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Myths About Homebuying

Myth 1: Buying a home is always a good investment

Depending on your financial circumstances, needs and life choices, it may be better for you to rent rather than buy. Also, it used to be that property prices would mostly steadily increase so a homeowner would sell their house for a good profit. The crash of the housing market a few years ago evidences that this is not always the case. The housing market of today is quite different.

Also, even when the figures look good on paper, the real story may be different. Say a home purchased in the 70s for the price of $50,000 and sold in 2005 for $300,000 which adds up to what appears to be a $250,000 profit.  Although there was a 500% increase in price, it does not factor in a number of factors related to the cost of owning a home.

For instance, based on the price, the annual compound return is just 6.15% annually. Inflation was not also factored in. It reduces the returns to an approximate actual return. There is also mortgage interest, homeowners insurance, taxes and the cost of maintenance and repairs incurred from when the house was bought up to the time it was sold.

In the final analysis, what looks like a sweet deal may actually have been a loss. It does not always work out this way but it is important to understand the figures and understand that you will not necessarily be able to sell your house at a profit should you ever choose to do so.

Myth 2: You will always get added tax deduction for your mortgage interest

Mortgage interest is deductible but it is not always wise for you to take the deduction. This is an individual matter and you should talk to your accountant or mortgage advisor before you decide. To accept the mortgage interest deduction, you have to itemize each deduction as compared to taking a standard deduction. Typically, standard deductions are higher than itemized deductions. It would therefore not make a lot of financial sense to choose to itemize your deductions.

Myth 3: Paying down your mortgage as fast as possible is always best

This advice became popular during the high interest rate 1980s. However, the advice may not have been ideal even at that time. Homeowners tend to focus on the interest rates and get into a panic. However, putting everything you get into paying into your mortgage may not be the best. There may be other uses for the money that would be more profitable.

For instance, you may choose to make long-term investments such as in stocks and bonds that would bring you some very good returns over the years. If you own a business, you can invest into expanding and diversifying it.

The important factor to consider is the rate of return. Work out which ones puts you in a better financial position in the long run: is it the saving you’ll make when you pay down the mortgage or the returns you would make from the investments that you make? Creating wealth is all about making your money work for you.

Bonus Myth: The Perfect Home

There is another myth that those buying a first home are especially susceptible to. It is the myth of the perfect house. With a first home, the focus should be on a home you can afford depending on your financial situation.

While there is nothing wrong with having the highest aspirations about the house that you buy, reality must reign. Otherwise, your mortgage applications will keep on getting turned down because lenders feel you cannot afford the payments or you will get yourself into a corner with a house that you can’t really afford.

If what you can afford is a smaller house, a fixer-upper or a home in a location that is different from what you wanted, take it. You can always remodel and renovate or wait for it to gain value and sell. There are renovation loans that lend buyers the money to buy the home and finance the necessary renovations.

What’s right for you?

When it comes to mortgages especially buying your first home, the fact is that there is no black or white or hard and fast rules that work for everyone. It depends on your individual financial circumstances. Take the time to do thorough research into the options. Listen to your mortgage advisor or broker too and use a mortgage calculator to see both the small and the big picture.