How to Be a Smart Home Buyer

When home values are slipping or going sideways, being a smart buyer can make all the difference. 

he "American Dream" of homeownership turned into a nightmare after 2008. Big mortgages, job losses and plunging home values left many buyers over their heads in debt and struggling to stay afloat. But buying a house can still be a great experience if done for the right reasons through a process with a clear plan and open eyes.

Buy cheap. You'll make more money down the road if you buy a home that's as much as 30% or 40% below the bubble-era prices in your area.

• Add up all the costs ahead of time. Insurance, property taxes, homeowners' association fees and other bills can stretch your budget on top of a mortgage payment. Be sure you can afford it all.
• Can you handle the indirect costs? Not all the costs are evident. Will you need another car because you aren't near public transportation? Will you be paying more for gas? Will you need lawn care? Pool maintenance? Extra furniture to fill the empty spaces?
• Don't forget the intangibles. Will it be worth it if you have such a long commute that you leave the house in the dark and return in the dark, never seeing the kids awake? Will you need a full-time sitter because you and your spouse are working so hard to afford the house? The right house should relieve your stress, not add to it.

Separate your wants from your needs. Aim for a good structure in a good neighborhood that is a good fit for you and your family.

• Forego the fancy stuff. Most people don't need a hot tub, a two-person shower, two dishwashers or a master suite the size of a basketball court. Stick with the basics.
• Weigh your future needs. When you consider how much you can pay, don't forget the other parts of your financial life that need attention. You'll still need to save for retirement, pay for the kids' college and take vacations, and you'll need to have enough financial flexibility to do that.

Manage your mortgage. Recognize your house for what it is: an expensive installment-plan purchase that may pay you back down the road.

• Speed up your payments. A typical home today will end up costing $1 million in principal and interest over 30 years. You can cut your interest costs way down if you pay extra principal every month as you go along.
• Consider sharing the burden. Buy a two-family house or a home with a room or an apartment you can rent out. Use those rental payments to help pay your mortgage off faster. Then use the proceeds from that house to buy the dream house you want, freeing up your cash for additions to your retirement fund and other savings.
• Skip the extra loans. If you need to renovate or remodel, pay cash. And do as much work yourself as you can, which will generate huge savings.

What not to do. Don't fall into the trap of thinking your home is something more than a place to put up your feet and let down your hair.

• Don't treat your house as a piggy bank. It's not a cash machine, or an investment fund or a retirement nest egg. So don't borrow against your home equity to pay off credit cards or go on vacation.
• Don't splurge on renovations. If you remodel the kitchen to look like Home & Garden or add a bath or bedroom, do so because you want it or need it, not to make a profit or to increase the value of the home. Most renovations are money losers because they don't add enough to the home's value to cover their cost.
• Don't move around. Staying put is the best way to build equity in your home, especially at time when home values are still slipping or going sideways. Most people stay in their homes just seven years, paying far more in interest than principal and then they buy a new house and start the mortgage clock all over again. If you stay put, you'll build equity the old-fashioned way, by paying off your debt.
• Source www.smartmoney.com/