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Saturday, February 18, 2006

Look out first time homebuyer!

First-time home-buyers face an unfamiliar road and risk purchasing the wrong place at the wrong time. Here's a guide to the potholes.

Buying your first home is an exercise in faith. You don't really know what you're getting into, you're awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.

You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:

A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.

Few states regulate home inspectors closely, so choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don't have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured.

" Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they're still fresh.

Taking advice about what you can afford

Your agent, your broker and your lender don't know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders' losses, not ensure that you'll maintain your financial health.

Lenders know that you'll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs -- including mortgage, property taxes and homeowner's insurance -- to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.

Getting a ‘temporary’ loan

This can be potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.

There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they're substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.

The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it's worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.

More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.

The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you'll be in the home for a decade or more, or aren't sure how long you'll be there, you might want to opt for the security of a 30-year fixed-rate loan and lock inng in your housing costs for the next 30 years.

If interest rates go up, your payment stays the same, and if they go down, you can refinance.

Before you decide on a mortgage, spend some time with one of our mortgage specialists at Home Financing Center and educate yourself about the options.

Opening or closing credit accounts Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together.

Failing to investigate the neighborhood

One common mistake is not looking at the property and the neighborhood at various times during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends.

This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.

Something which you construe as a problem might only happen one day a week or at a certain time of the day.

Quiz a few neighbors about what they like and don't like, and about which direction the neighborhood seems to be going.

Find out if there are any 'crazies' on the block. If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over ... zoned commercial? Do you want a McDonald’s as a neighbor?

Buying when you're not ready

Buying a home is a great way for the average person to build wealth over the long run, but it's not for everyone in all circumstances.

If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you're planning to move in a year or two.

And if the primary reason you're buying a home is for the tax break, or because real estate is a better investment than the stock market, or because you're tired of "throwing away money on rent," you might want to first read "3 worst reasons for buying a home."

Not buying when you are ready

All that said, you shouldn't let fear or uncertainty keedon't put off a purchase if you're able to stay put for several years -- long enough to ride out any downswings.

In five or 10 years, prices will be higher than they are today putting you on the sidelines if you're otherwise ready to buy a home.


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