The 4 Most Common Misconceptions Renters Have About Homeownership
Navigating today’s housing market involves a steep learning curve for those hoping to make the transition from renter to owner. Whether you’re considering buying a condo or single-family home, there are a few important things to keep in mind aside from the cost of the mortgage compared to your current rent payment.
While some expenses, such as the home inspection fee, must be paid upfront, there are a myriad of other costs (and confusing terminology) connected with purchasing a new home, too. With so many decisions to make and so much at stake, it’s essential that you move past these common homebuying myths to decide if buying a home is right for you.
Myth No. 1: I’m throwing money away on rent.
In some cities, home prices are so high that renting might be cheaper. The trend of working from home has widened the gap between renting and buying, according to a buy versus rent analysis by Realtor.com.
In tech hubs like Seattle, Los Angeles, and San Jose, California, those who choose to rent saved an average of 30 percent in monthly costs compared to those who buy. Plus, renting has the added bonus of taking the work (and cost) of home maintenance off your plate.
“When you’re renting, you may not have to worry about your lawn service,” says real estate broker Tigi Tasso of John Greene Realtor in Naperville, Illinois. “You may not have to worry about garbage pick-up or your utilities may be included in your rent, whereas when you’re a homeowner that burden is all on you.”
Myth No. 2: My mortgage payments will solely go toward building equity.
One of the biggest perks of homeownership is building equity in an investment (your home!) rather than paying rent to a landlord. But your mortgage doesn’t do all the heavy lifting immediately. Aside from knocking down the principal balance of your loan, your monthly payment also goes toward interest, taxes, and insurance.
So, the part of your payment that goes toward your principal reduces the amount you owe on the loan and builds your equity, which is great. But here’s the thing: when you first start paying your mortgage, a big chunk of your payment goes toward interest, rather than the principal. (On your mortgage’s amortization schedule, you can see how much you’ll pay toward your principal vs. interest per month over the life of the loan. Gradually, you’ll pay more toward your principal as time goes on.) This is all to say that you won’t be building lots of equity right away.
Myth No. 3: I need to put 20 percent down.
It’s a common misconception that you need a 20 percent down payment to buy a home. The truth is, your down payment depends on your lender, credit score, and the type of mortgage you qualify for. For example, some loans require as little as 3 percent down.
“In today’s market, 20 percent of a home’s list price can be tens or even hundreds of thousands of dollars, which would put homeownership out of reach for many of America’s renters,” explains Rashalon Hayes, assistant vice president of field mortgage services at Navy Federal Credit Union in Virginia. “The good news is that the 20 percent figure isn’t a hard-and-fast rule anywhere in the country.”
Myth No. 4: This will be my forever home.
Whether it’s welcoming a new baby or getting the okay to permanently work from home, life transitions are inevitable. That might mean upgrading to a larger house from a starter home.
“For younger adults who are buying into the market, they think a two-bedroom, one-bath condo is all they are ever going to need,” says Tasso. “And then they fall in love with Mr. or Mrs. Right, and decide to have a family. Suddenly, that two-bedroom, one-bath condo is looking like a really tight space.”
Whether you fall into that category or not, it’s important to remember that the first property you buy doesn’t have to be your last.