Home Buying

NEEDS vs. WANTS

Family needs
Do you have a family or are you planning to start one? This will affect the number of bedrooms you need. You may need a backyard for children or pets. If you have teenagers, maybe you could benefit from a basement room and/or an extra bathroom. If you have more than one car, you may need plenty of parking and/or a garage.

Location
Do you need to be close to schools for your children or near transit to get to work? A downtown loft-condominium or trendy Victorian row house might be the answer if you are a professional who wants to be close to your work and to nightlife -- just be sure to check that it's in a neighborhood where you feel secure.

Work space
If you work from home, you may want an extra bedroom for a home office. If you have hobbies, such as gardening you may require a utility room or a work area in the basement.

Maintenance
You'll want to consider ease of maintenance. A huge lot may be gorgeous, but do you want all the mowing and weeding that goes along with it? An old home may require substantial upgrades and more costly repairs than a newly built home. Can you afford the extra expenses?

What's important
Look behind them cozy shutters. Are the window frames solid? You may love the home's color scheme, but make sure the masonry and roof are in good shape. They are much more expensive to replace than the cost of repairing. Also, brass lighting may be appealing, but if the house doesn't include that, it's easy to install some new fixtures. Although, new wiring and a breaker box will mean fewer worries. Is the kitchen you're viewing somewhat dated but has the space you need and pleasant natural light? You can always paint the walls and cabinets for a quick fix and schedule a renovation down the road.

YOUR MORTGAGE

There are many different loan products available today and it is often difficult to pick the one best suited to your financial goals. By answering the following questions, you'll get a feel for what’s best in your financial situation.

How long do you intend to occupy this property?
 

Would you prefer a lower payment or more rapid accumulation of equity?

What do you feel interest rates will do in the future?

How well do you tolerate risk?

When interest rates are rising, a fixed-rate mortgage is usually a good choice, since it locks in the current rate and protects you from the higher rates to come. When rates are falling, an adjustable-rate mortgage (ARM) becomes more attractive, as its interest rate changes periodically (usually every one, three, or five years), allowing you to benefit from the new, lower rates.

Some people choose an ARM even when rates are rising. This is because the interest rate on an ARM is substantially lower -- as much as two percentage points lower than that of a 30-year fixed-rate mortgage. That means you’ll pay less until mortgage rates have increased a full two percentage points. After that, you’ll pay more than a fixed rate.

There are also hybrid ARMs, which have a fixed rate for a certain time period -- typically three to 10 years -- and then become adjustable. (A 5/1 ARM, for example, has a fixed rate for five years, after which the interest rate is adjusted annually.) Hybrid ARMs can be the right choice if rates are likely to rise in the short-term but then flatten or fall. However, these long-term trends can be difficult to predict.

Refinancing
A change in the interest rate trend can make it worthwhile to switch to a different type of mortgage. When rates are falling, you can save money by moving from a fixed-rate to an adjustable-rate mortgage, so you can benefit from the lower rates. If mortgage interest rates appear set for a sustained rise, switching from an ARM to a fixed-rate mortgage can lock in a lower rate and protect you from higher payments. However, you should make sure that any closing costs don’t offset the benefits of refinancing.

Fixing your rate
Some ARMs allow you to convert to a fixed-rate mortgage interest rate when interest rates threaten to rise significantly. This is a useful option, since it protects you from drastically higher payments with less paperwork and expense than conventional refinancing.

Locking in
If mortgage interest rates are rising when you’re negotiating your mortgage, it can pay to "lock in" the promised rate and points while the mortgage is being processed for around 30 to 60 days. This ensures you get the interest rate you’ve been quoted, even if the going rate is higher by the time the mortgage closes. There may be a fee for this guarantee.

Many of these decisions depend on how long you plan to stay in your home. For example, if you expect to sell in the next three or four years, an adjustable-rate or hybrid mortgage can give you a lower rate than a fixed mortgage for as long as you plan to own the house. You’ll have sold before the rates become too high.

At the same time, taking advantage of changing mortgage interest rates can require you to act quickly. Mortgage rates can rise and fall abruptly -- as much as a full percentage point in a couple of months. You can track these moves in the financial section of your newspaper. Then, be ready to make the choice that makes sense for you.