Seven Myths About Owning a Home That Cost First-Time Buyers Real Money

Somewhere tonight a young couple is standing in an empty living room, holding a pre-approval letter and a bottle of something fizzy, convinced they have just been handed a medal. They have not. They have been handed a number, and the number was calculated by a lender whose interest in their happiness ends the day the loan closes.

Let me tell you something, folks: owning a home is a wonderful thing, and I would like every family that wants one to get one. That is exactly why the folklore has to be tested. Folklore is cheap to repeat and expensive to believe. Below are seven things first-time buyers hear from relatives, real estate television and the general fog of American life, and each one gets a hearing, a test and a verdict.

What counts as a myth here

A myth, for our purposes, is a claim that is partly true, widely repeated and costly when treated as a rule. Almost none of these seven is flatly false. That is what makes them dangerous. A flatly false claim gets laughed out of the room. A claim that is true in some years, for some buyers, in some towns gets tattooed on a family's budget.

Two ground rules. First, where I use a figure, it is either arithmetic I show you or a long-standing rule of thumb that I label as one. Second, nothing here is advice about your own purchase. Your lender, your tax preparer and a real estate attorney in your state know your facts. I know the mechanisms.

Myth one: "If the bank approves me, I can afford it"

Start with the steelman. A mortgage lender is not a charity, and it does not want a loan that defaults. So if the lender says yes to a given amount, surely that is a sober professional judgment about what you can handle?

It is a judgment about what the loan can survive, which is a different thing. A lender underwrites with ratios, chiefly your monthly debt payments compared with your gross, meaning before-tax, monthly income. Gross. Your grocery bill, your child care, your car repairs, your retirement contributions and the water heater that quits in February do not appear in the formula at all. The lender also protects itself in ways you do not share. If you stumble, it holds a lien on the house. You hold the stumble.

Here is the worked example, and it is a hypothetical. Picture a household earning $6,000 a month before tax. A lender comfortable with, say, a 43 percent total debt ratio could approve a family for $2,580 a month in total debt payments (43 percent of $6,000 is $2,580). But the same household may take home something like $4,800 after taxes and payroll deductions. Then $2,580 is more than 53 percent of what actually lands in the bank account ($2,580 divided by $4,800 is 0.5375). Approval and affordability just parted ways.

Verdict: false as a rule. Pre-approval is a ceiling, not a target. Build your own budget from take-home pay, the way Give Every Dollar a Job Before the Month Starts, the Zero-Based Budget explains, and then see what the house costs against that. The lender's number is the most you may borrow. It was never a recommendation.

Myth two: "The mortgage interest deduction makes owning a bargain"

Steelman: the tax code has long allowed homeowners who itemize to deduct interest paid on a mortgage, up to limits. Interest is the biggest cost of a new loan in its early years. A deduction against it must be worth a great deal.

The weakness is the word itemize. A household gets a choice each year. It can take the standard deduction, a flat amount the law gives everybody, or it can itemize and add up mortgage interest, certain state and local taxes, charitable gifts and a few other items. It takes whichever is larger. The deduction for mortgage interest only helps to the extent that your itemized total beats the standard deduction. The Tax Cuts and Jobs Act of 2017 roughly doubled the standard deduction, and that change moved millions of homeowners out of itemizing altogether. For those households, the mortgage interest deduction is worth exactly nothing, because they are taking the standard deduction either way.

Worked example, hypothetical and with round numbers chosen only to show the mechanism: suppose a couple's standard deduction is $30,000, and their itemizable items total $26,000, mortgage interest included. They take the standard deduction. The interest they paid produced no extra tax savings, because the deduction they claimed would have been the same had they rented. Now suppose their itemized items total $34,000. They itemize, but only the $4,000 above the standard deduction is a gain, and it saves them their marginal rate on that $4,000, not on the whole interest bill. At a 12 percent bracket, that is $480.

There is a second point here, and it is the one I want you to carry out of the room. A deduction is not a refund. Paying a dollar of interest to save twenty cents of tax is a loss of eighty cents. Nobody ever got rich by spending a dollar to save a quarter.

Verdict: mostly false. The deduction helps some households, usually those with large loans in high-tax states, and does nothing for many others. Do not buy a house because of it. If it comes, enjoy it. Check the current rules and limits at the IRS or with a tax professional, because they have changed before and can change again.

