Myths Of Buying A Home
So you’re in the market for buying a home. It’s both, an exciting time and a scary time. All that money you have saved is about to be spent, for the intended purpose, of course! You have spent countless hours consulting various blogs and other how-to resources arming yourself with the most prudent and up-to-date information. Most likely you have come across many do’s and don’ts when it comes to buying a home, below are four common myths that I would like to debunk.
Home buying myths a more substantial down payment is always better
Common perception says this is a no-brainer. The more you put down now, the less you will pay over time. This is finance 101! While this is true; why use your entire safety net? Down-payments of 3.5% have become immensely popular in recent years. With the proliferation of mortgage insurance borrowers may be able to get lower interest rates than those who put down 20 or even 25 per cent! However, the primary reason why putting less money down is due to the benefit of having flexibility. By not having your entire portfolio tied up in your home, you have allowed yourself a safety net in case of the emergencies such as job loss, home repairs, injury, or family accident. Also, you may reallocate that money into other endeavours such as financial instruments where even novice investors can turn an 8% yearly profit.
2. Homes in the Suburbs are more valuable
Developers love the suburbs because the land is generally cheaper and therefore you get more home for your money. The apartments are also often brand new and attractive. Where you get hurt by the “hidden costs.” For instance, in the suburbs, you generally live further from your job, schools, transportation centres, and entertainment venues. The “savings,” from your cheaper home, are often lost due to the high transportation costs. For instance, take the average monthly commuting costs for a standard American car:
$210 for 10 miles
$389 for 30 miles
$549 for 50 miles
$848 for 100 miles
This does not include parking nor does it include weekend excursions. The average American spends over 100 hours per year commuting! That is pretty much two weeks’ worth of work time that you could spend doing activities that are much more enjoyable than commuting.
3. A 30yr fixed mortgage is always the way to go
This is only true if you plan on staying in your current residence for more than ten years. If you intend on moving in the next 5-10 years a fixed rate for ten years would be much more appropriate. This is because, typically the longer your rate, the higher your interest rate will be and hence you would be paying a more considerable sum of money for absolutely nothing in return. Nowadays, people tend to change jobs more frequently and thus, locations as well. Therefore there is little sense in a 30yr fixed rate if you are young and plan on moving anytime in the future.
4. You should pay down your mortgage as fast as possible
Homebuying mythsThis intonation was mainly formed in the 1980’s when many people had double-digit rates. Now rates are lower than ever so you should not be in panic mode from the lifetime value of the scale. Instead, you should weigh the opportunity costs of doing so. Having flexibility could be much more critical than penny-pinching to pay off your mortgage. For instance, you could redirect that money towards a different endeavour such as starting your own business, investing in the stock market, or making an additional real estate venture.