It used to be that buying a home was the most solid investment a person could make. Not so anymore. Buyers today have more trepidation than ever. But there are things you can do to minimize the risk of purchasing a home:
1) Get a mortgage loan with a fixed interest rate
Statistics show that adjustable rate mortgages (ARMs) are increasingly popular because of their low initial rates. Terms on ARMs are also more lenient today with lower lifetime interest rate caps for example. However, ARMs are not as stable and thus, less comforting – to newer home buyers especially. The rate may be higher initially but you know it’s never going to change. With ARMs the rate can change after a specified period, sometimes significantly. The market is sure to turn around and when it does, ARM loans will prove to have been a higher risk investment than fixed rate loans and rates will surely increase dramatically. Not to mention that with a fixed rate loan, you know what you will pay for the life of the loan, which is a guarantee an ARM loan cannot promise.
2) Have a plan
As I’ve mentioned on some other posts, when buying a home today, it’s wise to consider where you’ll be 10 years from now. In this market, you should avoid buying something you’ll grow out of in 5-10 years, or that you can’t afford if there is a substantial life change such as a loss of employment. The volatility is still around folks and probably will be for some time so you won’t want to try to sell your home in such a market. Try to buy at an affordable price and look at homes that you know will sustain you for at least 5-10 years. Consider your location as well. The harder hit the area in the recession, the longer it will take to recover.
3) Pay attention to the home inspection
A home inspection will be done before the purchase of your home is final. Not only should you know what is on this report, you should know how much it’s going to cost and who is going to be responsible for that cost. There are some items that sellers may be required to pay for, so find out what those are and make sure they are addressed before closing. Inspectors generally look at structural elements such as roofs and foundations, plumbing, electrical items, and major appliances. You can inquire with your agent for more information. There is typically an objection period before the closing where you can address items that are unsatisfactory (require repair). You can also request more specialized inspections. Just as with home warranties, you can reduce risk by being aware of and understanding the home inspection and by possibly paying for other inspections up front. Be sure to communicate with your agent to find out what the home inspection contained and what you will or will not be responsible for.
4) Ask about the HOA
Find out if there is a homeowner’s association (in Arizona there almost always is), and become familiar with their guidelines. Think about how this may affect you in the long run and possibly even make you want to move out. I’ve had some interesting experiences with HOAs. One that did not like the breed of dog we owned and tried to make us get rid of him. One that after 7 years of on-time payments and not one request, refused to remove trees on common land that had become overgrown and shed into our pool! These kind of things can actually make you second guess your purchase. And as mentioned earlier, this is not a market you want to second guess in. You could lose a lot of money by doing that today.
5) Get a home warranty
Buying a home warranty can alleviate a lot of stresses to homeowners, especially first time buyers, by covering the major parts of the home and appliances alike. This can be paid in escrow for a few hundred dollars on up, depending on coverage, and for the one time fee you can get a year or more of coverage on all major appliances, furnaces, water heaters and more. Then by simply renewing it, you can keep your coverage from year to year. There are a plethora of home warranty companies in the valley such as Fidelity Home Warranty. You can inquire with your real estate agent or check with a home warranty company directly for more information. For a relatively inexpensive cost in closing you may buy a lot of piece of mind down the road. In some cases, the seller may even agree to pay for the warranty. Talk with your agent to see what you can negotiate.
It’s always important to be aware of these things when you’re buying a home and even more so if you want to minimize your risk. Communicate with your agent about your concerns and the resources that are available to help you avoid risk and have some peace of mind when you make what is sure to be one of the most important purchases of your lifetime.