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By Tara-Nicholle Nelson | Broker in San Francisco, CA

4 Steps to Minimize the Risk of Owning a Home

Not so long ago, in a not-so-distant land, owning a home was thought of as the safest "investment" around. Fast forward to the present day, and home ownership seems super scary to many people who can afford homes, and would like to own them, but are paralyzed by the fear of buying a lemon, or having a mortgage catastrophe.  

Here are 4 simple steps to minimize the risk that you'll become the main character in a homeownership horror story.  

1.  Stick with a fixed-rate mortgage.  Recent data shows that adjustable rate mortgages, or ARMs, are increasingly popular, rising from 9 percent of the mortgage market in the fourth quarter of 2010 to 12 percent in the first quarter of this year.  This might seem crazy to some, but in financially aggressive crowds, the lure of low, 3 percent(ish) interest rates on ARMs is enough to overcome any qualms.  As well, today's ARMs tend to have lower lifetime interest rate caps and require payment of principal, so they don't adjust as violently as the subprime interest-only and option ARMs that contributed to the foreclosure crisis.

If the thought of your mortgage payment changing over time gives you the shakes, you don't want to live in a state of interest rate obsession for the next few decades, or you simply crave the simplicity and predictability of knowing what your housing payment will be for the next 15, 20 or 30 years, then stick to 

a fixed-rate mortgage.  The rates are higher, but with a fixed-rate loan, the risk of scary payment changes are not only lower, they are non-existent. 

2.  Put - and keep - a home warranty in place.  One of the most frightening things about going from renter to homeowner is the prospect of being solely responsible for the care and feeding of your home and all its systems and appliances. Responsibility for both the costs and the actual logistics of repairing things like a leaky roof, a broken hot water heater or a haywire electrical fixture looms large in the minds of first-time buyers, in particular. 

A home warranty plan kicks in when escrow closes, and depending on the coverage you select, will cover your home against the breakdown of major systems and even some appliances, like furnaces and water heaters.  In some cases, you can even upgrade the coverage to protect against roof leaks and some plumbing issues. When a covered item breaks down, just remember to call the home warranty company first - for the cost of a service call you can get the item repaired or even replaced, if necessary.  I remember the home warranty company replacing a $900 water heater in my first home; what a godsend!

Talk with your agent - you might even be able to negotiate for the seller to pay for the first year's cost of the warranty.  Just remember to renew it when it expires every year, to keep a cap on your risk of unexpected repair costs for the duration of your tenure as a homeowner.

3.  Get repair bids and estimates, not just inspections.  After you find the home of your dreams (or the home of your budget!) and get into contract, you'll have a contingency or objection period ranging from 7 to 17 days during which you can obtain all the inspections you want.  Most buyers start out with a general property inspection, a pest inspection and a roof inspection, then get more specialized inspections if the property calls from it.  Pest and roof inspectors will generally provide an inspection report AND a repair bid for any work they find needs to be done.  

But the overall home inspection could very well list a dozen needed repairs, upgrades and maintenance items, without providing any information about how much those repairs will cost.  If your inspection report surfaces work you'll need to have done to fix things (or avoid bigger fixes down the road), work with your agent to schedule actual repair contractors to come in and give you bids on the work before your contingency or inspection period expires.  That will position you to negotiate around repair costs with the seller, or to know what you're getting yourself into, cost-wise, if you take the property as-is.

4.  Buy on the 10-year plan.  Warren Buffett once famously advised stock investors to "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."  The same advice is good for buying a home in today's real estate market.  Take on a mortgage you know you can sustain, buy at a price you can comfortably afford and avoid having to sell because you need to move for some urgent reason, or because the home no longer meets your needs.  

You can take this last step to hedge against losing money on your home by planning your space, career and lifestyle needs out 5, 7, even 10 years in the future - everything from how many bedrooms and garage spaces you'll need to where you'll want to be located, geographically - and selecting a home that will meet those needs for that foreseeable future. As a general rule of thumb, the harder hit the area was in the recession, the longer you should plan to hold it.

