Shopping for and buying a home can be a long, confusing process—even for someone who has done it before. Many first-time buyers often feel lost at some point during the process and if they don’t have an expert they can trust with questions, they’re at risk of making decisions that end up costing them more money than needed or disrupting their budget.
The mistake: Using the same agent as the seller
How to avoid it: You may have heard that you can save money by using one real estate agent for the transaction. However, there is value in having a real estate agent representing ONLY your interests. Be sure to “interview” several realtors and discuss not only their experience, but your budget, needs and life goals. Even if you already have a realtor, don’t hesitate to switch if you’re not feeling heard.
The mistake: Paying points without considering how long you will stay in the home.
How to avoid it: When you pay points on a mortgage, you lower the interest rate on the loan by providing more money up-front. This certainly makes sense if you are planning on staying in the property long-term and will save a large amount of money by paying less interest over that time frame. However, if you plan on moving within a few years or are buying the home with the idea of selling it relatively quickly, it probably doesn’t make much sense to pay points. Ask your lender about the costs involved and do the math for how long you plan to own the home.
The mistake: Using an adjustable-rate mortgage to buy before you are ready.
How to avoid it: One of the reasons for the housing crisis of the late 2000’s and early 2010’s was that homebuyers were being encouraged to buy homes they couldn’t afford using a low initial interest rate that they could theoretically renegotiate as the value of the home increased. The problem came when many of those homes didn’t increase in value. Gambling that you will be able to refinance a mortgage or sell the home before the rate increases is not only risky but puts you in a very stressful position as a homeowner. Fortunately, there are many affordable fixed-rate mortgages with low down payment options and first-time homebuyer loans with competitive rates.
The mistake: Including closing costs in the loan.
How to avoid it: The lender may provide you the option of including the closing costs in the mortgage loan if you are not able to meet this expense at the time of closing. However, financing these costs means paying more since you will have to pay interest on that amount, too. You are likely better off saving up to pay closing costs separately since this will cost you much less in the long run.
The mistake: Being unaware of service contracts for your home.
How to avoid it: Hot water heater broken? Before you shell out the cash to have it fixed, check the paperwork to see if repairs are covered in a service contract included in the loan agreement. At the least, consider asking if there is a home warranty included with the purchase. You don’t want to pay out of pocket for something that is already covered.
The mistake: Thinking a passing home inspection grade means no worries.
How to avoid it: The best home inspectors will give you notes on possible future trouble areas even if they are working fine right now. However, this isn’t always the case. Don’t assume that a home inspector signing off on a property means that there won’t be any major expenses in the near future. Assuming that repair costs will spring up eventually and preparing accordingly is the best practice. Plan to save 1-3% of your home’s value annually for home repairs and build a schedule of regular home maintenance tasks to prevent more costly issues.
The mistake: Not planning for HOA fees.
How to avoid it: With all the costs popping up as you move through the buying process, it can be easy to forget about regular costs in addition to your mortgage, such as a Homeowners Association Fee, which is commonly associated with condos, some vacation properties and certain townhome communities. These fees can rise with an increase in services provided to homeowners or with inflation. Unless you have money to burn, a successful home buying experience is going to involve understanding first what you can afford and then the total monthly cost of the property you are looking at—including potential increases.
The mistake: Failing to plan for potential increases in insurance or property taxes.
How to avoid it: With a fixed-rate mortgage, you might think your mortgage expenses are locked-in. But think of parts of the country hit by natural disasters in the past few years. Many homeowners in these areas have seen dramatic increases in their homeowners’ insurance as a result. Even if the odds of this are low, it’s still wise to have some money set aside in a housing fund to cover increased insurance costs. Another potential increase to consider are your property taxes. If you make improvements to your home, your local government revaluates your community or the government budget increases, your property tax could go up. This is a strong reason to avoid buying a home that hits or exceeds your budget ceiling.
Homebuying can be a complicated process filled with opportunities that can cost you more money now or in the long term. That’s why it’s important to have experts you can trust during the homebuying process and why you should familiarize yourself with the costs of homeownership beyond your mortgage as well. Doing so can help you save money and reduce stress during what should be one of the more exciting milestones in