5 Lessons Homebuyers Must Know

NEW YORK (MainStreet) -- Growing signs of improvement in the housing market could draw more buyers in the coming months, and although the rules of the game haven't changed much, the big question for anyone returning to the housing market -- or getting into it for the first time -- is what are the long-term lessons to be learned from the recent housing downturn?

In fact, all the key lessons are things buyers and borrowers should have known before the housing crash. The crash just underscored how important they were. And even if the market does improve this year, as many experts predict, it's not likely to strengthen fast enough to offset the damage homeowners do when they make basic mistakes.

Growing signs of improvement in the housing market could draw more buyers in the coming months.

Lesson 1: Buy the cheapest home that will serve your needs for the next seven to 10 years. As we've seen, home prices can and do fall from time to time. That may be rare on a nationwide basis, but it happens quite often in individual markets. The more expensive your home is, the more you will lose if the market turns south.

Also, the recent downturn highlights a fact well-known among experts but resisted by many homeowners: Homes are not always a very good investment. Even when there is not a downturn, in the average year home appreciation barely beats inflation, and mortgage interest, insurance, taxes, maintenance and other costs can turn a home into a money loser. It can be much more profitable to own a modest home and invest the savings in something more promising.

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Lesson 2: Plan to stay put for a good, long while. Traditionally, experts assumed that the average homeowner could break even in four or five years. During that time a home could be expected to gain enough value to offset the various costs of buying and selling, making owning better than renting. But price gains could be small and intermittent during the next few years, pushing the breakeven period to seven, eight, even 10 years.

Lesson 3: Stick with a simple mortgage, like the standard 30-year fixed-rate loan. This is kind of a no-brainer right now, as lenders aren't offering the exotic types of loans that got people into trouble in the mid-2000s -- things like subprime, interest-only and pay-what-you-want loans. But as conditions improve, lenders could again offer unique products that could backfire.

Borrowers who can stomach some risk and don't expect to keep their loans for decades might take a look at straightforward adjustable-rate loans, such as five- and seven-year ARMs that don't start rate adjustments until the initial period is over. But to make any ARM an acceptable risk, you must be certain you can afford the largest payment it could possibly require.

Lesson 4: Spruce up your credit rating. While this has always been a good practice, it is especially so now that lenders are so jittery. The borrower with a top-notch rating is likely to get a much lower mortgage rate than someone with a so-so rating.

Lesson 5: Don't go overboard on home improvements. For many years, studies have shown that major improvements such as new kitchens and bathrooms do not add as much value to a home as they cost. Improvements are lifestyle expenditures, not investments.

That said, it could be cheaper to expand the home you have rather than buy a new one, given all the unrecoverable costs involved in buying, selling and moving.

For more news and updates on the housing industry, check out our Real Estate topic page!

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