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Comments

By Deborah Griffin,  Wed Jul 27 2011, 18:37
Great advice, thanks!
By Edyta Gryc - Broker Associate,  Wed Jul 27 2011, 20:15
As always, great tips!
By Judy Sharma,  Thu Jul 28 2011, 12:25
Great article. Thanks for posting.
By Sylvia Jonathan,  Thu Jul 28 2011, 12:26
I think # 4 is especially important for young families or couples planning a family in 5 years. If you CAN afford a 3 bedroom home but have been looking at 2 bedrooms, reconsider. Time flies, folks. The cost of selling a 2 bedroom and moving up to a 3 bedroom can wipe out any "savings" you have today in buying the smaller home. Naturally, if the larger home is not in the budget, do not over-extend yourself.
By Mike Gage,  Thu Jul 28 2011, 12:36
Always good advise.
By Mike Gage,  Thu Jul 28 2011, 12:36
Always good advise.
By Raymond Edler,  Thu Jul 28 2011, 12:49
Great advise!
By Bc1016,  Thu Jul 28 2011, 13:16
With te home warranty, just like an extended warranty on a car or some electronic you buy, I think you need to count the cost. A basic warranty usually cost $400-500 a year and you have to pay a small fee (around $40) every time they come out. And most of the times they won't straight out replace something, they will replace it only after they have tried fixing it many times. I used to have a home warranty and I had a garage door issue, for 3 times they come out a simply spray something and fix it then it stopped working again in a couple of months. So I ended up paying $120 over 6 months plus I have been paying $450 a year for 3 years already. That's over $1400, I could have gotten a new garage door opener installed for about $400. A home warranty is great if you are not handy or if you don't mind paying the fee, most of the stuff that breaks in a home can be fixed or replaced for relatively cheap. I have had my home for 10 years now and I have not have to replace anything big. $450 a year times 10 that's $4500, with that money saved I now can get a new frigerator or a new A/C even. Most of the big ticket items in a home last more than 10 years. All I'm saying is to crunch the numbers and see what's the best the choice.
By Dan,  Thu Jul 28 2011, 13:22
So how does a home buyer deal with interest rate risk? 30 year fixed rates are at all time lows. Home buyer demand is also very weak. When interest rates begin to climb then home prices will adjust downward accordingly if not catastrophically. Odds are excellent that 30 year fixed will go up from here. Makes renting look exceedingly intelligent.
By George Walsh,  Thu Jul 28 2011, 13:40
Excellent tips. Clear, to the point. Best I have seen yet in this blog.
By Wes Black,  Thu Jul 28 2011, 13:44
Another home run blog!
By Donald,  Thu Jul 28 2011, 13:50
Well, it would be nice if I was able to finance my home for that short period of time, however, when I purchased my home back in 2004, the rates were fair. Also, I could not afford to pay the monthly payment that a 10 year plan offered. Perhaps, If I was a member of the Senate or Congress or the President and was receiving ALL the benefits that they get that WE PAY FOR, then yeah, I might of been able to take a 10 year mortgage on my home.
By Glen,  Thu Jul 28 2011, 13:52
I would go further on #4 to say: Don't look at your home as some kind of liquid asset. Look at it as a place you live and therefore, treat it with care. Houses were never intended to be ATM's
glen ohlund New Hampshire
By George Walsh,  Thu Jul 28 2011, 13:54
@Dan sometimes it makes sense to rent vs buy but it is more complicated than you allege. Keep in mind that rents rise and fall also. Right now rents are rising in many markets. Rent payments are pure expense with no advantage such as equity building and tax deductablity features. Money lost forever. No chance for any increase in equity. If you just think in terms of one month or one year rather than a 5-7 year timeline (the average most homeowners live in theri home) you may come to a conclusion that is considering a scenario that is less than most real life living situatuations.
Take a look at this NY Times article for more info that you may find helpful in analyzing the rent vs buy decision.
By George Walsh,  Thu Jul 28 2011, 13:56
@Dan sorry Dan here is the link that did not show in my last posted comment:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
By Dawn Van Dyke,  Thu Jul 28 2011, 14:05
Good advice. I would also add that putting down a decent down payment helps. Although you don't see 100% financing any longer how many people actually save 20% for a down payment? Paying a little extra every month toward principal can make a huge difference in the life of a mortgage. There are so many benefits to home ownership - and Glen is right - our homes should not be treated as an ATM!
By Allan Erps,  Thu Jul 28 2011, 14:14
As always sound advise and great post!
By Michael Burkhard, CRS, GRI,  Thu Jul 28 2011, 14:21
Simple and sound advice. Thanks
By Tony Delgado,  Thu Jul 28 2011, 14:36
For people purchasing in the Tampa Bay region the 10 year plan is a must. Especially in areas where short sales and foreclosures dominate the inventory.
By Bridgette,  Thu Jul 28 2011, 14:59
Donald, did you even read the 10 year plan? She meant buy a house you plan on living in for the next 10 years or more. Your comment made you look foolish...
By Cary Cox,  Thu Jul 28 2011, 15:06
If you are going to be in the home for less than 5 years there is no reason not to do an ARM.

