediction. The best you can do is have a contingency plan in place if market values change over time.
You’ll be stuck in one place and can’t move.You’ll be stuck in one place and can’t move.
For anyone who’s never owned a home before and has always rented, the idea of being tied down to one place for years can be a scary one. It’s not an entirely misplaced fear. If you really have a hard time seeing yourself staying put for the next 5-7 years, then now is probably not a good time to buy. But some of these fears can be nothing more than pre-purchase jitters. Buying a home is one of the most important decisions in a person’s life, so you shouldn’t be too surprised if you feel a little nervous about it. Make sure you take time to assess whether you’re mentally ready for homeownership first. If the signs are all in your favor, then don’t let this fear hold you back.
Besides, if something does happen later down the road, getting out of a real estate asset usually isn’t that difficult. Provided you purchased a home in a popular area with good price appreciation, you should be able to sell within a year. If, at a bare minimum, you can sell for just enough to cover the remainder of your mortgage, then there’s little to stop you. Ideally, though, you’ll want to remain in the home for enough time to build equity and sell for a profit. No matter what you hear, there’s always a way out.
Run the numbers to see if buying or renting is the right fit for you: Buy vs. Rent Calculator.