It’s tough to sort out the myths from the reality when it comes to homeownership. In a given search online, you can find opposing viewpoints making directly contradictory arguments. We’re going to try to shed some light on the confusion and help separate the facts from the falsehoods:
Myth 1: You’re better off buying/Better off renting
Both of these statements are false. The truth is, sometimes you’re better off renting, and sometimes you’re better off buying. Anyone who says renting is always the better way to go is giving bad advice. Ditto to anyone who pushes homeownership under any circumstances.
The fact is, homeownership is better in the long term. If you plan to be in one place for five years or more, buying is usually (but perhaps not always) the better way to go. If you will be moving frequently and don’t plan to be in one place for at least five years, renting probably makes more sense.
Why is there so much conflicting advice online? Articles about renting vs. homeownership tend to be written by people with a specific agenda. Realtors and mortgage lenders want more homeowners, so they write articles saying homeownership is better. Investment advisors and landlords would rather see people rent and invest their extra income, so they write articles saying renting is a better idea.
A good way to get the answer for yourself is to talk to a nonprofit housing counselor, or take a first-time homebuyer education course. Examine your own unique situation and decide what option makes better sense for you. That financial advice columnist who’s trying to convince you to stay a renter forever doesn’t know anything about your situation.
Myth 2: Renters don’t pay taxes/insurance
In the many articles touting renting over homeownership, a common claim is that renters don’t pay taxes, but homeowners do. This is simply false. The fact is your rent payment does include the taxes your landlord must pay on the property. They’re just invisible to you, because they’re not itemized in your monthly rent payment like they are in a mortgage payment.
And while a renter might get away without having their own insurance policy, it’s a terrible idea. It’s crucially important to have renter’s insurance on your personal property.
We’re not saying that homeowners don’t have more expenses than renters. Of course they do. Lawn care, snow removal, HOA (Home Owner Association) dues, home maintenance, closing costs… these things add up and they aren’t trivial expenses. But it’s a myth to say renters don’t pay for things like taxes and insurance—landlords pass those expenses on to you as part of your rent.
Myth 3: You need to have 20% down to get a mortgage
Generally speaking, you are likely better off if you start with a large down payment. Having 20% down takes many of the additional mortgage insurance requirements off the table, which can save upwards of 1% annually to the cost of the mortgage loan.
While it’s clearly better to have a minimum of 20% down payment, it’s not necessary or required. The time you spend saving for the down payment is also time you’re not building equity and putting your money to work in a home. And if your home value increases over the years, you’re building equity even faster. So it can actually be a better move financially to buy as soon as you can, without waiting to have a 20% down payment available.
Today, the mortgage marketplace has more products and programs available for those with lower down payment funds. People who qualify for an FHA loan for example, can pay as little as 3.5% down, and those who can get a VA loan can get into a mortgage with 0% down. As well, many large lenders also offer strong incentives for first time homebuyers, which also don’t require the full 20% down payment.
Myth 4: Homeownership carries huge opportunity costs
The financial advisors mentioned in Myth 1 love to show you math about how if you stick with renting and invest all of your extra money in the market, you’ll actually earn more money over 30 years than if you spend that time buying a house.
There’s a huge “if” in that sentence. The fact is, people don’t invest their extra income. As of 2017, the majority of Americans don’t have enough savings to cover a $500 expense. 7 in 10 Americans don’t even have $1,000 in cash saved up. 34% percent have nothing saved. In light of this reality, it’s pretty irresponsible to tell everyone not to buy a house, because if you rent, you can invest more. The fact is, people don’t save, they don’t invest, and buying a home is the primary way people accumulate wealth in the long term.
Myth 5: Homeownership is an investment
Our wording was careful in the last sentence. Homeownership helps you accumulate wealth over time as you build equity. However, if you are buying a house with the sole objective of making big profits in short periods of time, there are risks, most notably that house price appreciation is not always a guarantee. We’d never suggest homeownership as a get-rich-quick strategy.
But the fact is, you can’t live in a stock certificate — homeownership puts a roof over your head and lets you accumulate wealth for the long term.
