7 Myths About Down Payments for Real Estate Purchases

There is a lot of misinformation out there regarding the process for real estate purchases, and this makes matters even more confusing for those that are new to buying a home. The biggest myth that first-time homebuyers deal with is that they need a large down payment. Today, we are going to do a little myth-busting of our own with the following list of 7 common myths. 

1: You need a large down payment. 

Many of us were told at some point or another that a down payment for a house is 20% of the purchase price. False. While that kind of deposit would certainly lower your monthly amount owed on your mortgage, it is simply not necessary. Many conventional mortgages, like the traditional 30 yr fixed-rate mortgage or FHA loans, will accept between 3-5%. 

2: Small down payments make my offer weak. 

While most sellers would obviously love a cash offer, the fact that you are taking on financing certainly doesn’t make you less appealing as a buyer. 

3: Down payments aren’t required. 

On the flip side of what we have discussed in the above commentary, there are some individuals with the misconception that down payments aren’t necessary at all. Down payments serve two functions: Most lenders will want to see some skin in the game and they keep your payment lowerThey are also beneficial in finding the best interest rates.  

4: The only money owed at closing is the down payment. 

In realitythere are other fees that may be charged like an inspection fee, origination fee, titleclosing, and the appraisal fee. Homeowners and lenders should be sure to discuss these fees openly to clear up any misunderstandings. Your “Cash-To-Close” on the big day will combine these additional charges with your down payment for your final amount due to get the keys. 

5: Down payments must be cash. 

A down payment doesn’t need to be in cash. For example, with a pledged asset mortgage, a buyer can eliminate the down payment on the house, secure a lower interest rate and avoid private mortgage insurance (PMI) payments by pledging a stock portfolio as collateral instead of paying a cash down payment. 

6: There is no reason to put down more than 20%. 

As we discussed earlier, it is not required to put down 20%. However, if you are able to do so, it certainly sets you up in a strong position in a competitive market. 

7: Closing costs are the only expenditures when buying a home. 

While they are usually the largest expenditure, they are rarely the only costs associated with purchasing a home. What about the stained carpet in the living room or the palm trees that haven’t been trimmed in years? Frequently you will need to buy new appliances after the seller takes the old ones to his/her new place. Don’t forget insurance and utilities. Homeownership is rewarding but with a lot of added financial responsibility.  

Source: Forbes Real Estate Council 

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