3 Outdated Financial Tips You Might Still Believe
As the economy changes, the way we buy and sell homes changes as well. What made sense for your parents, or even yourself, twenty or thirty years ago may not be relevant to today’s economic conditions. We reviewed three common real estate misconceptions that might be preventing you from making real estate moves.
Myth 1: Pay off your student loans before you buy a home.
The good news is more people are going to college, but the bad news is that cost is astronomically higher. From 1988 to 2018, the average cost of annual tuition at a public four-year institution has increased 213% and the average cost of annual tuition at a private school is up 129%. Because of these higher tuition costs, many college students finance their education through student loans. The cost increases even more for graduate school. The plan to pay off your student loans before you buy a home may no longer be a feasible goal, unless you’re interested in renting well into middle age.
Student loan debt is increasingly common and will not prevent you from getting a mortgage. If your student loan payments are too high to save for a down payment, you can consider a graduated repayment plan, where payments gradually increase with your income. However, this type of plan will cost more in interest over time. You can also talk with your lender about down payment assistance options. There are over 2,500 down payment assistance options nationwide, with many designed for first-time home buyers.
Myth 2: You need to save 20% for a down payment
Unfortunately, almost half of first-time home buyers really believe they need to save 20% before they buy a home. In high-cost metros experiencing rapid home price appreciation, that figure can easily approach six figures. Property data provider, ATTOM, reports the average down payment on a home in 2016 was about 6% of the purchase price.
If you have not saved 20% for a down payment, talk with a lender about low down payment options. Some loans, like the VA Loan and the USDA Loan, have no down payment options for qualifying buyers. The FHA Loan is available with down payments as low as 3.5%. Conventional loans also have low down payment options.
Myth 3: Pay off your mortgage as soon as possible
We all want to live debt-free, especially when it comes to big debt like mortgage debt. However, rushing to pay off your mortgage is not always in your best interest. It’s true, the sooner you pay off your mortgage, the less you will spend in mortgage interest over time. But if you are putting all of your money into your home you may miss other investment opportunities.
Have you maxed out your employer-matching retirement contributions? Have you paid down your higher-interest debt like credit card debt? Talk with a financial planner about your other debts before you start making extra payments on your mortgage.
Sources: Apartment Therapy, CNBC, the Lenders Network, Statista