Whether buying a house is a “future you” feat or you’re already actively shopping the local housing market, home-buying is a big deal. It's a decision you want to get right. Here are twelve of the most common myths and misconceptions regarding house buying. Take a peek below before you start signing any important paperwork…
12 Common Misconceptions About Buying a House in Arizona:
1. You must shell out at least 20% for the down payment.
Twenty percent is a fairly standard down payment requirement for some mortgage loans, and the more you can put down on a home the better chance you have of qualifying for the loan. It also bumps up your odds of scoring better interest rates and saving yourself a heap of money over the life of the loan. But if you stop and do the math, twenty percent (or more) of the price of a home in today’s market… well let’s just say it’s a big number.
The median home cost in Phoenix as of March 2019 is $273,000. What’s twenty percent of that? $54,600. If you are someone who doesn’t have that much cash hanging out your back pocket, there have to be other options, right? Yes. Conventional loans require a minimum of only 5% (or $13,650 for the median Phoenix home example). FHA loans, while they do have other pros and cons to consider, have requirements ranging from 3.5% to 10% down. If you’re active duty military or buying rurally, you might be a match for either VA or USDA-backed loans, which currently require no down payments.
So why is the 20% myth so widely-spread? Here’s the downside of putting down less than 20%:
- With less than 20% down on a conventional loan, you’ll pay Private Mortgage Insurance until the PMI is terminated, canceled, or you reach the midpoint of your loan.
- With less than 20% down on an FHA loan, you’ll pay a required Mortgage Insurance Premium potentially for the full life of the loan.
- Both of these (PMI and MIP) are usually tacked on to your mortgage payment monthly, and can be significant (think .5% to 1% of loan amount). You can find out much more detail on these costs here, if you’re interested.
2. The down payment is the only cash you need up front.
Don’t sink all of your cash into your down payment! You may also need to cover closing costs out of pocket, which usually includes an initial escrow payment, origination fees, recording fees, title fees, and more. You’ll also likely have moving costs and need to set up an ongoing fund for home improvement and repair. To get the full scope of the savings needed before buying a home, check out our post on home buyer savings goals here.
3. You should find a house before applying for a loan.
Depending on current market conditions, buying a house could be as intense as a wild boar fight in the Arizona desert. Ok, maybe not, but as you race to put in your offer before other buyers and then come up against counter-offers, you never know what will happen. Getting a prequalification letter before house shopping will do two helpful things for you: 1) Gives you the house price range you are qualified for 2) Enables you to put money down and sign a buy/sell agreement with confidence.
You could find the house first and do financing after, but you’re risking losing out to another buyer who was prepared with a home loan pre-approval and was able to make an offer before you.
4. You need perfect credit to buy a house.
An impressive credit score will help you get the lowest interest rates, but spotless credit history isn't necessary for qualification. Many lenders will require a credit score of at least 640 for a borrower to qualify for a conventional or USDA mortgage loan. However, credit unions tend to be more flexible in this area because of their tendency to work with the member as a person, not as a number. Speak with a knowledgeable credit union mortgage lender or local credit counselor for advice on improving your credit and to determine the best type of home loan for you.
5. You should plan to buy a house at the upper limit of what you qualify for.
Qualifying for a $500,000 mortgage doesn't mean you should find and buy a property that’s $500,000. Take the time to consider your budget and loan estimates. One of our mortgage loan specialists, Eric, ran this example scenario for a fictional character, Sherry VanDaan, who was considering buying a $500,000 home with 5% down at a rate of 4.5% interest rate over a 30 year term.
His estimates* say that Sherry would pay these approximate costs monthly & yearly:
Sherry will need to consider how much money she’ll have left of her monthly income to handle daily expenses, other debt payments, home repairs, furniture purchases, as well as future savings goals such as for emergencies or vacations. If Sherry makes $75,000 per year in take-home pay (or $6,250 per month), and her yearly housing expenses were to be over 50% of that, she will likely have a challenge making ends meet in other areas of her finances.
Purchasing a house at the top of your budget can put you in a financial bind; that’s why experts recommend housing expenses only take about 25-30% of your disposable income--even if your lender qualifies you for more than that. Remember, they’re not the ones making the payments!
Sources for above estimates*: AZ Property Tax Calculator , AZ Homeowner Insurance Averages , Amortization Schedule Calculator
*Estimates are hypothetical and do not reflect actual costs. Not intended as official financial advice. Please see a mortgage specialist to receive counseling for your specific situation.
