It’s a well-known joke that basically every real estate agent will always tell you that now is a great time to buy a house. Apparently there’s literally never a bad time. However, with mortgage rates currently at truly historic lows, those realtors may be right. Even ballooning housing prices don’t seem to affect affordability much. You only have to look at recent housing activity to see what others think. The market is on fire lately, in most parts of the country. It’s now the norm to see multiple bids (over the asking price) on any reasonably priced home. If you’re in a position to buy, you could do much worse than taking the plunge now.
However, if this is your first home purchase, there’s a good chance you could use some guidance. Home buying is a big process, involving a lot of paperwork and plenty of pitfalls. Here are five of the biggest home buying mistakes that newbies often make.
Shopping Without a Pre-Approval
Many first-time home buyers just want to get out there and start looking for a house. However, it’s important to get a mortgage pre-approval letter from a lender first. A pre-approval lets others know that you are serious. It’s proof that you already have the backing of a bank. The letter also gives you an idea of how much house you can afford. The last thing you want is to fall in love with a home and then find out that you can’t afford the mortgage required to make a bid.
Without a mortgage pre-approved, most sellers won’t even give you the time of day. Some really high-end homes won’t even let you view the place unless you can send them proof that you can afford it. For more reasonably priced homes, many experienced real estate agents will ask you to get pre-approved — or at the very least, pre-qualified — with a mortgage lender before they’ll take you shopping.
Figure out what you can afford first. Then get a custom letter from the lender, detailing what you plan to spend.
Fixating on a 30-year Fixed Rate Mortgage
When I bought my first home years ago, I got a 30-year fixed rate mortgage. I didn’t really know about the other options. I simply got the contact of a mortgage broker from my realtor, and he automatically tried to apply for a the 30-year mortgage for me. However, there were other options that would’ve made more sense for me financially at the time.
If you know you will be in the house for a while, consider a shorter (15-year) loan. You can also consider adjustable-rate mortgages (ARM). These are hybrid mortgages that allow you to lock in a rate for the first five years, and then the rate is adjustable once a year after that. These so-called 5/1 ARMs can be great for first time home buyers. You’ll get a lower rate during those five years, in exchange for a fluctuating rate afterwards.
Some Advantages to Think About
According to the National Association of Realtors, younger or first-time home buyers tend to sell and move much sooner than older, repeat buyers. Most people apply for a 30-year mortgage but only get five or seven years out of it.
Really look at your timeline. Consider all of your options. If you decide to go with a 5/1 ARM, make sure you’re aware of the risks involved. Some good advice is to look for a loan that caps the rate increases. It’s possible to find mortgages that won’t raise the rate more than 0.5 percent each year once the variable starts. A loan with a cap on the rate increases will prevent you from seeing a huge change in your payment, even with changes in the interest rate.
Unlike the average person who stayed in the same house for roughly five to seven years, I stayed in my first home for ten years. Still, I would have benefited from an 5/1 ARM. I could have reaped the rewards of the lowest initial interest rate for the first five years. I also refinanced a few years after I bought the house, which would have reset my initial interest rate lock. Plus interest rates kept going down. Even if I never refinanced, the variable interest rate would just have kept adjusting down every year.
Other Mortgage Options
A 5/1 ARM wasn’t the only ARM available to me either. There are 10/1 ARM and 7/1 ARMs too. The first number indicates how long the initial “locked” period is and the second number is how often the rates change. In the case of a 10/1, I could’ve gotten a mortgage that had a guaranteed fixed rate for the first ten years that then adjusts once a year after ten years.
There are more options still. PenFed, for example, has a 5/5 ARM that only adjusts the rate once every five years. For some, not having their rates continually change all the time can give them a bit more peace of mind. Any one of those hybrid mortgage options would have worked out for me better financially. Unfortunately, I didn’t know they existed. You should explore all of your options when applying for any mortgage, to ensure you’re getting the best deal possible.
Hire the Right (or Wrong) Real Estate Agent
Most real estate professionals just want to close your deal smoothly and quickly so they can move onto the next transaction. As a first-time homebuyer, you really need someone who is more patient. You’ll want them to guide you through the whole process. Like I mentioned, my realtor just sent me the contact of a mortgage broker and let me figure it out myself. Don’t you want someone who can give you some more guidance than that?
Like any other product or service, it pays to shop around for a real estate agent. Find someone with a style that fits your own. If you meet with anyone who seems like they are ignoring your wants or pushing their own agenda, don’t feel bad bailing on them entirely. One of the best ways to find a reliable real estate agent is to ask more experienced friends or family members if they have any recommendations.
Mortgage Insurance May Need to Be Paid
Not every first-time home buyer knows that they will probably need to pay mortgage insurance. It’s required if you can’t come up with at least a 20% down payment. And let’s be honest, that’s harder than it’s ever been right now, with skyrocketing housing prices and mostt flat wages.
However, the consequences of not knowing this beforehand can be huge. Mortgage insurance can be 1-to-2% of the whole mortgage cost. We are talking about a difference of thousands of dollars here for a typical mortgage. Obviously it’s much more ideal to find a way to meet that 20% requirement. However, if it’s simply not possible for you, make sure you budget in mortgage insurance costs to your home buying expenses.
Avoid the Temptation to Raid Your Emergency Funds
You really ought to do your best to keep your emergency fund intact when you buy a home. This is true even if you have to pay for mortgage insurance. Many first-time home buyers use all of their savings when they close the deal. After all, buying a house is an expensive process. There’s the down payment, legal fees, real estate fees, etc, etc.
However, there’s a reason you setup the emergency fund. And emergencies will happen. I bought a new home last year. The deal had been closed for literally a week and a half before the world’s economy was shut down due to the pandemic. I was lucky that my emergency fund was solid enough for me to pull through the storm. Now the world seems to be much more optimistic about the future and I’m going to be just fine. Things might’ve been very different for our family, though, if I raided the emergency fund to fund the home purchase.
The Bottom Line
For most people, buying a house will be the largest purchase of their entire life. It can be a decades-long commitment, depending on the length of your mortgage. The whole process can be complicated — especially for inexperienced buyers. There are multiple mortgage options to think about, real estate agents to choose from, and a seemingly endless list of financial questions that you’ll have to answer.
The last thing you want is your new home to turn into a money pit. To avoid this, do your homework ahead of time. Shop around and gain pre-approval for a mortgage. Find yourself a trustworthy real estate agent to help guide you through the process. Don’t forget about the extra expenses of owning your own home, so keep that emergency fund topped up. If you can keep making smart financial decisions, your new home will be a place of immense pride — as opposed to causing you constant stress.
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