Real Estate Myths
I overheard a conversation of a first time home buyer talking about their recent experience. There were a few major pain points that I wanted to share...
- Different Types of Mortgages (what are the actual differences)
- Closing Costs
- Down Payment
- Communication (or lack of it)
Overhearing a conversation about real estate as an agent is always interesting... As a professional, it's sometimes hard to realize that we do real estate deals every day and our clients don't.
What I've always found to be true, is that most consumers don't ask enough questions until it's too late. I'll answer the questions that this home buyer should have had answered before he ever bought a home.
Different Types of Mortgages
FHA vs. Conventional
FHA loans are typically referred to as "First Time Home Buyer" loans, which is not true. There actually aren't really any first time buyer loans. It's more of a marketing pitch than anything.
The idea behind first time buyer loans is that you're likely just putting less than 20% down payment. You can do that with most loans.
Conventional loans can be as low down payment as 3% but if you can do 5%, you'll be way better off.
FHA loans are as little as 3.5% down, and typically have a lower rate or APR, but will often have more fees.
General advice, compare both options but if you don't NEED an FHA loan, you are probably better off going conventional.
Pro Tip - Ask your lender for a loan estimate to compare the two options. (You can always reach out to our favorite lender for an estimate without running your credit)
This should be no surprise, but when you're spending as much money as you are when purchasing a home, there are a ton of fees involved.
The short explanation to closing costs, is to expect 2% of the sale price in fees or costs. There are a ton of different fees, so I won't list them here, but the major ones for buyers are:
- Escrow fees
- Title Insurance fees
- Loan Origination fees
Let's say you're planning on putting 5% down payment, you should have at least 7% available to make the purchase.
Closing costs can definitely be more expensive, but this is a safe guess. The thing that would likely drive up the costs would be getting a "more expensive" loan.
The cost of your loan is referred to as 'points'. One point = 1% of the loan amount. Typically, the more you pay in points, the better rate you get and visa versa. If you're 'buying down' the interest rate, you're paying more for the loan in exchange for a slightly better rate. It's important to know that if you refinance down the road, that money is gone.
The biggest myth in real estate is that you need 20% down payment to buy a home.
Our first time buyers put an average down payment of 6%.
Yes, you have PMI (in most cases) when you don't put 20% however that amount only adds a few hundred dollars to your payment. It can also be removed either through a refinance OR by paying down your loan to 80% of the value of the home.
Rates are also higher with less money down, yet not enough to make a difference for most buyers. A lot of people would prefer to have cash in the bank rather than a $250 cheaper payment.
Always compare your different options before you get into escrow.
The biggest complaint was the lack of communication from all parties, their realtor (not on our team) and lender.
One of the most common things we hear from clients, is they're amazed at the level of communication at all points. This is only possible because we have a team of people working together.
We try to over communicate up front, and give our clients more information than they may actually need. We do this through what we call a Strategy Session, where we share what our clients are doing to be successful & how to get the best deal.
We go through several things but we make sure our clients understand the following...
- How they're protected
- What their options are
- How to leverage terms
- Timelines in the deal
It also makes a difference having more than one single person to help you through the process.
What questions do you have that you wish were answered before you bought? Or if you're a first time buyer/seller, send us your questions and we'll make sure they're answered.
PS - If you're in the market to buy a home and you haven't done a Strategy Session, click here to learn more about it.