ARMs if used properly can save you a lot of money.

In Houston there are a lot of people that relocate with oil and gas companies every 3-5 years. Putting them in a 30 Year Fixed a full 1.5 points over a 5-1 ARM would actually cost them a lot of money.

Saying ARMs are bad is like when people say guns are dangerous, it depends on who is using it and under what circumstances.
By Helen Oliveri,  Thu Jul 28 2011, 15:11
Great tips Tara!
By Harrisfinancetax,  Thu Jul 28 2011, 15:55
Great Tips....I have forwarded this info to a few friends.
By John Welker BPOR (Re-locator),  Thu Jul 28 2011, 15:55
This is a must read for a buyer and a money making advice for an agent trying to help a buyer
By P B,  Thu Jul 28 2011, 16:08
The most important step has been left out. Don't overpay for your home in the first place.

With all the artificial programs in place to try to keep housing prices high (such as government provided or guaranteed mortgages, quantitative easing to lower interest rates, direct grants, loan forgiveness, etc., etc.) there is still a strong temptation to overpay for houses. Because the government is finally now being forced to cut its spending, artificially high home prices well become much more difficult to sustain. A return to more affordable housing prices is likely in the near future, so be wary of paying too high a price today.
By Cynthia Ramsawh,  Thu Jul 28 2011, 16:57
I am not a real estate agent, but I have my home on the market and plan on buying my last home if this one sells, your information is helpful and appreciated.
By John Knechel,  Thu Jul 28 2011, 17:54
These are 4 solid things that should be a top priority for homeowners.
By Seda Gulliver,  Thu Jul 28 2011, 18:14
Great advice! Thanks!
By Patrick Mcandrew,  Thu Jul 28 2011, 18:52
I was a builder at one time, and I think that I know houses because I built them them for years. I'm in the market for a home at this time. If anyone thinks that I'm not going to insist on a fixed loan, purchase insurance and not have the home inspected from top to bottom you're wrong. Another tip that you may or may not believe in is having the paperwork looked over by an attorney before you sign on the dotted line. Finally, if you buy from the realtor whos name is on the sign, who is the realtor working for, you or th seller? Hummm...
By Caro,  Thu Jul 28 2011, 19:19
Great Great Great advices....Thanks very much!
By Tonya Brinson,  Thu Jul 28 2011, 20:05
Awesome tips! Personally I like a fixed rate mortgage, but for some an Arm may be the answer depending on length you are planning on being in the home, at a lower rate you could save money. but if you are doing it only for the rate and your finances at present just remember we always hope that things get better up the road and we will be in a different place financially but that does not always happen you could end up with a much higher % rate down the road than the 4's we are in right now for fixed.. Just make the best decision for you, your family and your finances. These are all good tips for any homebuyer :)
By Dangee1,  Thu Jul 28 2011, 22:45
Interesting article. My husband and I are retired and we are looking for a home in the Leesburg, Fl area. We live in OH now and want to go away for the winter months. At first we planned on paying cash for a home. We can put a large down payment on a home, 80,000 but now the homes we are looking at will require us to take out a loan for around $25,000 or more. We have no mortgage on our home in OH. The home we buy in Fl will probably be more permanent if we really like living there, and then we'd sell our home in OH. We are looking for a home in Fl that we'd like to live the rest of our lives in. So we are planning on using the 5-1 ARM so we can pay it off in 5 years. We have never done an ARM before and was wondering if there is anything we should know about them? Any help would be appreciated. Thanks. Danette
By Nicole Smith,  Fri Jul 29 2011, 01:48
I have an arm and love it!!! I bought my house 9 yrs ago... My rate has never been higher than 5% and is currently 2.63%!!! It's based on an average of interest rates for the past 12 mos... So it will never jump up outrageously. If rates start climbing I could always refinance, but I don't forsee that being an issue...
By Wol,  Fri Jul 29 2011, 04:02
The article's title 'Four Steps to Minimize the Risk of Owning a Home' is an attempt to address some of the variables a prospective home owner will be able to control/manage, namely 1) financing (a fixed vs variable mortgage), 2) operating costs/maintenance (insurance of household appliances), and 3) home improvements (fix vs replace). What about the major factors that nobody can control? I believe a prospective buyer in today's environment SHOULD also consider where we are in the current economic/business cycle (read US losing its AAA rating > banks to be re-rated as no bank can have a higher rating than the country they operate in > higher financing costs > more pressure on disposable income) and MUST look AT LEAST 10 years out into the horizon. Renting has in recent times been associated with people not smart enough (not wealthy enough) to know better (to be able to afford a home.) Well, allow me to share with you a long-forgotten fact: RENTING IS A SERVICE. The