Myth 6: Homeownership is the best way to build wealth
We think homeownership is a great idea, and a good way to build wealth, but it’s far from the best way. We can’t stress this enough; buying a house isn’t a way to get rich overnight. It comes with obligations and commitments. Your goal should be to own a home free of a mortgage by the time you retire, so you will have a much easier time living on a fixed income in retirement.
In reality, we’re talking about homeownership as a savings vehicle. For each mortgage payment you make, the amount that pays down the principal balance is your contribution to building equity or wealth in your home asset. What seems like a disadvantage where the home’s equity is difficult and expensive to cash out and not readily available at a moment’s notice — are actually benefits. A big reason most Americans don’t have much cash in the bank is because they tend to spend it as they make it. Home equity is savings, thankfully.
When it comes to growing wealth, you should be taking a multi-pronged approach. Homeownership is one way you’re building up wealth over time, and contributing to an IRA might be another.
Myth 7: A down payment is all you need to buy a home
While you don’t need a big 20% down payment to get into a mortgage, there are many other costs that you must be aware of when pursuing homeownership.
Mortgage related closing costs include many fees and taxes that must be paid at the time you finalize the mortgage loan. Depending on the location of your home and the type of mortgage, there are many potential fees so it’s tough to list them all: origination fees, service fees, underwriting fees, title search, title insurance, appraisals, inspections, surveys, escrow fees, taxes, and certifications. Typically, you can plan on adding 2 to 5% of the home’s total purchase price in related mortgage fees. And yes, some of these can be rolled into the mortgage loan balance, but not all of them.
Besides the costs of the mortgage loan, there are costs of homeownership, such as homeowner association dues, utilities, maintenance, and even the actual costs of moving into the house. All of these extra expenses should be factored when buying a home, and they’re a good reason not to put all of your money into the mortgage loan up front—there will be plenty of unexpected expenses as you get established in your home.
Myth 8: You need perfect credit
These days, it does take better credit to get a home loan than it did 10 years ago. Since the housing crisis and record number of mortgage defaults and foreclosures across the entire county, lenders continue to be a bit more cautious about whom they extend mortgage loans to. Good news though, it doesn’t mean one’s credit needs to be perfect.
Obviously, the better your credit, the better interest rate you’ll qualify for, and the more loan options that will be available. But if you have a few dings on your credit report, you can still pursue homeownership. You can take steps to ensure your credit history is accurate and up-to-date, and talk to a nonprofit housing counseling agency about pre-purchase housing counseling and your credit and how it will affect your mortgage application.
Myth 9: Mortgage rates are getting too high
Mortgage rates fluctuate all the time, and you might miss out on a great rate if they spike even by a quarter of a point.
But if you end up with a mortgage loan at 4.25% instead of 4%, you’re still getting a very good rate. Historically, interest rates have been much higher—in the 70’s and 80’s, they were at least twice as high as they are now, and in 1981, rates peaked at over 18%. Historically speaking, rates are really good right now and there’s no reason to put off homeownership just because rates go up a quarter or even half a percent.
Myth 10: You will lose your house if you miss a mortgage payment
While it’s crucially important to pay your mortgage payment on time every month—our standard advice is to make that the first bill you pay from your monthly budget. However, — it’s not the end of the world if you are late.
If circumstances make it impossible to make a mortgage payment on time, there are adverse consequences: a late fee, a negative mark on your credit report, a significant drop in your credit score… but losing your home won’t be one of the immediate consequences.
If you miss two payments, then things will get serious quickly. Your lender will send you a “demand for payment letter”. This gives you 30 days to get caught up before things could get worse.
Generally after missing 3 or more payments, and depending on the state you live in, the lender will start the legal action of foreclosure proceedings. That’s a lot of time to look for options to save your home, including working with your lender as well as contacting a HUD-approved nonprofit housing counseling agency to also provide you with a range of foreclosure prevention options that may be available depending on your particular situation.
There’s no reason to go it alone if you’re thinking of becoming a homeowner. First-time homebuyer education and housing counseling are available to help you understand all of your options and make a better-informed decision.