(WPRI) — Sometimes what we think we know about personal finance turns out to be wrong. We hear things from friends and family, read them on the internet and even see them on television.
But how do we separate fact from fiction?
On this episode of The Money Pros, the experts look at some widely held financial myths as they relate to some very important topics such as taxes, mortgages and real estate.
Myth: APR, or Annual Percentage Rate is the rate I will pay on my loan
Annual percentage rate is the effective rate to borrow dollars from a lender. When comparing two or more lenders APR’s it is not always clear. Government regulations have various APR calculations, so when comparing lender’s rates calculation may differ. A better way to compare lender rates is to use the note rate and then list out all fees.
Myth: You need to have 20% down to buy a home:
FHA loans will allow many borrows to put down as little as 3.5% on certain loan amounts. Programs such as first time home buyer, USDA and VA loans accommodate loans with no down payments.
Myth: You need a perfect credit to get a loan.
Fair credit in most cases will get you a loan. In some cases a FICO score as low as 600 can get you a mortgage loan. Also, if you have extenuating circumstances such as health issues, divorce, etc. the lender will work with you or let you know to come back after a certain period of time.
Myth: My bank is loaning me their money when I take out a mortgage.
In most cases they will not hold a mortgage loan on long term fixed rate mortgages. This would expose them to interest rate risk. Most loans are resold in the secondary market (FNMA or Freddie Mac).
Myth: Home office deduction increases my risk of being audited.
As long as you meet the criteria to take a home office deduction there is no increased chance of an audit. Next year the IRS implements a safe harbor home office deduction that streamlines this deduction.
Myth: Cancelled checks and credit card statements are valid documentations for deductions:
Keep your receipts. A copy of a cancelled check or credit card statement is not sufficient. You need to be able to provide documentation where the expense directly relates to your deduction.
Myth: Is it good to get a big refund?
No. Manage your money as you earn it. If you consistently receive large refunds make 401K contributions throughout the year and adjust your withholding.
Myth: Minors and elderly do not need to file tax returns.
There is no age restriction on the filing of tax returns. It is an income amount threshold that may vary year by year. Remember that income is both active (W-2 Wages, Self Employed) and passive (investment income, social security income, etc.).
Financial Myths in Real-Life Situations
Many times financial myths or beliefs are media driven. In an age where there is no shortage of media material individuals need to rely on financial fundamentals, research and trusted advisors rather than being led by a sensationalized television program, website or blog.
A common tax myth is that one should represent themselves to the IRS when they are audited. This is quite the contrary. Many individuals go in with no shot of winning their case. In many cases individuals can make their situation even worse by giving up too much information or not knowing the correct way to respond.
Another mortgage myth is adjustable rate mortgages (ARM) are bad for the consumer. This is not necessarily true. Know your short and long term plan for being in the mortgaged property. If you plan on living in the property for a short period of time or refinance in a short period of time then an adjustable rate mortgage might make some sense because the rate tends to be lower than the fixed rate mortgages.
Whatever the myth be sure that you don’t just follow the myth because it sounds like your situation. Your situation is always unique and many times will have its own unique resolution. Many times a myth leads to a quick answer, but there is no substitute for evaluating and researching your scenario.