utility one gets is fixed all-in costs with the added flexibility to move with a short notice period. I know an ever increasing number of smart people with the means to buy choosing to rent instead. Who do they rent from? Well, the people that thought they were smart enough to find a way to buy their homes which they can no longer afford to keep and can not afford to sell at the current market price. Are you now ready to hear a dirty little secret that 90% of the people commenting on this article do not want to admit in this forum let alone in person? RENTERS ARE LIVING BETTER THAN THE OWNERS WITHOUT THE STRESS. Bottom-line: owning real estate during times of increased uncertainty can become a highly illiquid strategy that adds stress/hardship. Disclosure: I used to own more than one property and am now renting/enjoying life. For how long? I don't know...I am in my early 40s.
By Lynne Stuparek,  Fri Jul 29 2011, 05:40
Good Article. All things I usually already suggest to my clients.( I am a Realtor in Md) To those recommending an arm as a way to save money , one can save money with an ARM if they are willing to take the risk: That (risk factor ) is why you save, at least in the beginning.. Anyone who is risk adverse is better off with a 30 yr fixed rate. Even if you think you'll only be in your home 5 years that could change and sometimes circumstances prevent you from refinancing ( like a job loss) or interest rates could rise drastically , or maybe in 5 years you can't sell it. A 30 yr fixed is always safer, worst case you could rent it and you'd know your interest rate was fixed.. The people who take an ARM are the often same people who claim their lender took advantage of them if , in 5 years, their interest rate increases or they can't sell when they planned to. To Patrick the builder: The listing agent ( name on the for sale sign) always works for the seller,choose an agent you are comfortable with to represent you and then begin your search with your agent . To the folks from Ohio: rent a place in Florida first to see if you really want to be there. If/when you decide to buy, hire a reputable home inspector and don't buy a house with corrosive drywall ( a problem in some post-Katrina homes). Also - most lenders will not loan only $25,000. Get a mortgage for 80% of the value and keep the rest of your money. ( Always use the banks' money when you can- once your money is gone it's gone - very difficult to get it back sometimes)
By Lhartmann57,  Fri Jul 29 2011, 05:47
I'm in the process of deciding whether to rent or own a home. This article is very interesting and gives me several things to think about in making my decision. What scares me most about purchasing in today's market is paying too much for a home that will suit my family's needs for the next 5 to 10 years and then trying to sell (including realtor fees) in a even more depressed market. Too bad we don't have a crystal ball to help us know what to expect in the year's ahead. The only thing we can do is make the home-buying decision with the best information we have at the time. We have to be informed consumers today!
By Sbacchus6,  Fri Jul 29 2011, 06:46
Very good advise. Keep it coming.
By Donna DeMeglio & John King,  Fri Jul 29 2011, 06:47
Good advise in the Rent vs. Own senerio would be not to take on a bigger mortgage payment then you would pay for rent. You got to live somewhere, and that costs money. No one has a crystal ball. in this time on uncertainty, being practicle is probably more important then ever. Most importantly don't guess, get competent advise from someone you know you can trust. The hard truth is sometimes hard to swallow, know what you can afford and stick to it. Too many people purchase on emotion, then wonder why the foreclosure process is happening to you.
By Ro Edwards,  Fri Jul 29 2011, 06:48
Always find your comments most helpful. Thank you.
By Morty Jayson,  Fri Jul 29 2011, 06:50
Great advice - especially in today's market.
By Donna DeMeglio & John King,  Fri Jul 29 2011, 06:54
Back in the day, most families lived in the same home for many many years. Now people change homes like they change cars. If you are in a job that may require some demographic changes, it may be more suitable to rent for a time until you know you will be in the same place for an extended time. In many areas now, house prices are at an all time low. Even if you HAVE to sell in 4, 7 10 years, there is a more then excellent chance that your home will be worth more then, then it is now. I little more advise, research your new area. The old adage, if you sell high, chances are you are going to have to buy high too. And vise versa.
By John Crowe,  Fri Jul 29 2011, 06:54
Big fan of W.B., and his advice on the 10 year plan translates perfectly to real estate.
By Alejandro F. Cordova,  Fri Jul 29 2011, 07:59
Always great advise to follow these four step of buying a home.
By Kim Loizzi,  Fri Jul 29 2011, 09:15
I love the points you hit on - Great JOB!!!!! I teach my buyers this everyday.
By Jack Macioce,  Fri Jul 29 2011, 09:42
How would these steps differ from minimizing your risk of owning a rental home? I would think Step 4 only, but I wanted to hear some other perspectives.
By Car,  Fri Jul 29 2011, 09:48
People it's ADVICE not advise.

