MORTGAGE RATES JUST OFFICIALLY HIT A 3-YEAR LOW. READY TO BUY THAT DREAM HOME? OVER OUR FAVORITE NORTH END LATTE, THE LOVELY AND NUMERICALLY TALENTED RACHEL LAKE AND I COMMISERATED OVER THE MISGUIDED MYTHS THAT WE'VE ENCOUNTERED IN OUR TEN YEARS IN THE REAL ESTATE BUSINESS. RACHEL, A LOAN OFFICER AT FAIRWAY INDEPENDENT MORTGAGE IN BOSTON, QUICK-WITTEDLY SPRINKLED ME WITH COMMENTARY ON THE BIGGEST OFFENDERS, WHICH WE WISH HOME BUYERS WOULD LET DIE. OUR CLIENTS CAN NEVER QUITE RECALL WHERE THEY STUMBLED UPON THE MISLEADING INFORMATION— "I THINK I READ IT ON THE INTERNET SOMEWHERE”. LET’S PUT THESE REAL ESTATE MYTHS TO REST ONCE AND FOR ALL— AND POST IT ON THE INTERNET SO EVERYONE WILL KNOW IT’S TRUE— SHALL WE?
MYTH #1 — YOU MUST HAVE 20% DOWN TO MAKE A WISE FINANCIAL INVESTMENT
Traditionally, a buyer got a 30-year-fixed loan and put 20% down. But times have changed. While putting down 20% is ideal, not everyone can realistically afford that. You can get away with a smaller down payment in exchange for paying PMI (Private Mortgage Insurance) until you have enough equity in the home to have it removed—usually 20%. FHA and VA programs require down payments as low as 3.5% and 0% respectively if you and the property qualify.
What’s PMI, you ask? "I once presented to a room full of financial advisors all within their first three years in the business. I asked them what they advise their clients need for a down payment on a home. They all simultaneously yelled out 'TWENTY PERCENT!' I asked them why and I got one little voice that squeaked 'PMI'," Rachel recalls. “This is a deeply ingrained urban legend without a leg to stand on. PMI is not a dirty word. It’s a gift that opened up homeownership to the masses. PMI hedges the lender’s risk and allows them to lend a higher percentage of the property’s value. To contiue to rent because you don’t want to pay PMI can cost you big bucks. Not only are you not gaining equity from property appreciation, you’re not paying down the principal. You’re also missing a crucial tax write off for the mortgage interest that many people qualify for. Property values will increase. Waiting to save 20% means you'll pay more for the property in the long run."
MYTH #2 — ALWAYS CHOOSE THE MORTGAGE LENDER WITH THE LOWEST INTEREST RATE
Cost is always a factor, but differences in fees may matter more. In a competitive buying market like many housing markets are seeing right now, the reliability of your lender could mean the difference between getting your dream home and losing to another offer, so you’ll want a lender with a good reputation. You’ll also want someone who can work well with your real estate agent, so ask your agent for referrals. A good loan officer will also always pull credit. Multiple pulls in a 30-day period only count as one for mortgage purposes, so don’t be afraid to let your loan officer fully vet you prior to your home seach.
MYTH #3 — A 30-YEAR FIXED-RATE LOAN IS THE ONLY SMART OPTION
This could be true if you keep the home for that long but if you only intend to keep the home for 5-7 years, a fixed rate for 7 years could be more appropriate. The best loan for your home purchase should be based on three factors: spending habits, savings, and credit history. The longer you fix the rate, the higher your interest rate will be so you could be paying a higher rate for nothing. A 15-year fixed-rate loan grows equity faster than a 30-year, plus you'll pay less total interest over the full term of the loan; an FHA loan requires a smaller down payment; and an adjustable-rate mortgage loans, which reset the interest rate frequently.
Lake advises, "The national average time that Americans live in their home is well under ten years. In the Greater Boston Area that is thought to be significantly less. The hangover we all have from the great real estate bubble implosion has left a bad taste for ARMs (Adjustable Rate Mortgages) in our mouths. Modern day ARM programs have protections in place that prevent the rate from adjusting up by more than a certain percentage. Longer term ARMs are available that offer up to 10 years of a fixed rate on a 30-year term loan. The savings on these ARMs is dramatic! If a buyer is purchasing a starter home and plans to move out in less than 10 years, why would they not look at this option? Even after 10 years, the upfront savings during the low-rate fixed period often offsets both the cost of the refinance and the later, higher rate. Instead of making the traditional choice out of fear, have the conversation with your loan officers before committing to a fixed rate."
MYTH #4 — A BUYER WITH A LOAN CAN’T COMPETE WITH A CASH BUYER
A buyer with a loan can absolutely win a bid over a cash buyer. A client of mine wanted to make an offer on a condo in a very desirable neighborhood in Boston. Out of the twelve other offers, nine were well above asking and cash. Ours had a financing contingency with only 5% down. “Forget it, I’ll never get the place. Who can compete with that?”
This is the deal that taught me creativity and a little recon goes a long way. Thank you college Sociology major. I realized that the seller was likely deciding based on pure emotion. It was her first home, where she lived for over fifteen years. Years likely filled with fond memories. She was moving out of necessity for a job. I thought that a heartfelt letter about my client and his family would help the seller identity with him on a deeper level. It worked. To top it all off, the listing agent called me to commend me on the loan officer that I had referred to my client. “To be honest,” she said, “That sealed the deal. I know this loan officer fully vets each borrower. There’s no question that the deal will get done.” 5% down payment or not, I was able to prove my client's financial stability. By working with a real estate professional who takes the time to think creatively and aligns with other professionals with spotless reputations in the business, you’ll successfully navigate the offer process against cash buyers. My client beat out twelve other offers despite being the weakest offer for the least amount of money, and it didn’t cost him an ounce of extra money or energy.
MYTH #5 — YOU SAVE MONEY IF YOU USE THE LISTING AGENT TO REPRESENT BOTH SIDES
As the adage goes, “You don’t know what you don’t know.” This is why you rely on an expert. By searching and researching independently, buyers going directly to the listing agent assume they can negotiate a better deal by cutting out the middleman—the buyer’s agent. A good buyer’s agent keeps a finger on the market’s pulse— they don’t simply access listings. They know the comps and the other agents, adding an incredible amount of value simply through sharing their experience and knowledge— at no cost!
Rachel said it perfectly: "Real estate is the largest investment most people will make in their lifetime. The truth is that seller’s agent is contractually obligated to represent the best interests of the seller and will always advocate to put the seller in the best position. When that inspection issue inevitably comes up, a good buyer’s agent will negotiate the best terms for their buyer to compensate them for the issue. They get involved with resolving issues that come up during the process right through closing and often times after closing if things come up later or remain unresolved. Plus, these guys know people! They can connect you with lenders that you can trust, contractors, inspectors, etc. Not utilizing a buyer’s agent is the old penny-wise pound-foolish thing. Trying to save upfront can end up costing thousands."