A lot goes into buying a home. You have to save up for a down payment, decide on a lender and fill out a bunch of paperwork. Oh, and after that you have to decide what you even want to buy and where!
The last thing you need is to be lied to so read on as we shut down the top 3 lies about buying a home in 2023. Oh and stick around to the end because I’m going to tell you the one thing you should never do when you’re in the middle of buying a house.
Lie number 1:You should marry the house and date the rate
How many times have we all heard this phrase, right? Basically, it means you’re committing to a life-long, long term relationship with the house you love but you can dump the interest rate when you refinance. So where’s the lie?
We’re looking at a two in one here. This phrase makes two assumptions that are not always true. The first is that the entire premise assumes interest rates will always come down. Right now the bond market does seem to be indicating rates will be going down, at the end of the day this is out of your control. So instead of making that dangerous assumption, evaluate your relationship with the house first.
Here’s the second lie within the phrase: You should always marry your house.
Ever heard of the equity game? Sure, we’d all love to have our first house be the perfect home for the rest of our lives but in reality, that’s almost never the case. Most first time home buyers can barely afford a home at all in this market much less their dream home. The equity game allows you to buy a small first time home, build equity, and then sell and move on to something bigger and better.
Besides, as life changes, so do our needs for a home! Small first homes are outgrown when kids come along, large, family homes eventually become burdensome once your kids have grown and gone, and a lot of times people in the military, college, or other various careers end up relocating every few years.
Why marry your home when you could just date it instead? Colin Robertson comments on this. He says, “If you’re not looking for a serious commitment, why get involved with a 30-year fixed? Especially one you have to pay a premium for?”
If you’re not marrying your home, what does that mean about your relationship with the rate? Well for starters, don’t close your mind to an adjustable rate mortgage or an ARM. Bankrate explains that “Generally, the initial interest rate is lower than that of a comparable fixed-rate mortgage” Colin Robertson continues on why ARMs are a good idea, “ARMs are mostly hybrids…with long periods of fixed-rate goodness (such as 5/1 ARM or 7/1 ARM), meaning you can date your rate for a good amount of time before looking for a new rate.”
An adjustable rate mortgage might go up after it begins to adjust or it might go down. The rate cap is a very important feature. It controls how much your interest rate can adjust each year. If your interest rate was at 3% in January of last year and today’s rates are well over 6% your rate would still only adjust to 4%. That’s the protection the rate cap offers and why it’s so important.
So yes, you’re sharing an amount of risk with the lender, but that’s exactly why you get a lower rate!
Now a 2-1 buydown is a completely different animal. It will definitely go up. This loan is more risky but is also predetermined. 2-1 buydowns are mortgage agreements that offer a low interest rate for the first year, a medium rate for the second year, and then a higher or full rate for the third year and rest of the loan. This is a good choice for those who know their income will increase year over year.
Ultimately, there are circumstances where adjustable rate mortgages make sense but it should never be based on assuming the rates will adjust downward. So be open to different types of mortgages depending on your relationship with the house, but don’t make decisions about your budget assuming rates will go down. Whether or not rates go down isn’t your decision to make.
Lie 2: Your lender decides how much home you can afford
This lie assumes your lender should decide how much you can spend on a house. Financial professional or not, the lender will never take all aspects of your life into consideration when qualifying you for a home. This should always be YOUR decision.
Lenders base their qualification by what’s shown on a credit report. Gobanking rates explains that “lenders look at how much debt you’re responsible for on things like credit cards, car loans and mortgages” but there are several other regular expenses that don’t show up on your credit report. Things like groceries, gas for your car, and even childcare can’t be forgotten when deciding on your budget for a new home!
This is where it comes down to you. You as a buyer must have a carefully planned budget that also assumes certain expenses will increase after your home purchase. Property taxes are going to go up, you’ll have home maintenance and repairs, and your utility bills will go up if you’ve moved into a larger home.
In the end, don’t let the lender or anyone else for that matter decide on your budget. This is your decision and yours alone.
Lie 3: Real estate always goes up in value
This one is an especially dangerous lie because there is an element of truth in it but it totally depends on your timeframe. Over the years, real estate value has gone up. But if you’re looking to sell only a season or two later, your value may not have gone up. In fact, it could have even dropped a bit at that point depending on the market condition.
As a whole though, home values have appreciated nearly 4.6 percent per year over the last 65 years. Looking at the long haul, your home’s value is likely to go up, but there may also be seasons in between when the value goes down.
You need to understand that this is completely normal! Home price appreciation isn't a straight line up. There are times where home prices go up and then the next year they go down then they go back up. So even though the long-term trend for Real Estate is up, you have to make sure that you're buying for the right reasons and have that longer term time horizon so that you protect yourself against any pullbacks in the market.
Now that you know the three lies, what’s the one thing you should never do while buying a new home? Anything that involves credit. Guaranteed Rate explains that “If you take on new debt…the whole loan application may need to be redone…or (it could) …lead to the rejection of your application.”
But what about using credit when you’re buying new construction? I’ve heard that can take months if not up to a year. How am I supposed to handle that? Well new construction is definitely a whole other ball of wax and to get the answers to that question you’re going to want to check out this video right here! https://youtu.be/lbhEDWEhYKE