Advice” is the noun, “advise” the verb. When a columnist advises people, she gives them advice.
By DIANA POMBANO,  Fri Jul 29 2011, 10:22
Good basic advise for todays home buyer. Mortgage rates being so low, there's no reason not to stick with a fixed-rate mortgage. Evryone needs a place to come home to that will provide them with not only shelter, but an environment in which to refresh, nurture their families and feel safe and secure. Why rent when you can own?
By Mark Harrison,  Fri Jul 29 2011, 12:03
Great advise: I am working with many first time home buyers. In many instanaces we are seeing couples paying as much for rent as they can own the home for,Now its a matter of painting the picture, of what home ownership can bring. A place to raise your family, and not the ATM machine it became 5 years ago. We have record interst rates, and if you feel the job market is stable it is the perfect time to buy the first home. With the arms so low, even full adjustment is a manageable rate. I try and educate my buyers this is not your last home only a stepping stone instead of paying rent. Some will want to have the $400 car payment, but the ones who don,t have the perfect opportunity to secure their the future down the road.
By Anna Baran,  Fri Jul 29 2011, 13:15
Kudos for Great advice for homeownershi! Well stated.. It's so important to plan wisely, build equity...Thanks for endorsing the home protection plan. I'm surprised how many of my real estate clients on a limited budget decline to get this. All of the clients who have purchased it are thrilled that they have this it's a great hedge against the unexpected. It's a small price to pay for peace of mind. Great article thank for sharing.
By Jim Moran,  Fri Jul 29 2011, 13:48
Good advice...(mostly)
Having been a lender for over 20 years the fear of adjustables is way out of proportion. A Mortgage professional can explain the different indexes and relative risks. (some can't). How "risky" is an index tied to savings account interest. Most of the folks that have those loans are at about 3% currently. They also have annual payment caps of 7.5% of the payment amount. That means their $1,000 payment cannot increase more than $75 per year.
Learn before you borrow.
The biggest contribution to our financial woes was the 100% loan to value purchase or refinance, No Income, No Asset verification loan whether fixed or adjustable.
By Wol,  Fri Jul 29 2011, 14:04
Here's a tough question for all the realtors in the chat room: why are the fees charged by realtors to the sellers still 5-6% in the US while in the UK the average is 1-2%? Don't buyers see that realtor's commissions are out of line with the times? If I were to buy real estate I would buy a foreclosure from the bank because the sales commissions are capped and the buyer gets a better deal! Curious as to what Tony Robbins 'coached' the lot to say to that :)
By Brian Petrelli,  Sat Jul 30 2011, 09:31
#3 has saved my clients $1,000's over the years and helped them avoid buying the wrong house. Great post.
By Kathy Weber (951) 551-7587,  Sat Jul 30 2011, 15:17
As usual Tara, awesome information and well written!
By Matthew Klein,  Mon Aug 1 2011, 08:31
I think your advice is useful; but I would like to add to a couple of your items. I am coming from a different perspective. We are an engineering firm that does home inspections as well as structural and warranty inspections. I agree with obtaining the bids for repairs; but the buyer should also get a full detailed bid for those repairs, not just a number. Not all bids are the same and the details as far as amount of work and the quality of materials can vary widely. I would also make sure the guy doing those inspections is well-qualified and the buyer's guy--not the seller's guy.

