Busting Mortgage Myths: Truths About Down Payments

The prospect of home financing comes with plenty of information, advice, and, unfortunately, a fair share of mortgage myths. When purchasing a new home, home buying myths can cloud your judgment and financial decisions. This is particularly true for mortgage myths concerning down payments.

Down payments are upfront costs you pay as a home buyer. Moreover, these costs are a part of the home purchase price. However, mortgage myths often result in critical mistakes home buyers make while paying the upfront costs of their new homes.

In this blog, we'll unveil the truths concerning mortgage myths related to down payments. So, let's explore these home buying myths and get a clearer picture of what you need to know about down payments when buying a home.

Key Takeaways

The 20% Down Payment Home Buying Myths

One of the most common mortgage myths revolves around making a 20% down payment when purchasing a home. These home buying myths have deterred many potential homebuyers from taking the first financing step. The truth is, while a 20% down payment can have its advantages, it's not an absolute requirement.

Depending on the type of mortgage you opt for, the minimum required down payment can be as modest as 3% to 5% of the home's purchase price. For instance, FHA loans offer down payment options as low as 3.5%. This means that if you're eyeing a $300,000 home, you might only need $10,500 upfront.

There's No Rationale For Exceeding 20% Down Payment

With all the home buying myths about the 20% down payment requirement, you might wonder if contributing more is worthwhile. The answer is a resounding "yes." The greater your initial investment, the smaller your borrowing amount, resulting in reduced monthly payments and decreased overall interest expenses.

To illustrate this, consider the scenario: You're purchasing a $250,000 home with a 4.5% interest rate on a 30-year fixed-rate mortgage, excluding taxes and insurance:

It may seem challenging to envision putting down $100,000 for a $250,000 home, but its difference is striking. Your monthly mortgage payments would decrease by $253, a 25% reduction, potentially easing your monthly budget and providing more flexibility for living expenses or savings.

Moreover, your total interest paid over the next 3 decades would drop by 25%, resulting $40,000 in savings. So, consider the possibility of saving more than the customary 20%.

Down Payments vs. Interest Rates Mortgage Myths

This mortgage myth commonly leads individuals to believe that a larger down payment is the sole avenue to securing a lower interest rate on their mortgage. Lenders consider various aspects when calculating your interest rate, such as your credit score, income, and loan duration.

By improving your credit score and shopping for the best mortgage rates, you can often secure a competitive rate even with a lower down payment.

The Always Cheaper Rental Home Buying Myths

Prevalent mortgage myths related to down payments entail the belief that renting is invariably more economical than purchasing a home. In some cases, renting may seem cheaper in terms of a down payment, but buying a home can be a more financially sound decision in the long run.

With each installment of your mortgage payment, you're progressively accruing equity in your home, yielding substantial investment returns over time.

Down Payment Must Be Solely From Your Personal Savings

Gathering the necessary funds to become a homeowner may feel like an obstacle. Here's the truth: You can't secure a loan or use a credit card cash advance to cover your down payment. There are inventive ways to fund your down payment. Numerous alternative avenues exist to assemble the required cash for your down payment.

Establish suitable savings goals and proceed to examine these prospective avenues for securing funds:

• Consider tapping into your 401k or IRA: You can take out a loan of up to $50,000 from your 401k or half the total value of your account (whichever is lower) to fulfill your down payment requirements. While you'll be obligated to pay interest, you can avoid taxation if you repay the borrowed amount promptly.
• Consider selling a vehicle: If you've transitioned to remote work and can switch to a more economical, older car, selling your current vehicle could yield a few thousand dollars, potentially reducing your monthly budget by eliminating car payments.
• Seek contributions for your house fund: Remember to consider the idea of using gift money to finance your down payment! Consider requesting contributions toward your future home. It's an effective way to build your savings rapidly.
• Evaluate your crypto holdings: Can you liquidate some of your cryptocurrency assets or stocks to generate cash for your initial real estate investment? Keep an eye on potential tax implications, but this strategy could accelerate the growth of your down payment fund.

Down Payment Assistance Isn't Limited to First-Time Buyers

While some assistance programs are designed specifically for first-time homebuyers, not all fall into that category. In certain situations, you can qualify as a first-time homebuyer, even if you've previously purchased one or more homes, as long as you have yet to own a house for three or more years.

Lenders Can Provide Reliable Down Payment Guidance

If you're new to home financing, relying solely on lenders to determine your affordable price range and appropriate down payment might be tempting. However, lenders can sometimes overestimate how much house you can afford, and it may serve their interests to do so, as borrowing more translates to increased interest payments.

For optimal results, educate yourself on the intricacies of home buying and make informed decisions. Crunch the numbers to establish a price range, leaving room for unforeseen developments such as job losses, income fluctuations, or unexpected health crises.

Adopting a conservative approach that aligns with living below your means will provide financial security and enable you to work towards goals like retirement savings. Conversely, purchasing a costly home could lead to financial stress and difficulty maintaining mortgage payments.

Mortgage Myths About Credit Scores Playing Minor Roles In Down Payments

Lastly, consider the significance of your credit report and credit score. A low credit score can result in higher interest rates on your home loan, leading to increased monthly payments and greater overall interest costs over the life of the loan.

In some instances, securing a mortgage might become problematic. Specific lenders may even require a higher down payment if your credit score is subpar.

FAQs

1. Can resources help me navigate mortgage myths and the home buying process?

Various resources and expert advisors can guide you through the process, debunking mortgage myths and making homeownership achievable.

2. Are there tax implications when borrowing from my 401k for a down payment?

Borrowing from your 401k for a down payment generally doesn't incur taxes, provided you repay the amount borrowed according to the terms.

3. How can I calculate my home purchase's ideal down payment target without falling for mortgage myths?

Calculate your ideal down payment by assessing your finances, understanding mortgage options, and considering long-term goals to steer away from home buying myths.

4. Are there any tax considerations when using retirement savings for a down payment to challenge mortgage myths?

Yes, using retirement savings for a down payment can have tax implications, and it's crucial to navigate this while challenging mortgage myths.

5. Can requesting contributions toward future home funds during special occasions help overcome home buying myths about funding sources?

Yes, requesting contributions during special occasions can help overcome home buying myths about funding sources, providing an innovative way to fund down payments.

The Bottom Line

It's time to set the record straight about mortgage and home buying myths. Whether you're worried about the size of your down payment or your credit score, mortgage options, and resources are available to help you debunk home buying myths.

Don't let mortgage myths hold you back. With the truth about down payments at your fingertips, you're better equipped to deal with common mortgage myths. Best of luck!