Debunking Real Estate Myths for First Time Home Buyers
Today we’re going to have a little fun debunking some common real estate myths. And if you’re new to the channel, welcome. We enjoy bringing value to people buying and selling and really giving them education that’s helpful for the buying and selling process, and especially first time home buyers. So as we look at some of these things, this video is specifically geared towards somebody maybe buying their first property or making their first purchase. But if this is the second or third or fifth time that you’ve gone through this, you might still find this video helpful.
Myth number one, renting is cheaper than buying. I put this one first because well, most people that are thinking about buying their first house are currently renting a house, and this myth is maybe a little less common than it used to be, but I still think there are a lot of people that think it’s cheaper for them to rent than it is to buy. And maybe it is right now, at this moment as we’re making this video, mortgage rates are at least relative highs for the last 20 years or so, hovering around 8%, which means that your monthly payment’s going to be considerably higher than it would’ve been maybe with a lower interest rate. So yes, in some situations it is more expensive to buy than it is to rent. And in other situations, maybe if mortgage rates drop down again into the 4% range and prices were still down as they are currently, then maybe it’s actually cheaper to buy a house. There are multiple things to consider when you compare renting and buying right next to each other. One of the things that a lot of people that are renting don’t know is that they are potentially able to deduct the interest payments on their mortgage from their income. So a tax benefit of owning a home, that’s pretty cool. There is also equity built up in your house or debt pay down. So each month, some of the payment, not a lot of it, especially right now, goes towards the principal pay down on the mortgage. So you are yes, paying money every month just like you are when you’re renting, but some of that money and it becomes a larger and larger percentage over time goes towards your principal pay down or essentially it’s just money in the bank and that’s called equity. So whatever your down payment is, that’s equity in the home. It’s what you own. And over time you own more and more of the house as you pay down the mortgage, whereas if you’re renting, you’re not building up any equity. So there are some tax advantages and also equity buildup that I would factor into the equation when I’m considering is it better for me to rent or own? Again, that’s not what this video’s about. So I guess the long-winded answer to myth number one is that it is cheaper to rent in some situations. It’s also cheaper to buy in others. And a third I guess thing to throw out there is if you’re comparing them side by side, I think there’s maybe some more information you want to consider in the equation.
Myth number two, buying a house is always better than renting. This is essentially the exact opposite of myth number one, but some people come to real estate with the assumption that I need to buy a house. I’ve got a job, let’s buy a house. I just moved somewhere I got to buy a house. At least for some people, I don’t think it makes a lot of sense. And if you’re moving to the area and you never have been here, we’re in Seattle. If you’re moving to Seattle, you’ve never been to Seattle, it might make a lot of sense to rent, not just monetarily, but you might not have any idea where you want to end up. Buying is a lot more permanent than renting. In some situations. It makes a lot better sense to rent and do your exploring without committing yourself to a purchase. Now, yeah, if you’ve got more familiarity with where you’re going to be and you have the means, maybe it does make sense to buy for some of the other financial reasons, but if you’re just coming into it with the assumption that buying is the best option, it might not be. And another scenario where maybe buying doesn’t make sense is if you don’t plan to live in the area very long, if you’re going to be in the area for a year or two and you’ve already decided that in your mind. Well, a lot of times the break even point for a purchase is beyond that timeline. Now again, each housing market and situation is different. So maybe the break even point is earlier, maybe it’s later. If homes are appreciating in value really quickly like they did for some people in 2018, 19, 20, 20, right? There’s that window where people that bought just automatically benefited. But right now, people that bought in 2022, some of them are sitting with negative equity or maybe they’re about breaking even, and that’s not necessarily a massive win. So if they were thinking about moving or wanted some more flexibility in their life, they’re somewhat trapped in that mortgage. So something to consider if you are coming into this thinking, I have to buy a house.
Myth number three, you need a 20% down payment to purchase a house. This is one of the more common myths that I encounter or conversations that I have with home buyers, and it’s really around how much should I put down? And for each person, that’s a completely different conversation depending on their income and their assets that are available to them. But as we’re considering a home purchase, most first time home buyers are going to put 10% or less down on a purchase, and many studies confirm this year after year. And as we’re looking at what you should do that’s different than what you can do. The main reasons I think people maybe believe this myth is number one, because there is what’s called P M I or private mortgage insurance. If you put less than 20% down on a home loan, you will have P M I. And for a lot of people, they’re like, I don’t want to pay this extra thing, I just don’t want it. Well, let me tell you, it’s not that expensive to have and it’s relatively easy to remove On a conventional loan, when I bought my first house, I put 10% down on the mortgage and I had private mortgage insurance. Well, after two years, you can remove this by either increasing the amount of equity in the house yourself by putting more money down, so it has to be up to 20%. Or if the property’s appreciated in value and the net equity is 20% or greater, voila, it’s gone. So I think over two years I paid $4,500, which was at the time tax deductible, and I got my mortgage insurance off and I only had to put 10% down versus 20%. So I was able to keep that other 10% liquid. Now I had the 20%, but I chose to do 10%. Now for other people, maybe they can’t even do 10%, maybe 3% or 5%. There’s some other loan programs where you can put even less. What I’m saying is there are a lot of options, especially for first time home buyers. There’s even assistance programs for first time home buyers when they’re considering a down payment. If you’re financially able and your credit is suitable, then there are a lot of different options for you when it comes to down payment amounts. So don’t believe the myth that you need to have 20% down to make a purchase. Now, as you continue in your real estate investing career, maybe you’ve bought or sold a couple different houses, you may elect to put larger amounts of money down and some loans. If you get jumbo loans or you’re investing in properties, typically they will require larger amounts down. But for a first time home buyer, there are a lot of different options, and many of them are far less than 20% down.
