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  • 5 common real estate myths - busted

    5 common real estate myths - busted
    Published September 18, 2012
    5 common real estate myths - busted
    A home is one of the most expensive purchases you’ll ever make...which means that being uninformed can have expensive consequences.

    For many people, home buying is like deep-sea diving: sinking into a murky and unfamiliar world, and hoping you’ll surface with a home that’s right for you. Well, it’s time to swim back to the surface, take a deep breath and start shouting for a life preserver. A home is likely the most expensive purchase you’ll ever make. And the best way to protect yourself from costly mistakes is to go in with a solid understanding of all aspects of the home-buying process. Feel like you’re swimming in misinformation? Check out some of the most common real estate myths that plague homebuyers...

    Myth #1: A home is a great investment
    A home is often touted as a great investment, one that will appreciate steadily over the years and help you build your net worth. Over the very long term, that’s generally been true. But there are a few problems with looking at your house as an investment. The first is pretty simple: you need somewhere to live. This means that unlike other investments - such as stocks, bonds or even investment real estate - you can’t just sell your house when the market’s hot. And even if you did sell, you’d probably have to plough that money right back into a new home – one that has likely appreciated at a similar rate as the one you’re selling. Furthermore, the real estate market is like many other markets in that it is not entirely predictable; it may not be at a peak when the time is right for you sell.

    This isn’t to say a home isn’t worth buying. Many of the biggest benefits of homeownership are more personal than financial – and you can’t put a price on that. Just remember that the real, underlying reason you have a home is to keep you out of the rain. And that makes it unlike any other investment you’ll ever own.

    Myth #2: A mortgage is a debt
    This one will surprise a lot of people, but a mortgage technically isn’t a debt; it’s a security interest in a property, held a lender as collateral for a debt. What that means is that a mortgage is an asset exchange; the buyer gives the bank an interest in the home in exchange for the money to finance its purchase. It is this transaction that makes real estate different from most other things we might buy on credit. Unlike a takeout lunch or a night out at a concert, real estate is not consumable; it’s a hard asset like money, and often an appreciating one at that. So, while homebuyers should aim to pay off their mortgage as quickly as possible to save on interest costs, don’t get too dragged down the notion of being in debt. Living expenses are a fact of life, and once your mortgage is paid off, you’ll have a piece of land of your very own. That’s a lot more tangible – and valuable – than anything you’ve ever bought with a credit card.

    Myth #3: You get more for your money in the suburbs
    Canadians love the suburbs. Although we’re increasingly becoming more urban, according to figures released Statistics Canada in April, areas beyond major cities’ cores have been growing their populations about 40 percent faster than urban centers. This growing legion of suburbanites is often dominated families with young children. And who can blame them? Houses in the suburbs are often bigger, newer and cheaper than anything you’d find deep within a city’s boundaries.

     

    But suburban life has hidden costs. According a U.S. think tank called The Center for Neighborhood Technology, the cost of living far from services can be as much as $3,800 per year, much of which is taken up transportation costs. Sure, you get a brand-new house, but it won’t be long before it too has chipped paint and dated decor. The only difference is, you’ll still have to commute for ages to get to work and back.

    Myth #4: A mortgage’s term and amortization are the same thing
    If there’s one thing that confuses people about mortgages, it’s the difference between a mortgage’s term and its amortization. Well, it’s time to blow up this myth because if there’s anything that’s financially irresponsible, it’s paying into a financial instrument you don’t understand.

    So here it goes...amortization is the rate at which a mortgage is paid off. If you have a 25-year amortization on your mortgage, it will take 25 years to be mortgage-free if you continue making the same payments. This is the calculation used to spread the price of the home out over a period that will make it affordable for the buyer.

    A mortgage term, on the other hand, is just the length of the contract you have with the bank or lender, which determines your payment, interest rate and other factors. It is generally anywhere from six months to 5 years, regardless of whether your amortization is 10 years or 25. Once the mortgage term is up, you have to renew your mortgage, which may mean a new interest rate, a new payment amount or even a switch to a different type of mortgage altogether. Why can’t you just be locked in for the full amortization period? Well, the term is designed to protect both the lender and the borrower allowing them to renegotiate the loan agreement at a set point in time rather than sticking with the same product and interest rate for decades. In Canada, the end of the term also gives the homeowner the opportunity to pay off the mortgage balance without penalty.

    Myth #5: Renovations are a great investment
    Go ahead and remodel if you want to. Just don't tell yourself it's an investment. In fact, you'll be lucky to recoup your costs, much less make money. Don’t believe us? Remodeling Magazine’s 2011 Cost vs. Value Report looked at a number of common household renovations and found that rates of return peaked out at about 75 percent of the cost of the remodel. That said, when the real estate market is really hot and you pick the right kind of renovation, such as adding a bathroom, that number can go above 100 percent – but it isn’t much, and that isn’t the norm. The bottom line: if you renovate, do it for you, not a future buyer.

    Learn the truth
    When it comes to buying a home, don’t fall prey to neighbourhood talk and common fiction; learn the truth.  Go in with your eyes wide open and a keen sense of what to really expect. You can’t afford not to.

    About the Author/Partner: GoldenGirlFinance.ca is a free personal finance and education site for women.

    Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.

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