Myth three: "A house just costs the mortgage payment"

Steelman: the payment is the biggest monthly line, it is the number on the bill, and the rest is small potatoes.

Count the potatoes. A homeowner pays principal and interest, which is the loan. A homeowner also pays property taxes, which a lender often collects monthly into an escrow account, and homeowners insurance, collected the same way. Those three are often rolled into one payment, which is why people call it "the mortgage." Then comes everything the bill does not show: the roof, the furnace, the water heater, the appliances, the fence, the tree that has an opinion about your garage, and the plain annual upkeep of a structure that spends every day in the weather trying to return to nature.

A common rule of thumb, and I am labeling it as exactly that, holds that owners should expect to spend about one percent of a home's value each year on maintenance and repairs. It is a rough figure, and it varies by age of the house, climate and how handy you are. But run it. On a $300,000 house, one percent is $3,000 a year, or $250 a month, and the cost is lumpy. It does not arrive as $250 monthly. It arrives as a $9,000 bill for a roof repair in a year when you also bought a car.

This is the place where owning and renting really differ. A renter's landlord absorbs the lumps, and builds the average into the rent. An owner absorbs them directly. That is not an argument against owning. It is an argument for a repair fund as a line in the budget from the first day. And it is part of why Why the Emergency Fund Comes Before Every Other Money Goal You Have deserves its title.

Verdict: false and costly. Budget the payment plus taxes plus insurance plus a maintenance reserve. If the house only works on the payment alone, it does not work.

Myth four: "You must put 20 percent down or you're a fool"

I want to be fair to both sides of this one, because the folklore has two faces. The old rule says twenty percent down, always. The new folklore says that a tiny down payment is just as good, because the money is "working elsewhere."

Start with what twenty percent buys. On a conventional loan, a down payment smaller than twenty percent of the price typically means the lender requires private mortgage insurance, called PMI. This is an insurance policy that protects the lender, not you, if you default, and you pay the premium. It is commonly added to the monthly payment. It does not build your equity.

But the Homeowners Protection Act of 1998 gives borrowers real rights on conventional loans. You may request cancellation once your loan balance reaches 80 percent of the home's original value, if you are current and meet the lender's conditions, and the lender must end it automatically at 78 percent of original value on schedule. Government-backed loans have their own mortgage insurance rules, and those differ, so ask what applies to the loan you are offered.

So here is the honest ledger. Putting less than twenty percent down is not foolish. Many families buy sooner and pay PMI for some years, and for them that trade is rational. The foolish version is doing it without knowing the cost, and without a cash cushion left after closing. A family that empties its savings account to make the down payment has bought a house and sold its safety net in one afternoon.

Verdict: half right. Twenty percent is not a law. But whatever you put down, count PMI as a real cost, know the date it can come off, and leave an emergency fund standing.

Myth five: "Houses always go up in value"

Hold on, because this one deserves the full treatment. Steelman: over very long stretches, American home prices have risen, and a family that bought and held through most periods has seen a gain. Fair enough.

Now the two tests it fails. The first is the word always. In the years after 2006, national home prices fell for roughly six years, bottoming out in 2012. Lehman Brothers failed on September 15, 2008, in the middle of that decline, and the foreclosure wave that followed hit millions of families. People who had been told that houses only go up discovered that this was an observation about the past dressed up as a law of nature.

The second test is the one almost nobody runs: appreciation is not the same as profit, and a rise in price is not the same as a rise in value. Suppose a house bought for $200,000 rises in price by 3 percent a year for ten years. Compound that. $200,000 times 1.03 to the tenth power is about $268,800. Good news. But if general prices rose 3 percent a year too, a dollar ten years later buys what about 74 cents buys today, and the house has only kept pace. It stayed even in real terms, before the owner paid a dime of property tax, insurance, repairs or interest.

Add the cost of selling. A commonly quoted rule of thumb puts total selling costs, including agent commissions and closing costs, at roughly six percent of the price, though that varies by market and has been shifting. On a $268,800 sale, six percent is $16,128. That comes out of what you think you made.

Verdict: false. Houses go up and down, and the gain is smaller than it looks once you subtract inflation and costs. If your plan requires appreciation, you do not have a plan. You have a wish.

Myth six: "2008 was a freak and can't happen again"

Folks, this is where I want to say that every generation believes its own housing market is built differently. It is the oldest sentence in every bubble: this time the fundamentals are sound.

