How To Purchase a First Home?

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When you narrow your focus, you are better equipped on finding yourself the best possible deal. When buying a home, you can use this strategy by focusing on a specific neighborhood.

If you’re new to a city, it’s wise to take some time to know what area you want to live in. Once you’ve done this, you can narrow your focus to a specific area. This has several benefits. First, you become an expert quickly. You become more aware of trends that affect the area. You also have a good understanding of what type of home you like. You also know approximately how much each house is worth. When you establish a degree of familiarity, you are better able to make an informed decision.

A home in a good location will always be worth more than a home in a mediocre area. This isn’t solely dependent on the neighborhood. It also depends on the street and the property that surrounds it. Generally, you should trust your intuition when selecting a location. If a property is available for an attractive price, but it doesn’t feel right, you should pass on it. Even if it’s available for a great price, it’s probably not something you would be happy with. This is why narrowing your criteria is critical. It can save you from making a mistake and settling for less than what you originally wanted.

As mentioned earlier, specific streets and lots do matter. Very few people like being on a busy street. In addition, it’s preferable to have trees and good landscaping. This is especially important in a desert environment.

Zoning is another important element of finding the right location. It can make a huge difference in the future of that location and neighborhood. School zoning is another factor that can add or subtract value from a location. Be sure to do your homework by researching the reputation of the schools your neighborhood is zoned for. These are all factors that matter and will make an enormous difference in the long run. If you have strict criteria and never bend on your requirements, you will find a home that you’ll be happy with.

Think Twice Before Making Extra Principal Payments

Many homeowners are in a rush to pay off their home loans. This is not always a wise decision. First, you lose liquidity and put your home equity at a higher risk. This is especially the case if you have little cash set aside and if you have few liquid investments. You should always strive to have at least six months of savings set aside.

Consider the following two situations. The first is a homeowner who routinely pays extra on her mortgage with the intent of the home being paid off early. Yes, it is true that if you pay a little extra each month, you will pay the home off substantially faster. Now, the second homeowner only makes the minimum payment each month.

Let’s imagine that a few years go by and both homeowners lose their jobs. And can no longer make their mortgage payments. Who is better off? The first homeowner has more equity than the second owner. However, the real estate market is slow and she may not be able to sell the home before it goes into foreclosure. And, yes, the second owner is in the same situation.

That being said, the second homeowner, who had been just making the minimum payment, has more options. She knows that the bank has little incentive to foreclose on the property. This is because the mortgage balance is high. That is, the bank isn’t in a position to gain hardly anything by foreclosing. The firs homeowner is a better target for the bank because they can sell the property and recover their losses.

Let’s also pretend that the second homeowner either saved or invested the money in which she was considering paying extra on the mortgage. She now has multiple options. She can keep current on her mortgage from these savings. This is the case whether she kept the money in a savings account or invested the money in liquid investments like stocks. Or, if she stops making the payments, the bank would be in no rush to foreclose.

Banks are incentivized to foreclose on properties with low loan balances first. This is because they can recover their losses easily. A home that is underwater or has a high balance will cause the lender to incur a loss, which is why lenders are seldom in a rush to foreclose on an underwater home. This is especially the case in a weak market because it would only add to the inventory of homes for sale, which is one more thing driving down prices.

Real Estate Prices Finally Leveling Off

Markets correct themselves over time. After periods in which too much supply was dumped on the market, depressed prices lead to an increase in demand. This has been reflected from the fact that foreign buyers are buying properties with cash in the most distressed markets. And population growth has help absorb the excess inventory. Real estate is now in line with historical prices in many localities. This will help create a bottom in the market going forward.

In most US markets, the excess inventory has slowly been getting soaked up over the last five years. If you were a homeowner during this span, you realize how painful it has been. On a more positive note, buying a home is very affordable. In the most distressed areas, it’s considerably cheaper than renting. This situation usually only occurs in distressed markets and the opportunity will not last forever.

This good news does not imply that housing will immediately rebound and prices will start going up. They likely will go up in price over a long period of time. And real estate is a good long term inflation hedge. However, we are still in a period of deleveraging. This means that many consumers have too much debt and are slowly paying it down. This will be a drag on our economy for a while yet. Deleveraging is a process that takes years to complete. Deleveraging is the main reason why it takes such a long time to recover from a major financial crisis.

The one thing that can speed up the deleveraging process is liquidation. Bankruptcies and foreclosures can clean up a person’s balance sheet quickly. Obviously, there is a huge drawback to this. If too many people liquidate at the same time, bankers and creditors will also suffer and perhaps go bankrupt. This creates a downward spiral and leads to financial crises and panics. Although liquidation gets us through the debt problems more quickly, the pain is much sharper.

Record low interest rates make buying a home a great bargain for new homeowners. This is a big part of why buying is so much cheaper than renting in many markets. Low interest rates aren’t likely to last forever. They could be around for a while as it’s impossible to predict when they will rise. The Federal Reserve has announced that they will keep interest rates low through 2014. When inflation inevitably rises, they will have no choice but to raise them. Inflation will likely rise once we get to the end of the deleveraging cycle.

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