Hidden Money Traps when Buying a New Home
Today’s Guest post is from Dwayne Thomas who works for CableTv.com. He frequently writes about various subjects, including saving money and technology. He welcomes your feedback on Twitter @DwayneThomas15.It’s awonderful experience, moving into a new home. There’s a great deal of satisfaction in having a place you can call your own and to shape a future within its walls. Sadly, there are also potential problems, even pitfalls, when it comes to buying a new home; financial pitfalls, which can multiply quickly if you’re not careful. Here are a few things you should watch for when making a purchase.
#1 The Hook of FREE
The first trap to watch for is the smoke and mirrors of a free lunch. The very word free can cause many of us to agree to a purchase we would never consider otherwise. Free anything is appealing. Don’t be swayed by added offers to entice you—weight and consider the whole picture before making any financial decision. It’s wise to use a 24 hour approach: take a day to discuss the ramifications of any decision before deciding to buy a house. If anyone tries to push you into making an immediate decision, there’s something shifty going on.
#2 Cut the Ships’ Anchor
Have you ever had a Real Estate pro show you a breathtaking home or two, only to be carted off to see surprisingly less expensive homes immediately after? The asking prices were still out of your price range, but now, compared to the first homes you saw, they seem more affordable, don’t they? That’s called anchoring—using the higher-priced homes to create the standard to which you will now compare all of your other choices. This is a powerful tactic and one you should be very careful to avoid. Have your price range agreed upon before ever talking to a realtor, and stick to it.
#3 Pennies Equal a Dollar
You see an end table you like for $100. However, in the morning paper, you saw the exact same table for $50 just a mile away. Would you drive a mile to capture the savings? Sure you would. But what if that same table was $5,000? The same table is $4950 just a mile down the road—would you still drive there to save the money? Most people wouldn’t. The brain tricks us into looking at percentages, rather than dollars and cents. In the first example, you saved 50%, whereas the second example was only 1%. We miss the fact that it’s still a savings of $50! This is the same challenge when moving and the process of disconnecting of services, such as phone, cable, even utilities. Instead of swallowing all the connection fees—have you thought of utility or account transfers? There are brilliant services online, like billshrink.com that allow you to find the lowest prices in the area you’re moving to for cable service. Many times you can simply transfer your current account from one location to another and save a decent chunk of change.
#4 The Special-Savings trap
When we receive gifts, especially money, we tend to treat it with special care, above and beyond our own accumulated wealth. A good example is receiving in inheritance from Grandma. She saved pennies over her lifetime—when she passed, it came to you. It’s special because Grandma worked so hard to get it. This affects us adversely in two ways: one, we underestimate the worth of our own money in comparison, and; two, we hold back using the gift for fear of losing it. But that’s what money is for—to use. When buying a new home—you may have more resources than you initially realized. Are you holding back because of an emotional misconception about the money in your possession? The best solution here is to mingle your funds in a savings account until you feel the same about all your funding, then use it wisely. Trust me, Grandma will understand.
#5 The Hidden Cost List
I know this might seem odd, the last item on this list being a list—but there are some specific hidden costs you need to prepare for when buying a new home. Here are the most common: Home Inspection: This is probably your biggest purchase to date—so you should protect your investment and have it professionally inspected. Find the damaged areas and make lists of what needs to be repaired and/or replaced. This can be an advantage—to bring a list of items to the negotiation table, or to discover if the property is worth buying at all. Appraisal Fees: Lenders require current appraisals, which used to be included in the closing costs. But what if the deal goes south? The appraiser still has to get paid, which is why you’re likely to get charged up front—which can be an average of $350 to $400. The good news is it will show up as a credit on the closing statement when you buy the home. Closing Costs: Recording fees, survey fees, title, insurance, processing and underwriting fees are all legitimate fees, which are never really explained or outlined for homeowners. There are even administration costs in some instances that will be tacked on as well. Some of these items can be eliminated, if you’re willing to do the leg work. Ask lenders for a Good Faith Estimate outlining the closing costs in detail. This gives you a chance to compare lenders and choose the one that’s right for you. Trust me, the costs can vary—as much as 2 to 3 percent of the entire mortgage loan amount. That’s huge, so do your homework. Moving Costs: Did you forget that you actually have to move in? Unless you have a lot of loving friends and family, it can be a huge financial drain, especially after getting hit with closing costs and other fees. Property Taxes and Homeowners Insurance: Your monthly bill will reflect more than just your mortgage and interest payments. All mortgage borrowers are required to get homeowners insurance. You will also have your property taxes included. PITI is principle, interest, taxes and insurance, and it’s what you can expect on your monthly statement. Homeowners Association/Condo Fees: This is the devil of all fees, in my opinion—additional monthly robbery on top of everything else, paid to an association for services that “benefit the community.” These same associations can dictate the rules and regulations governing how your property must look and how you can use it to a certain degree, while charging you an average fee of $100/mo. to do so. I recommend you get involved within your community and make sure your voice is heard. If you have had experiences in buying a new home and think I’ve missed anything of importance, please leave a comment below and share them.