Myth number four, you can’t buy a home with bad credit. Let’s be perfectly clear. There are certain things that will immediately disqualify you, at least for a time in getting a home loan. A recent foreclosure, short sale or bankruptcy will put you in a bind. But if we were to look at some of the other options, I think you’ll find that you can, even with bad credit, make a home purchase. Now, those things that I even mentioned, there are ways around that as well. It’s not usually as much fun. You may be able to get a co-signer, somebody who is willing to vouch for you. That would be the same as having no credit. If there’s somebody that’s willing to put their neck out on the line for you, well then you might be able to buy a house still, maybe the seller’s willing to give you financing. Seller financing would be another option. Very uncommon where a homeowner wants to sell a house to a buyer and carry the mortgage deed as well, but it’s an option. Now, credit repair is also an option. Maybe you can’t buy a house right now, but you can work on it. So maybe you need to wait a year, maybe you need to wait six months or maybe it won’t even take that long to work on your credit and improve it to the point where you’re able to buy. Now, if your credit is better, typically you have a better rate, and that’s what some people would be working towards. But just getting started is a huge piece of the game when it comes to real estate. Even if your rate’s not amazing at the beginning, you’ll be able to, and most people do refinance their mortgage over time. Most people don’t keep the initial mortgage. And if you own a house and you’re making those payments regularly, you’re actually building your credit as well. Now, a third option is government backed loans. These typically will take people with lower credit ratings or allow for financing to happen a little quicker maybe than the conventional mortgage. Some of the more common loan options when it comes to the government loans are F H A loans and VA loans, although the VA loans are specific only for veterans.
Myth number five, the best time to buy a home is in the spring. It’s not a bad time to buy a house in the spring. The weather’s nice and there’s usually more options on the market. But what I find in the Seattle area is usually in the spring, you don’t have as many houses available because well, in the winter there’s hardly anybody selling. And then they start to sell. And by the time the spring comes around, there’s still not a lot of houses on the market. And all the people that think the best time to buy houses in the spring are out trying to buy a house. So typically you see houses selling above asking price, and you see houses getting multiple offers. So it’s just harder in the first place to buy, and you don’t have as many options. Also, houses tend to sell near their peak of the year, late spring, early summer, at least in a normal year. So is buying a house in the spring the best? I think it really depends on your situation. I would personally, if I was looking at it, think, okay, well price is a factor. Selection is a factor. And in the summertime and in the fall, usually there are more houses available than there are in the spring as far as the amount of choices. Sometimes they sit on the market for a little bit and there’s some negotiating room, and usually you don’t encounter the fierce competition that you would encounter in the springtime. If you’re a home buyer and you’re looking at buying in the spring, it’s not a bad time to buy. So don’t get me saying that. But at the same time, I would encourage that there are ways to buy and there are benefits to buying in every season of the year. So it really comes more down to what’s your timing look like? When’s your lease up, when are you moving to the area, and what makes the most sense for you? And there are benefits and drawbacks to buying at any time of the year.
Myth number six. This is the final myth for this particular video, and that is that buying a home is a guaranteed investment. We talked about earlier that buying a house doesn’t always make sense. It’s not always better than renting. I think it’s important to talk about the fact that real estate goes up and down in value. It’s like a stock in that sense. If you are into stock investing, it goes up and down, and historically the trend is up. But when you’re buying a house, it’s not a sure thing. If you bought a house in 2022 in the springtime, early summertime, you likely paid the peak of the market. If you’re watching this video sometime after, you may or may not. No. People that have what’s called negative equity, that means their house is worth less than what they paid for it. Now, does that mean that they’re in trouble? Not necessarily. A lot of the people that bought in 2022 have really low mortgage rates and their payments are affordable. And as long as you stay in the house and you keep making your payments, it doesn’t really matter what it’s worth at the moment. It’s all about where it ends up. Now, does real estate historically appreciate and value? Yes, for sure. And if you’re looking at local markets, it’s also localized. So you have the US real estate market and you also have the local housing market. And this Seattle housing market has historically been a good place to put your money, but it’s not an immediate return. It might take a few years, it might take 10 years for you to see the benefit. Some people, if they look back at 2006, seven and eight, and they bought a house at the peak of the market before, what we look back on, at least in the shorter term as the worst housing collapse that we’ve seen, people that held onto that house for the next 7, 8, 10 years, they made out great. They sold for way more than they purchased for. It was the people that had to sell when their house was worth less. That had a difficult time. So we talk about earlier on in this video about your situation and your goals and your timing. Buying a house is not a guaranteed investment, but if you hold onto it for longer it can be a solid investment and you can have confidence in it all the same. So again, it really comes down to your timing and your goals. But if you’re buying a house, you can’t count on it a hundred percent, especially in the short run.
In the long run, I would be very confident to bet on real estate, first time home buyers or really anybody who made it to the end of this video. I hope it was valuable for you. Please show some love with a thumbs up if this video was beneficial to you. If you have questions, drop ’em in the comments. I’d love to engage with you. And of course, if you know somebody who could benefit from this video, please share it with them.