Owning property is a great experience for millions of people across the United States. While homeownership has decreased in the past 20 years, approximately 2.9 million people still buy homes each year in the United States*. Since buying or selling a home is one of the largest financial transactions that most adults experience in their lives, it’s important to be aware of the risks associated with real estate transactions. The following guide provides effective tips and tricks for navigating the pitfalls of buying or selling a home.
Understanding the Market
When buying a home with a mortgage, it’s important to understand all the financial ramifications associated with a six-figure loan. Since the price of a home is contingent upon the health of the economy, changes in national unemployment or job growth rates can have a lasting impact on your home’s value.
An Underwater Mortgage
During the 2008-2011 recession, millions of homeowners watched as the value of their homes dropped below the amount of money they borrowed from banks. These were known as underwater mortgages. While some owners walk away from the property, others are forced to hold onto the property until the price and market value balance out. This can severely damage credit ratings and create a wealth of financial distress. When purchasing a home, keep in mind the proper price range that could help eliminate potential for this situation.
The Fixer ‘Downer’
When finding the perfect home, some buyers understand they will need to fix up their new residence. However, if you find that fixing this home will put a serious dent in your finances, it may not be the right home for you. Spending thousands of dollars in repairs or upgrades can increase a home’s value but put you in the red when recouping your costs. Be sure to look at the big picture in order to make the most informed decision. Completing home projects is one thing but being enslaved to a property is another.
A Small Down Payment
Many buyers make down payments on their home but at times it isn’t enough. By making a down payment of 30 percent or more, homeowners could reduce the risk of a home loan becoming greater than the value of a home. While making a larger down payment won’t prevent a home’s value from declining, it can significantly reduce the risk of going ‘underwater’ in the future.
For homeowners looking to sell a property, the economic downturn had a significant impact on home values. When prices were at historic lows, banks were unwilling to lend money to many potential buyers. Because of this, sellers watched as their homes sat on the market for undetermined periods of time. A solution for some was to offer personal financing. This can be a risky tactic. While self-financing can be beneficial for buyers, it can expose sellers to a significant amount of risk if the buyer defaults. To reduce this risk, self-financing should always be balanced against a higher down payment by at least 30%.
As buyers and sellers continue to benefit from the improving market, it is important to keep these common pitfalls in mind. Making a balanced and well-informed decision has an immediate impact on your finances as well as determining your financial situation for years to come.