The 14 Costliest Home-Buying Mistakes
Buying a new home is as exciting as it is nerve-racking; you long for your dream home where you'll grow your family, but you don't want to make any costly mistakes along the way. Here are the top ones to avoid.
Trying to time the housing market
It’s foolish to try to time the stock market and the same goes for the housing market. Home prices may seem high now, but in a couple of years you may look back on them and think how cheap things were. “There will never be an ideal time to buy a home and trying to time it can leave you missing out,” says Adam Beaty, a certified financial planner with Bullogic Wealth Management. If you can find a home in your price range that you are happy with then move on it. If you cannot, then wait until prices come down or you save up more money. That said, the historically low interest rates on mortgages of the past several years have recently been ticking upward and are likely to continue doing so. Find out 16 other things that are about to get way more expensive.
Hiring the wrong real estate agent
Many people in America spend more time researching dinner reservations than they do researching real estate agents. “In fact, most home buyers work with the first agent that they meet, who is typically referred to them by a friend. Just because your friend bought a home with that agent doesn’t mean they are good at what they do,” says Thomas Kutzman, co-founder of Prevu, a real estate brokerage.
Waiting to get a mortgage pre-approval
When you finally find the right home for you and your family, you want to be ready to make an offer. If you aren’t already pre-approved, a seller may accept an offer from a buyer who is, while you’re still busy getting your paperwork together. Pre-approval also shows that you are a serious buyer and helps you better understand how much house you can afford and what your monthly payment may be. “It’s highly encouraged to get a pre-approval prior to starting your home search,” says Kutzman. One caveat: Most mortgage pre-approvals have an expiration date of a few months, so don’t go through the process too early.
Not having the best credit score possible
One of the biggest mistakes people make when buying a home is not improving their credit score first. Although most home buyers are aware that they will need to have a good credit score to secure a home loan, many may not realize just how much impact increasing their credit score will have on their monthly repayments.
“It can often be worthwhile delaying your home purchase even by a few months while you work on improving your credit rating as it can save you thousands in the long run,” says Steven Millstein, founder of CreditRepairExpert. “It’s also important to note that lenders will recheck your credit score just before closing so don’t get too carried away with buying new furniture on a credit card for your new home before you have the keys in hand.”
Not considering the full cost of home ownership
Many want-to-be homeowners only factor their potential monthly mortgage payment into their budget, without considering the extra costs of owning a home, of which there are many. Unlike when you’re renting, when you own a home, you are responsible for paying for property taxes, electricity, oil or gas, water, yard work, snow removal, the cost of maintenance and repairs, any homeowner association fees, and more, depending on where you live. Potential buyers should build a monthly budget using estimated costs for these items to figure out what they can truly afford. “This is also a good time to make sure your emergency fund is in order,” says Beaty. These are the 16 things smart homeowners do once a year.
Using an ARM Loan
Adjustable rate mortgages (ARM) were all the rage before the financial crash of 2008. “They are rarely used these days, but still exist,” says Beaty. “It is always best to stick with a fixed rate and a 15 or 30-year loan,” says Beaty. While the lower initial interest rate of an ARM mortgage is alluring, it can, and will, go up unpredictably. “With a fixed rate mortgage, the interest rate will be higher in the beginning, but it will be easier to plan and budget for because the rate stays the same over the course of the loan,” says Beaty. These are the 26 real estate terms you must know before buying a house.
Not putting a large enough down payment
Rushing into buying a home before having a 20 percent down payment in cash will cost you more in the long run on two fronts. The first is a higher interest rate, which equates into a higher monthly payment for the life of your mortgage, says Dustyn Ferguson, personal financial blogger for Dime Will Tell.
The second factor to consider when you put down less than a 20 percent down payment is that your lender may require you to have private mortgage insurance (PMI). This insurance offers you virtually zero benefits and is only there to cover your lender in case you stop making payments and default on your loan. “PMI doesn’t help build any equity in your home and can cost you anywhere from around $40 to $80 a month, per $100,000 of your loan. This is a big expense that will cost you thousands of dollars more per year,” says Ferguson. The bottom line? Wait until you have at least 20 percent to put towards the down payment so you can get the best interest rate possible and avoid PMI.
Skipping a home inspection
While most homebuyers choose to have their prospective home inspected, some buyers waive it to save on costs. However, while this may save you $1,000 or so in the short term, it could cost you thousands more in the long term. Says Kutzman, “The findings of a licensed home inspector can help you avoid major problems, such as a faulty septic tank or hot water heater that needs replacing, that could really cost you down the line.” Find out the 39 secrets home inspectors won’t tell you.
Forgetting to ask about the benefit of a commission rebate
The concept of a commission rebate is a newer one and traditional real estate brokers don’t talk about it. “Homebuyers can save thousands by receiving a commission rebate from their agent and these rebates are currently legal in 40 states,” says Kutzman. Ask your agent in advance if they will offer you a commission rebate if it is legal in your state. Find out 22 things your real estate agent isn’t telling you.
Rushing into a decision
In some real estate markets, homes can sell very quickly, but that doesn’t mean you should feel pressured into making an offer on a home you’re not certain about. “A home is not something you can easily return,” says Kutzman. And you may regret an impulsive home purchase later. Here, 13 first-time home buyers share their biggest remorse.
Being afraid to ask questions
Sometimes homebuyers are shy about asking simple questions during the home-buying process because they are afraid of sounding stupid. But this is such an important decision, you need to ask as many questions as you want; after all your agent is being paid to help you find the right home t the best price. These are 15 questions everyone should ask before buying their first home.
Only checking with one bank or online mortgage lender
When you are financing a large sum over 15 to 30 years, half a percentage point on your interest rate makes a big difference. “Check with local credit unions, as they tend to offer some of the best consumer rates, since they don’t play by the same rules as bigger box banks do,” says Ryan Fisher, president, White Coat Wealth Management. He also recommends online mortgage companies like Rocket Mortgage by Quicken Loans.
Not researching closing costs
You will need more than just a down payment in cash to buy a home. Many homebuyers, particularly first-time homebuyers, are surprised when they learn about the additional closing costs they will have to pay before signing on the dotted line. Depending on where you live, you could be responsible for mortgage fees, title insurance fees, state and local transfer taxes, and more. Follow our 10-step plan and you’ll be ready to buy your first home in five years.