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Purchasing a home can be one of the most exciting, rewarding, and smart purchases you ever make.
Before you start shopping, though, you should know about three misconceptions that often cause people to spend more on a home than what they can afford.
Below, you’ll discover the three biggest myths about homebuying that can hurt your pocketbook.
Read this list before you start shopping around for homes, to help you avoid poor financial decisions that could affect your future.
Myth 1: Real Estate Always Holds Its Value
Once upon a time, people were brought up to believe that real estate always holds its value.
So if you bought a $100,000 house, it was referred to as an “investment” because it would “certainly” increase in value over the years.
But the idea that real estate will always retain its value is, and always has been a myth. Real estate is worth what people are willing to pay for it, and when demand drops, your home can quickly lose value.
“I think everybody's dream, when you are a normal person — not super rich, not super poor — is that your home is kind of your biggest asset,” said Brian Burns in a 2016 interview with NPR Radio.
The former Las Vegas homeowner, who had a credit score of about 850, recalls the myth he bought into when purchasing his $320,000 home before the 2008 mortgage crisis,
“…you feel like, ‘I'm going to play by the rules, I'm going to pay my mortgage, it's just going to continue to increase in value.'
But the value of Burns’ home plummeted when the recession hit. Across the U.S., home prices fell an average thirty-three percent following a historical stock market and housing crash.
Without warning, Burns’ home value dropped to $140,000 — which was less than half the price he paid for it.
Simultaneously, his work as a graphic designer dwindled, and Burns ended up letting the bank take his house.
When NPR caught up with Burns for an interview in 2016, Burns had still not recovered financially and was living in a rented Las Vegas apartment.
Eight years after the mortgage crisis of 2008, about 20% of Las Vegas homeowners were still underwater with little hope for recovery.
We don’t want to scare you away from buying a home — a home can be one of the best purchases you ever make, and the right financial planning can help you avoid losing it during an economic crash.
However, before you buy, it’s critical to know that homes don’t always retain their value.
If you purchase a home with this in mind, you’ll make better decisions about what you buy and when you buy it.
- Waiting until you can afford a 20% downpayment before you take out a mortgage loan will cut your home costs and lower your monthly mortgage payments.
- Building a six-month emergency savings account, before you buy, will help you meet your loan obligations if something should happen to the economy.
A home is a fantastic way to spend your money, and if you buy wisely, you may never regret the purchase.
However, there’s no guarantee that any home will hold its value, so please be sure to plan your homebuying budget accordingly!
To plan your homebuying budget accurately, we recommend you visit Credible to compare vetted lenders and determine what you can afford to spend on a home.
Myth 2: You Can Upgrade Your Home And Sell It For Profit
Technically, you can upgrade your home and increase its value.
If you live in your home, you probably will upgrade it over time.
Will those upgrades increase the value of your home enough to offset depreciation over time? Probably not.
If you’re thinking of doing a few quick upgrades to sell it for a profit, you might want to do some research on what it takes to make money from flipping a home.
Professional home flippers earn an average of $64,900 per home, but here’s what you might not know:
- It takes a full-time house flipper an average of 4 – 6 months to complete the renovations and resell the home.
- The cost of upgrading a for-profit home flip runs about 20 – 33% of the home’s value (after repairs).
- The actual profit earned from a flipped home is 12%.
Upgrading a home costs a great deal of money and time, even for professionals, and the profits aren’t as high as they sound unless you’re managing multiple flips at the same time.
On top of that, there are a lot of costly mistakes you can make in the process.
Upgrading your home is a fantastic way to help it keep its market value and allow you and your family to enjoy your life while living in it.
However, be careful not to stretch your home buying budget or buy more house than you can afford because of the myth that you can upgrade and sell it for a profit later.
If this is your first time buying a home, be sure to read the Minority Mindset's First-Time Home Buyers Guide for tips on how to prepare for homeownership and save $$$ on your purchase.
Myth 3: A Home Is The Most Important Investment Of Your Life
One of the first things to understand before buying a new home is that a home is not an investment.
People might tell you that your home will build equity and become an asset because you can use your home as leverage, but that’s a myth (and often an effective marketing ploy).
Here’s the truth: a home requires a large down payment, closing costs, and fees (but you can lower those costs significantly by finding the better interest rates).
Then, you make mortgage, insurance, and tax payments every month while you’re living in it.
Eventually, you’ll sink more money into your home for repairs, maintenance, and upgrades.
Twenty years later, your house is still eating money, and you haven’t earned a dime from your “investment.”
A home is not an investment because investing is when you buy something for the sole purpose of making money.
You shouldn’t have to wait years to see a return on your investment. When you invest in real estate, you should get a cash flow going within a couple of months.
Your home is a purchase.
You’ll live in your home, use your home, and make memories in your home, but it won’t provide you with income the way that investments do.
It’s okay that your home isn’t an investment. You’ll get plenty of use out of it, and it may be the best money you ever spent!
But, don’t let anyone persuade you to buy bigger or spend what you can’t afford because it’s a great “investment.”
Remember, every dollar you finance is a dollar you have to pay interest on (and a dollar the bank profits from).
When you determine your home-buying budget, keep in mind that you’re not investing the money, but spending it. If you go into it with this mindset, you’ll make better financial decisions about which home to buy!
Don’t Let Homebuying Myths Drain Your Pocketbook
A home is hundreds of wonderful things, all wrapped into one structure.
However, when it comes to budgeting for a new home, it helps put the emotions aside and make decisions based on logic instead of myths.
Remember that your home is not an investment, won’t always hold its value, and isn’t a profitable way to spend your spare time.
Understanding these myths will help you make better financial decisions about your home so you can continue investing and building wealth for the future!
*Advertisement from Credible Operations, Inc. NMLS 1681276, not available in all states. Click here for important information about Credible’s licenses. Address: 320 Blackwell St. Ste 200, Durham, NC, 27701.
- How to Start Investing
- Is Real Estate Investing Right For You?
- Investing: Why It’s Important and Why You Need to Start Doing It