The 2008 bust is a case study in how cheap credit and thin down payments interact with a price decline. Here is the leverage arithmetic, hypothetical and exact. A buyer puts 5 percent down on a $300,000 house: $15,000. Prices fall 10 percent, to $270,000. The buyer has lost $30,000 of price, which is two full down payments. The buyer now owes more than a fresh buyer would pay for the same house. That is called being underwater, and it is a trap, because a family that needs to move for a job cannot sell for what it owes.

This is not a prediction that prices will fall. I make no such claim, and nobody honestly can. It is a statement about the shape of the risk. Leverage multiplies gains and losses alike, and a small down payment is a large bet. The people hurt worst in 2008 were those with the thinnest cushions and adjustable payments that reset higher. The lesson is not "never buy." It is that a home you can afford to hold through a bad stretch, with a fixed payment and a cash reserve, is a home you will not be forced to sell at the bottom.

There is also a bigger lesson about who decides these things. When Washington decides that everyone should own a house and pushes credit toward the goal, it tends to produce a market where the marginal buyer cannot survive a shock. Good intentions with other people's mortgage are not a policy. You can read more on that theme in Buy or Rent? One Family, One City and a Five-Year Worked Example, which runs the numbers for both sides.

Verdict: false. The mechanisms behind 2008, high leverage and low cushions, are always available. They are only unused when borrowers and lenders are careful.

Myth seven: "Your home is your best investment"

Steelman: a home is the largest purchase most families ever make, it often rises in price, it provides shelter you would have to pay for anyway, and for many people it is the only forced savings program that works. A mortgage payment turns into equity month by month, which is more than a renter can say about rent.

That is a strong case, and part of it is right. A fixed-rate mortgage is a discipline machine. Every month, a slice of the payment becomes principal, and over decades the slice grows. For the household that stays put and pays it off, owning gives real security. There is also a moral point I hold dearly: a family with a stake in a place has a stake in its schools, its streets and its neighbors. Ownership produces citizens.

But "best investment" is a claim about returns compared with alternatives, and the house fails a basic test. A house is two things at once. It is shelter, which you consume every day, and it is an asset, which you might sell. The part you consume is not an investment return, it is a living expense. The part you might sell competes against everything else your money could do, and your money is locked in one building in one town, with no diversification, a large transaction cost to exit, and a maintenance bill that never ends.

Compare two households in a hypothetical. One buys a house. The other rents a similar place for less money each month and invests the difference, along with the down payment, steadily in broad funds. Which one wins depends on the price of the house, the rent, the interest rate, how long each stays and what the funds earn. Sometimes the owner wins, sometimes the renter does. Anybody who tells you it is always one or the other is selling something. For a family still learning the mechanics of saving, Compound Interest Year by Year, the Arithmetic That Rewards the Patient Saver shows why the length of time matters more than the clever choice.

Verdict: overstated. A home can be a fine part of a financial life. It is a poor reason, by itself, to stretch beyond what the household can carry.

The founders and the home

None of this is an argument against property. The Founders saw widely owned property as the foundation of a free republic. Jefferson hoped for a nation of independent landholders, and the Homestead Act of 1862 later turned that hope into law by letting settlers earn title to public land through residence and cultivation. If you want the story of that, see The Homestead Act of 1862 and the American Habit of Earning Your Own Ground. Notice the verb, though: earn. The Homestead Act gave people a chance and demanded they work for it.

The Fifth Amendment protects property from being taken without due process and just compensation, and that guarantee is part of why ownership is worth pursuing. A home is a piece of ground a family can call its own against the world. The point of the myths above is not to talk anyone out of that. It is to make sure the family that gets there gets there standing up.

The case in brief

1. A lender's approval is a ceiling set on gross income, so build your own budget from take-home pay.
2. The mortgage interest deduction helps only those who itemize above the standard deduction, and it saves a fraction of each dollar of interest, never the whole dollar.
3. Count taxes, insurance and a maintenance reserve of about one percent of value a year as real costs of owning.
4. Prices fall as well as rise, appreciation is not profit once inflation and selling costs are subtracted, and a small down payment multiplies losses along with gains.
5. A home is shelter and a stake in a community before it is an investment, and it is best bought by a family that can hold it through a bad year.

What you can do: before you shop, write a one-page budget from your take-home pay with lines for taxes, insurance and repairs, and ask a tax preparer in your state whether you would itemize.