Myth #1: “You need a 20% down payment to buy a house”
Absolutely not! There are plenty of low down payment options. You can get a conventional loan with as little as 3% down. There are various grant and down payment assistance options to bring that amount down even lower. There are loan options that don’t require any down payment at all! When you are ready to see what your options are, ask your mortgage broker what down payment assistance options are available to you.
Putting 20% down does allow you to reduce your payment because you will not be paying private mortgage insurance. But in some cases, putting 20% down that is not necessarily the best financial decision. Why? If you have good credit the amount you pay in mortgage insurance is so low that you can typically get a better return on your money by investing it, then the amount you pay in mortgage insurance.
Skip this part if math scares you:
Let’s say you are buying a $400,000 house. Do you put the $80,000 down for the 20% down payment or not?
If you put 3% down ($12,000) you would pay $100/month in mortgage insurance. That leaves you with $68,000 you could invest and earn interest on($80,000-$12,000=$68,000). If you earned 2% annual interest on $68,000 (This is very conservative, you could most likely get this kind of return in a savings account, CD or bond) you would earn $1360 in the first year ($113.33/month). Because of compounding interest you will make more over time as your money grows. The second year at the same 2% rate of return you will now make $1387.20 ($115.60/month). The third year you will make $1,414.92 ($117.91/month). The fourth year you will make $1443.24 ($120.27/month). Now 5 years later you have turned your $68,000 into $73,605. You would have spent $4800 in mortgage insurance but would have made $5600. Therefore you come out ahead, $805, and you still have $73,605 in the bank or other investment so it can continue to grow, rather than having it tied up in your equity. Now at this time if your value has appreciated 5%/year you would be able to refinance out of your mortgage insurance without any down payment! So essentially, you made an extra $800 over 4 years, kept your money in the bank and will still be able to refinance out of your mortgage insurance!
Myth #2: “Buying commits you to living their long term”
When you rent, you typically sign at least a 12-24 month lease committing you to living there for that duration. Buying actually give you more flexibility than renting to move because you can always sell or rent your house out. If you buy a house and life pulls you to a different city or state you can simply list your house for sale and pocket your equity, or you can rent the house out. Any amount that you rent the house out for over what your mortgage payment is, goes into your pocket each month. You could manage the rental yourself to maximize your returns or hire a property management company for piece of mind. From here, you could buy another house in the city/state that you move too and now you are creating wealth through real estate because you now have two appreciating assets with one producing you cash flow (another reason to not put 20% down so you will have the money for a down payment on the new house). Once the mortgage on these two houses are paid off you will have a good passive income stream through retirement.
Myth #3: “Real estate is risky”
Some people may still be gun shy from the 2008 housing crash. After all, some properties lost more than 50% of their value! Values in just about the whole country have rebounded past the levels before the crash. Meaning if you didn’t sell during the crash, you are unaffected by the crash. You may have been stressed out at the time seeing your value down but this only matters if you sold and took a loss. If you did not sell, your value would be the same or higher today. If you rented during this period instead, you would be in an even worse situation because you wouldn’t have created any equity. When you own, even if your value never goes up you are still creating equity because you are paying down your mortgage balance.
If you don’t intend on becoming a real estate investor and are simply buying your forever home, the value is meaningless. If you don’t ever intend on selling your home, it makes no difference if the value goes up or down. Once you have your mortgage paid off and are living without a housing expense and you can careless what the value does. This also sets you up for a successful retirement because your social security check can now be spent on living expenses rather than a rent payment.
Real estate has historically been the best investment you could have made. Don’t believe me google what industries most millionaires are in…REAL ESTATE.
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