Buying a home is a very emotional process, but if you allow those emotions to get the best of you, you may fall prey to a number of common home buyer mistakes. Since buying a home has many far-reaching implications — ranging from where you will live to how hard it will be to make ends meet — it's important to keep your emotions in check and make the most rational decision possible.
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There are eight common emotional mistakes that people make when buying a home. Avoiding these pitfalls will help you find the best home-sweet-home. (To learn more about how your emotions can cause financial distress, see When Fear And Greed Take Over and Master Your Trading Mindtraps.)
Once you've fallen in love with a particular home, it's hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered — the lovely, tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances. However, if you can't or won't be able to afford that house, you're just hurting yourself by imagining yourself in it. To avoid the temptation to get in over your head financially, or the disappointment of feeling like you're settling for less than you deserve, it's best to only look at homes in your price range.
Start your search at the low end of your price range — if what you find there satisfies you, there's no need to go higher. Remember, when you buy another $10,000 worth of house, you're not just paying an extra $10,000 — you're paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of your loan. You may be better off putting that money toward another purpose. (For further reading, check out Buying a House in a Down Market.)
Unless you are a high-end buyer looking at custom homes, chances are that for any home you find that you like, there are quite a few others that are nearly identical to it. Most neighborhoods have multiple homes that are the same model. Further, most neighborhoods are full of homes that were all constructed by the same builder, so even if you can't find an identical model for sale, you can probably find a house with many of the same features. If you're considering a condo or townhouse, the odds are also in your favor.
Even when you have a long list of must-haves, there are probably several homes out there that can meet your needs. If there are snags with the home you've decided you like - such as major repair issues, an inflexible asking price or a difficult possession date - consider moving on. Being open to keep looking will save you from making rash decisions you might regret later.
When you've been looking for a while, and you do not see anything you like — or worse, you're getting outbid on the houses you do want - it's easy to get desperate to get into your new house now. However, if you move into a house you'll end up hating, the transaction costs to get rid of it will be costly. You'll have to pay an agent's commission (up to 5-6% of the sale price), and you'll have to pay closing costs for the mortgage on your new house. You'll also deal with the hassle and expense of moving yet again. If you decide not to move but to try to make the best of what you have, remember that alterations and renovations are expensive, time-consuming and stressful. If you have time on your side, it's OK to wait until something that suits you comes along - as long as your demands are realistic for your budget, you are bound to find something you live with.(To learn more, check out McMansion: A Closer Look at the Big House Trend.)
For any of the three reasons we just discussed, you might be tempted to ignore major problems with the house that will be difficult, expensive or impossible to change. Carefully consider your options before you make a commitment, and consider waiting until something better comes along. New houses come on the market every day.
Don't buy a fixer-upper that's more than you can handle in terms of time, money or ability. For example, if you think you can do the work yourself then realize you can't once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in the labor - and that may not be in your budget. Not to mention the costs involved to fix anything you may have started and the fees to replace the materials you wasted. Honestly evaluate your abilities, your budget and how soon you need to move before purchasing a property that isn't move-in ready. (For related reading, check out Your Car: Fixer-Upper or Scrap Metal?)
In a hot market, it may be necessary to pull the trigger very quickly if you find a home you like. However, you have to balance the need to make a quick decision with the need to make sure the home will be right for you. Don't neglect important steps like making sure the neighborhood feels safe at night as well as during the day and investigating possible noise issues like a nearby train. Ideally, you'll be able to take at least a night to sleep on the decision. How well you sleep that night and how you feel about the home in the morning will tell you a lot about whether the decision you're about to make is the right one. Taking the time to consider the decision also gives you a chance to research how much the property is really worth and offer an appropriate price.
It's a tough balancing act to make sure you make a careful decision, but don't take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences. Let's say you are self-employed. Perhaps for you more than anyone else, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the home buying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage. If you don't pull the trigger quickly, someone else might, and you'll have to keep looking. Don't underestimate how time-consuming and routine-disrupting house shopping can be. (A small business can increase your disposable income. To learn how to set one up, see How To Make A Million In Your Small Business and Starting A Small Business In Tough Economic Times.)
If there's a lot of competition in your market and you find a place you really like, it's all too easy to get sucked into a bidding war - or to try to preempt a bidding war by offering a high price in the first place. There are a couple of potential problems with this. First, if the house doesn't appraise at or above the amount of your offer, the bank won't give you the loan unless the seller reduces the price or you pay cash for the difference. If this happens, the shortfall on your bid as opposed to your mortgage will have to be paid out of pocket. Second, when you go to sell the house, if market conditions are similar to or worse than they were when you purchased, you may find yourself upside down on the mortgage and unable to sell. Make sure the purchase price for the home you buy is reasonable for both the house and the location by examining comparable sales and getting your agent's opinion before making an offer. (For further reading, check out Do You Need a Real Estate Agent?)
It's natural for emotion to come into play in the home-buying process. Buying a house is a big decision, but this is exactly why you need to ensure you are making rational choices, rather than getting wrapped up in the notion of a dream home. In addition to the above-mentioned steps, once you've secured the right home, don't just go with the first lender you talk to, do your research on mortgages using a calculator.
In short, when it comes to buying a new home slow down, overcome your emotions and, ultimately, make a home-purchase decision that's good for both your feelings and your finances.