Insanely low mortgage
interest rates—and the knowledge that they’ll eventually go up again—make a lot
of people feel like it’s time to buy a house right now. And maybe
it is … if you go about it the right way.
Buying
a home is a major purchase (to put it mildly), and there are plenty of ways to
trip up. But don’t worry—we’ve got your primer right here.
1. Don’t … buy a house if you’re planning to
move again soon.
If
you’re a renter, it can be frustrating to write that rent check every month and
have no home equity to show for it at the end of the year. But if you aren’t
certain that you’re going to stay put for a few years, it’s probably not the
right time to buy—equity or no equity. “Some people tend to buy a house knowing
that they’re going to be relocating after a few years,” says LearnVest Planning
Services certified financial planner Ellen Derrick. “Don’t buy property
and automatically assume that you’ll be able to rent it out or sell it when you
move.”
What to do: If you aren’t in an
area with a strong rental market that would allow you to cover the mortgage on
your home if you move elsewhere, then stick with a rental for now.
2. Don’t … bust your budget.
Shopping for houses can
make you a little giddy. Look at this one! And this one! For a little bit more,
you could get granite countertops, plus an office nook! You’re dealing with
such large numbers when you’re browsing real estate that it might not seem like
such a huge deal to stretch another $10,000 or $15,000 to get the home youreally love. But that’s not a game you want
to play. “People look at the top end of their affordable monthly payment, and
they don’t really think about what happens if their income goes down or they
have to change jobs,” says Derrick. (If you’re wondering what percent of your budget
should go toward housing, check out the 50/20/30 Rule.)
What to do: Get preapproved for a
mortgage. Not only will this prove that you’re serious to your realtor and to
home sellers, but it will also give you an idea of your upper limit. “Remember
that the lender is there to make you a loan, and the more money you borrow, the
better it is for them,” Derrick says. “They want you to max out. I would take the
pre-approval number and cut about 20% off.”
3. Don’t … forget about added costs.
Buying
a home isn’t just a matter of replacing a rental payment with a mortgage
payment. There are also maintenance costs, utilities (which will likely cost
more) and property taxes. “People tend to forget about both property taxes and
insurance when they’re thinking about how much house they can afford,” Derrick
says. “The actual monthly payment could end up being well out of your price
range when you figure those things in.”
What to do: Ask the homeowners
about their average utility costs and property taxes, get a homeowner’s
insurance quote and budget about one percent of the home’s purchase price for
annual maintenance. Then run the numbers to see if you can
afford the home. (And don’t forget about closing costs. The average cost to
close on a $200,000 mortgage is about $3,754, according to Bankrate.com, but
your broker should be able to give you an estimate.)
4. Don’t … put down a nominal down payment.
Even with lenders
tightening requirements to qualify for a mortgage, it’s still possible to buy a
house with as little as 3% down. That’s not necessarily a bad thing, but it
does mean that you’ll have very little equity in your home when you first move
into it. So if something comes up, and you have to sell, you’ll end up owing
more than you can get out of the sale once you factor in closing costs. It puts
you in a precarious position. Even if that doesn’t happen, you’ll have to pay private mortgage insurance (PMI)
every month until your equity in the home exceeds the 20% mark—and that could
take years. (If you can’t put 20% down, your loan is technically considered
risky—PMI is insurance that protects the bank if you default on your mortgage.)
What to do: Consider whether it’s
prudent to buy a home now if you’re nowhere near having a 20% down payment.
Yes, interest rates are low, but if you have to borrow thousands more because
you don’t really have a great nest egg, it may be a wash in the end. You could avoid
years of PMI, and owe a lower monthly nut, if you spend a year or two saving
aggressively toward a down payment.
RELATED: I Want to Get a
Mortgage Checklist
5. Don’t … neglect to get everything in
writing.
You
wouldn’t be the first home buyer to assume that the kitchen appliances come
with the deal—only to discover an appliance-free kitchen on the final
walk-through. “I’ve heard of buyers going ten rounds because the seller took
the drapes down, and the buyer expected them to be left,” Derrick says. “I’ve
seen all kinds of deals blow up over stuff like that.” Common points of
contention: window treatments, hot tubs, light fixtures, shower and bath
fixtures, ceiling fans and big appliances, such as washers and dryers.
Replacing something you thought was staying could cost hundreds, so it’s not a
small thing.
What to do: Go through your
contract with a fine-toothed comb. If the item that you expected to be there
isn’t, ask about it—and get it added in writing.
6. Don’t … skip the inspection.
Even
if the home looks like it’s in winning shape, it would be foolish to skip a
thorough once-over by a professional. “People tend to think that the inspection
and the appraisal are the same thing,” Derrick says. “They’re not.” An
inspector is there to spot the things you don’t know to look for, like if the
chimney is in great shape or whether those little cracks in the foundation are
a big deal. He’ll look for signs of water damage and check the insulation in
the attic. If there are conditions that will need repair, you may be able to
negotiate with the seller to drop the price. In other words, the inspection is
worth every penny.
What to do: Get recommendations
from your realtor or friends who’ve bought in the area, and have a professional
inspection done before you close on the house.
7. Don’t … think a brand-new home entitles you
to brand-new everything.
“A
lot of people buy this nice house, and then look at the ratty car sitting in
the driveway and think, ‘We better buy a new car,’” Derrick says. Or you
suddenly have a formal living room but no formal living room furniture—so you
buy some! It’s a mistake to feel like you suddenly have to upgrade all of your
stuff to match the shiny new home. “You don’t want to get yourself into a pile
of credit card debt just so you can keep up with the house,” Derrick says.
What to do: Live in your house for
a while, so you can figure out what you really need. Then save up for it!
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