Tuesday, September 25, 2007

Myths About Mortgages & Home Ownership

Grad Money Matters' post about mortgage and homeownership is mostly self-explanatory, but I have a few disagreements. It's worth reading just for the commenter that prompted an author correction (I agree completely with the commenter). Here's what I would add:

Myth 1 - ISPF says that it's untrue that "If I can afford the mortgage payments, I can afford to own the house." It is true that owning a home comes with maintenance expenses and likely higher utility bills, but the property taxes, home-owners insurance and HOA fees are all considered part of the mortgage payment from the lender's perspective. So if you can afford your mortgage payment (according to the old fashioned method of qualifying for a loan), you can probably afford the house in general.

Myth 2 -- ISPF says that you might not benefit on your tax return from owning your home. I know that this is a possibility, but it is so remote that it's really not worth mentioning. It actually happened to me once though. My husband and I have always lived well below our means, and when we bought our first house way back when, it was a teeny tiny little house for $80,000, and we did an adjustable rate loan at 5% interest. The interest we were paying wasn't even close to enough to effectively itemize. Still -- if you can find a house for $80,000 these days, let me know -- I'll take it, tax break or no. Also, even though we didn't benefit tax wise, we had a $650 mortgage payment (PITI) for four years and then sold the house for $110,000. MUCH better ROI than if we'd rented.

Myth 3 -- ISPF says that 40 or 50 year loan terms are not a good idea. I completely agree. Neither are 20 year terms usually a very good deal.

Myth 4 -- ISPF says not to enroll in a bi-weekly payment program. Absolutely. Why pay someone to do something for you that you can EASILY do for yourself? A variation on the bi-weekly program, if you make ONE additional principle payment each YEAR on a 30 year loan, your loan will pay off in the 22nd year. Another option is ask your loan officer to calculate for you a 15 year (or 10 year or however many years you want to pay it off) amortization and just pay that much every month. It's not that complicated, don't pay anyone to do it for you. I'll do it for you if you e-mail me.

Myth 5 -- ISPF says that fixed rate payments don't equate to fixed rate expenses. Well duh. However, what do you have to show at then end of ten years of giving your landlord $1000 per month? The answer is: nothing. A home is an investment -- renting is carefree in comparison, but that doesn't mean it's always financially savvy.

Myth 6 -- ISPF says that you don't have to have private mortgage insurance even if you don't put 20% down. This is sort of true. Most people have been doing "piggyback" loans the last five years or so. However, many lenders have stopped funding second mortgages altogether. Since all of the chaos happened this summer, I haven't done a piggyback loan, but I'm sure they'll come back around. Also, for people earning less than $100,000 per year, mortgage insurance is now tax-deductible, so it's not always worth the hassle (or expense) of avoiding it.

Myth 7 -- ISPF says lenders can amortize your loan on a refinance so that you will still pay the loan off at the original date. This is true of a "streamline refinance," and it can be done on a regular refinance, but I've never had anyone ask to do it.

Myth 8 -- ISPF says shopping for a mortgage at multiple places only counts as one inquiry on your credit report for credit scoring purposes. It's the truth. Same is true if you've been all over town shopping for cars this week.

Myth 9 -- ISPF says you should get pre-approved for a loan FIRST, then shop for a house. YES! It's a rare real estate agent who will take you shopping for a house if you haven't been qualified by a lender anyway.

Myth 10 -- ISPF was spreading that tired old rumor that "the bank owns your house." But was big enough to retract when the error was pointed out.

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7 comments:

ispf said...

Thanks for picking up the ball and running. I enjoyed reading your take on the "myths" :)

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