At the beginning of a new year, it’s natural to make resolutions. For instance, you may have been putting off buying a home. Now you’ve resolved to buy before interest rates rise and you’re priced out of the market. Before forging ahead, consider the following tips and traps.

The first trap to avoid is buying a home because you think this is your last chance. It may be an excellent time for you to buy, but you shouldn’t base your decision on fear. Certainly, if interest rates go up significantly you may not be able to qualify for as big a mortgage. But, higher interest could also have an adverse effect on the home sale market, depress prices and create better buying opportunities for buyers.

Following this line of reasoning, you might decide to wait to buy until you see what the market will do in 2005. After all, if you buy now, you could end up paying too much if rates rise and the market softens. Herein lies the second trap: waiting for a better time to buy. You could wait to buy only to find out that home prices didn’t soften; they continued to rise.

One couple who had saved enough for a 10 percent down payment, waited one year to buy in order to save a 20 percent down. During that year, home prices in their area increased by so much that the additional money they saved still only enabled them to make a 10 percent down payment. They would have been better off buying earlier and earning home price appreciation for the year.

HOUSE HUNTING TIP: It’s impossible to time the real estate market, so it’s better to make your home buying decision on factors other than whether you think the market will peak or dip. You can’t know this with certainty except through hindsight. 

The first question you should ask yourself before buying is if you’re ready for home ownership? Owning a home is a big commitment of time and money. In addition to mortgage and property tax payments, homes need to be maintained, which requires even more money. First-time buyers often overlook this fact, and are caught short of funds when the roof needs repairing or the water heater goes out.

Before you make a home purchase, make sure you’re in a position to buy for the long term. The real estate market fluctuates. You can insulate yourself from swings in the market as long as you’re not caught having to sell in a down market. Historically, residential real estate prices in this country have increased over time. But, if you had bought a home in the 1989 and were transferred and sold in 1991, you would have lost money in many areas of the country. If, on the other hand, you were able to stay put until 2000, you would have realized a significant profit. Ideally, you should have at least a 5 to 10 year time frame in mind when you buy a home.

Just as it’s risky to buy for the short-term, it is also risky to stretch to buy using an interest-only mortgage. These loans are popular because the initial payments are. This makes loan qualification easier. But, at some point, the loan is amortized over the remaining loan term. This can result in a significant jump in your monthly mortgage payments.

Some buyers figure they can always refinance for payment relief. But, if interest rates are much higher when the interest-only payment period expires, you might not be able to qualify for a refinance.

THE CLOSING: Buying a home using an interest-only mortgage may be worth the gamble if you’re sure that your income will be higher when your monthly payment increases.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.


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