“Success does not consist in never making mistakes but in never making the same one a second time.” – George Bernard Shaw, playwright
“Yeah, cool, but it’s still better not to make it the first time when buying a home.” - Me
When Forrest Gump said, “Life is like a box of chocolates, you never know what you’re gonna get” he could have added, “especially when trying to buy a home.”
You never know what’s going to be on the other side of that door the first time you enter into a new property. Is the inside a palace or a train wreck? There's only one way to know for sure.
Once you've crossed the threshold, you have to make a quick judgment about whether you want to spend the next several years or more calling it your home.
No pressure there.
Given the circumstances, it’s easy to see how you could make a mistake. This is especially true for your first rodeo. If you’ve never purchased a home, these are some classic mistakes that you are going to want to make sure you avoid.
1. The Mistake: Using the same agent as the seller
The Problem: Let’s pretend you are a young girl named, say, Little Red Riding Hood. Now, you happen to be suing a person named the Big Bad Wolf for the wrongful death of your grandmother, whom he ate.
Would you be comfortable if the Big Bad Wolf were using the same lawyer you were? I think not. Because, you never know if that lawyer is acting in your best interests or in the best interests of your adversary.
After all, it’s pretty tough to argue that the Big Bad Wolf wrongfully ate your grandma and deserves to pay handsomely for it, while also arguing that maybe he’s not so big and bad after all and anyway Grandma happens to be great stir fried with carrots and onions.
Buying a house is pretty much the same situation. Now, the person you’re buying a home from probably won’t eat any people that you know. But, they will try to extract the maximum financial value out of your bank account upon handshake and signed contract.
Using the same real estate agent they are using may save you money on the surface, but chances are, you’re not getting the best deal possible because of the conflict of interest.
Don’t pay more than you need to. Help save Granny. Go find your own agent.
2. The Mistake: Buying points without considering how long you will stay in the home.
The Problem: Buying points on a mortgage means that you get a lower interest rate on your loan. The tradeoff is that you have more out of pocket costs at closing.
This can be a good deal for you if you plan on spending many years in your new home. But if you’re probably going to flip it within a few years, you won’t have enough time to make up for the extra money you spent on points.
And, of course, always remember the first rule of finance: you don’t talk about finance. Wait, that’s a different club.
The first rule of finance is: money now is worth more than money later – because it has more time to compound its interest earnings.
So make sure you figure out what time frame you’re working with and then pick the appropriate strategy for buying points.
3. The Mistake: Choosing an Interest Rate Type That's Not Right For You
The Problem: Mortgages, like a distressed pair of jeans or a combo meal from your local sandwhich joint, are not one-size-fits-all. That's why they come with different types of interest rates. You may know that the two main kinds of mortgages are Fixed-Rate mortgages and Adjustable-Rate mortgages (ARMs).
If you take a Fixed-rate loan, you lock in your interest rate and are protected in the case that interest rates climb, as they well might, during the life of your loan. That's significant peace of mind. On the other hand, it's possible for mortgage rates to go down, and that's when a Fixed-rate loan puts you at a disadvantage, because you could have been paying the lower rate instead.
The nice thing about ARMs is that when interest rates are lowered, the interest rate on your loan will decrease with it. You aren't locked into the original rate. Other advantages of an ARM include their low initial payments as well as increase the amount that a person can borrow. However, you should keep in mind that with an ARM, the interest rate will increase with hikes in the prime rate. Your monthly payment will also be less stable than with a fixed rate loan since the ARM varies with the general interest rates.
To hammer the point one more time, there's no right answer or wrong answer that always applies about which loan is going to be the better deal. So take into account all of the information you have about your own personal finances and about the broader economy so that you can make the best possible decision for you.
4. The Mistake: Including closing costs in the loan.
The Problem: 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 significantly more because now you will have to pay interest on the closing costs, too.
You are better off saving up for closing costs ahead of time since this will cost you much less in the long-run. So, remember when I said don’t rush into buying a new house a few paragraphs back? Yeah, I’m going to stay it now, again.
Don’t rush into buying a house. Save up for your closing costs, just as you’ve been saving up for the down payment. It’s just not worth the money spent in the long run to finance these.
Get your finances in great shape. Save up the money you need up front. Then, when it comes time to take out a mortgage, the interest accrued won’t be an arm and a leg more than it should be.
Wait! Will you make any of the rest of the Eight Mistakes That First Time Home Buyers Make? Will you spend much more than you need to on your next home?
Stay tuned for next week's second and final edition of this post. Same Bat Time. Same Bat Channel.
In the meantime, I invite you to check out our guide The Road to Home Ownership, which you can download by clicking below. I think you'll find it helpful.
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