Still, go one step higher in that item. Make sure you get a home inspection from a QUALIFIED home inspector. I do not mean one who has a stream of initials behind the name. I mean someone who actually knows and understands not just the building but the ground around the building. Most people do not know that the minimum requirements for home inspectors is a few day course and passing a two to four hour test. That is not a lot of qualifying. Price usually is linked to the quality of home inspection you get. I would say that if a buyer pays less than $400, s/he is going to get what s/he paid for. And Realtors, remember that a quality home inspection also protects you.

Finally, about that warranty. READ AND COMPREHEND IT. Most buyers cloak themselves the comfort of a warranty--until they need it. Then, they find the real details are kinda scary. Just an example: warranties usually state that a foundation crack will not be repaired unless it exceeds 1/4 inch per foot. Note that another way of saying this is two inches for a full eight foot basement foundation wall. Most homeowners freak at 1/4 inch wide for the wall height. The other details in the typical warranty are similar. If the buyer, or even you, do not understand those details, please contact someone who does (and note that your typical lawyer is not that someone).
By Paul Lindow,  Mon Aug 1 2011, 08:48
Great tips, I would add- learn to fix it yourself or make friends with someone who can. Knowledge is a lot cheaper than a warranty.
By RYAN MCKINNEY,  Mon Aug 1 2011, 21:21
Some good tips to keep in mind!
By Hector Reyes,  Tue Aug 2 2011, 05:04
Great article. Thanks for posting..
By Maricar Gabonada,  Wed Aug 3 2011, 22:16
This is really an awesome tip very beneficial for home buyers and sellers.
-http://www.wellington-homes.com/
By Leah Henderson,  Thu Aug 4 2011, 19:43
Great coverage of an important topic. Thanks for sharing.
By Jack Gillis, CRS, M.B.A., J.D.,  Fri Aug 5 2011, 11:37
Great post to the community. Very interesting.
By Voices Member,  Sat Aug 6 2011, 17:50
Some of the most successful real estate people I know bought and NEVER sold!
By Carolyn Hauck,  Mon Aug 8 2011, 08:35
Great info thanks for sharing!
By Carolyn Hauck,  Mon Aug 8 2011, 08:36
Great info thanks for sharing!
By Brenda Feria,  Mon Aug 8 2011, 20:19
Great blog, Tara. I enjoy reading your posts.
By Melia Indra,  Tue Aug 9 2011, 11:58
Thanks for your post !
By NonRealtor,  Mon Aug 22 2011, 09:23
5. Wait another year to buy, prices are declining. Good Luck
By Roberta Golub,  Mon Aug 22 2011, 12:07
Great advice!
By Simone Hardy,  Tue Aug 23 2011, 08:53
Excellent advice. As Robert Kiyosaki says of Rich Dad fame, "Buy Right" and you can't go wrong.
By Voices Member,  Wed Jun 5 2013, 13:27
I love your articles and how much they help me. Keep up the excellent work, Tara! :)

David | http://www.glassermediationservices.com/
By Voices Member,  Mon Sep 2 2013, 14:22
I want to commend you on working so hard to produce a good piece of writing! I will keep reading this because it is so good! :)

David | http://www.azarkodental.com/azarko-west-office

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