Buying a home? Don’t make these 5 mistakes

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Make sure you have a home inspector take a close look at a property you intend to purchase.
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Q. I’m thinking of an adjustable rate mortgage because the payments are more affordable, but I know interest rates are going up. How can I decide what’s the smartest choice?

A. That question would be a lot easier if we knew the future of interest rates. But the Brain doesn’t have a crystal ball, so the best we can do is model a few scenarios.

You should consider the cost of the mortgage if there are no interest rate hikes, then run the numbers to see what a modest rate increase and a larger rate increase would do to your payments, says Sheri Iannetta Cupo, a certified financial planner with SageBroadview Financial Planning in Morristown.

“All scenarios should be based on the features of each ARM (adjustable rate mortgage) you are quoted,” she says. “Then compare each scenario to a fixed rate mortgage.”

Cupo says you should use online calculators, such as the one on the Mortgage Professor, mtgprofessor.com, to help in the comparison.

Armed with this data, you should be able to determine if uncertain future mortgage payments are a risk worth taking. We are still in a period of historically low interest rates so locking in a low predictable rate might not be a bad choice even if the ARM is lower than the fixed-rate loan.

“Many people feel they will only be in their homes for a few years, so they opt to go with an ARM,” Cupo says. “We have seen a number of times where circumstances change and people end up staying in their homes longer than planned.”

Be sure you can cover potentially higher mortgage payments if this should happen to you.

— K.P.M.

A HOME IS the most significant purchase that most of us will ever undertake, but if you don’t do your homework, you could make some big mistakes.

“Raising a family in a familiar place can be a lot of fun and a source of pride,” says Bill Connington, of Connington Wealth Management in Paramus. “However, there are pitfalls to home ownership, or what some people refer to as ‘The Money Pit.’ ”

Don’t make these five big mistakes when you shop for “home sweet home.”

1 | Buying too much house

Many new buyers forget that, in addition to the home price, there are other costs. You should consider homeowner’s insurance, property taxes, utility bills, home improvements, flood insurance and the cost for new furniture, says Connington.

He recommends analyzing your current cash flow after taxes, debts and other outlays, then add the potential costs of this new home.

“Run the numbers and take into consideration increases in not only your income, but also the cost of housing expenses and see where that leaves you with discretionary income,” he says. “You still have other obligations, such as saving for retirement and educating children.”
If the costs are too high, re-evaluate how much house you can afford. “Make sure that you can (attain) all the other goals you have. Don’t buy too much house for image or status,” he says.

2 | Getting the wrong mortgage

The right mortgage depends, in part, on how long you plan to stay in the home.

If you’re planning to remain in a new home to raise a family, the traditional thinking is a 30-year fixed loan, says Andrew Wang, senior vice president of Runnymede Capital Management in Mendham.

Conversely, if you estimate you will move in 10 years or less, an adjustable-rate mortgage (ARM) may be better.

“Today, mortgage rates remain near record lows, but many, including the National Association of Realtors, expect rates to rise in 2016,” Wang says. “Although I do not think the Federal Reserve will be raising the federal funds rate as quickly as originally stated, buyers of adjustable-rate mortgages may want to consider a fixed-rate mortgage, or at least (contemplate) the impact of higher future rates when considering different loan types.”

If you do end up with an ARM, know that your monthly payment could move higher quickly. Also remember that with any mortgage, you can expect additional costs to process the loan, including an appraisal and a credit report.

But for some fees, there is room to negotiate, Connington says. “Sometimes, you can get the mortgage broker to waive the application fee or the processing fee. Both fees can cost anywhere from $200 to $500,” he says.

And don’t forget that you will have to pay private mortgage insurance (PMI) if you put down less than 20 percent.

3 | Not hiring an attorney

Most real estate transactions go smoothly, so buyers may feel like the legal work is boilerplate, Wang says.

But not working with an attorney means you’re taking a gamble.

“When things go smoothly, you gain an extra set of eyes to review the contract and the amount of time the attorney spends is minimal,” Wang says. “When things go wrong or are more complicated, an attorney can add significant value when handling the legal issues.”

4 | Not considering property taxes

Be aware of property tax trends in the town where you’re buying.

“Are there mostly residential, or a good amount of commercial properties in town? This will play into the increase in property taxes,” Connington says. “Is it a growing community, meaning new homes being built, young families moving in? This will also have an effect on property taxes, based on how many children need to be educated.”

Wang recommends you contact the local assessor’s office to identify the possibility for a rate hike or reassessment, which will help you budget for any unanticipated tax increases.

“Also be mindful that remodeling a home — for example, adding a bathroom or installing central heating and A/C — can also trigger a reassessment, resulting in higher annual property taxes,” Wang says.

5 | Not getting an inspection

Make sure you have a home inspector take a close look at the property you intend to purchase.

You will need to do a little homework to find someone with the proper qualifications. Requirements are different for each state. So, if you’re moving out of New Jersey, be sure to read up on what’s mandatory in other states.

Learn more through these industry groups:

* American Society of Home Inspectors (homeinspector.org)
* National Association of Home Inspectors (nahi.org)
* National Institute of Building Inspectors (nibi.com)

If your real estate agent tells you to use his favorite inspector, be wary and consider additional names.

Contact the state’s Home Inspector Advisory Committee (njconsumeraffairs.gov; click on “home inspection” under Boards & Committees) to make sure the inspector is in good standing. Also check the Better Business Bureau (bbb.org) and do a simple Google search to see what comes up.

Karin Price Mueller, the founder of NJMoneyHelp.com, writes the Bamboozled consumer affairs column for The Star-Ledger, and the Money and Biz Brain columns for Inside Jersey. Send your money questions to her at Bamboozled@njadvancemedia.com.

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