6. You’ll get a big tax break.
People often think that if they take out a large mortgage, they’ll reap enough benefits from the tax deductions to make it worth it. Keep in mind: there are limits to how much the IRS will allow you to deduct, based on whether you’re filing as an individual, a married couple filing jointing, or head of household. For 2019, this limit was set at interest on qualifying mortgages with a principal balance of up to $750,000. To really benefit from tax deductions on mortgage interest, you’d have to pay more than the standard deduction annually. Speak with an experienced tax accountant to determine the amount you would be able to deduct, and whether it’s worth it to itemize your return for mortgage interest purposes.
7. Fixer-uppers cost less.
Even if you are experienced enough to handle most repairs yourself, fixer-uppers can cost much more than you anticipate. A low initial home cost is tempting, but pretend that the upper estimate on repairs and updates needed is factored into the cost. Is the house livable before these repairs/updates are finished? How will you finance those expenses? A house may only cost you $85,000 to buy but could take over $100,000 to renovate before it’s in livable condition. Be sure you know exactly what you're getting yourself into by following along with the home inspector before you buy, and read through these fixer-upper pros and cons for more info.
8. Buying a house is always a good investment.
Yes, it’s true that real estate values tend to increase over time. It’s a low-risk, low-cost investment option for many folks–but not everyone. For example, if you’re on a temporary job assignment in Atlanta, GA for 18 months, buying a house in Atlanta is probably not a good investment for you! With how long it takes to close on a home loan, to the amount of months’ payments it will take to make up the costs & fees of your mortgage loan, 18 months probably isn’t enough time to make it worth your while. However, if that job assignment were to be extended another five years, it may now be a good investment for you to buy a home.
The local housing market also impacts whether buying a home at a specific time is a good investment. Speak with an experienced local real estate agent to get their perspective on this factor.
If you do decide to buy, do your research and make sure you’re getting a fair price for the house and the loan. Plan to remain in the home for a minimum of 2-3 years (although more conservative estimates say 5 years is a better minimum to hold to.)
9. Appraisals aren't a requirement if the home is new.
An independent, professional appraisal is required for almost every mortgage loan. Your lender will order the appraisal from a licensed, unbiased professional to ensure accurate and thorough valuation.
It’s a myth that you should take the lead and get your own appraisal; reason being – you could choose an appraiser that the seller or their agent feels is biased, and it could negatively affect your odds of closing on the house.
It’s an even more dangerous myth to think that you don’t need an appraisal at all! The appraisal is what will heavily factor in to the final cost you pay for the home loan. So it’s pretty important.
10. You should avoid adjustable rate mortgage loans in all cases.
Adjustable rate mortgages are commonly referred to as ARMs. An adjustable rate mortgage set to adjust interest every five years is called a 5-year ARM or 5/1 ARM.
These loans typically feature an initial low introductory interest rate, which will adjust according to a predetermined schedule and base rate.
For some situations, an adjustable rate mortgage can be a smart choice for a loan. Experienced home buyers will use these types of loans strategically, taking advantage of the significantly lower introductory rate and then selling or paying off the home before the rate moves into the unpredictable adjustable phase.
Do your homework before going this route, but know that it’s not always a bad choice.
11. Online real estate values are consistently accurate.
Although some online tools can be useful, most value estimates are inaccurate, leading buyers to unintentionally make too-low offers to sellers. Comparing Zillow's Zestimates to the actual value of homes in in various areas around Sacramento, CA, showed that they are within 10%-20% above or below actual values based on appraisals and sale prices. This could be a $25,000 to $50,000 difference on a $250,000 home! It will help immensely to work with an experienced, reputable real estate agent who will research similar home sales in the area. You’ll feel more confident making an informed offer to a seller when the time comes.
12. Your mortgage payment will stay the same.
The total amount you pay monthly toward your mortgage can fluctuate, up or down, throughout the life of your mortgage loan.
Payment requirements change for a variety of reasons:
- adjustable interest rates
- changing tax rates
- homeowner's insurance premium changes
- mortgage insurance premium adjustments or drop-offs
The allocation of your payment will also change based on the amortization schedule. This means that at the beginning of your loan term, more of your payment goes towards interest. As the loan matures, and you pay off the bulk of the interest, more of your payment will begin to make an impact on the principal. Be ready for these changes as they come.
Hopefully, reading through these misconceptions has helped you feel more empowered to start the home-buying process!
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only.
Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.