Consumption Activities

Identifying Critical Components While Selecting a Home

Prepared by: Kent Sakamoto

Americans will consume and eventually own real estate at some point in their life. After all, it is the “American Dream”. There are multiple steps that need to be taken into consideration when contemplating on buying a home. The consumer should first determine if it is beneficial to buy versus rent in their current economy. Next they should consider a specific geographic location in which to purchase. By specific, meaning a precise location within a city needs to be selected. Lastly, they should distinguish between the various mortgage products and learn to understand them in their entirety. If the consumer takes time and carefully examines every facet of purchasing a home, it can be enjoyable and exhilarating.

A critical component while selecting a home occurs before the actual selection process. Potential homeowners should carefully scrutinize the pros and cons of buying a home versus renting a home. Most Americans like the stable payments, tax deductions, and the opportunity to build equity while owning a home. The cons of owning a home include maintenance costs, liquidity risk, and possible fluctuation in value. For most Americans, the benefits far outweigh the risks in purchasing a home. That is why home ownership in the United States is nearing 69%.

Determining a specific location to purchase a home is as important now as it ever has been. Consumers should take into consideration cities with declining markets, as well as neighborhoods beleaguered by foreclosures, and vacant properties. In Michael King’s article “Housing Bust Makes Location More Important for Home Buyers”, he states that lenders are more likely to favor plentiful neighborhoods because of the abundant information they provide in helping lenders gauge future clients. Thus meaning, they also tend to steer away from the foreclosure plagued neighborhoods. Other reasons to consider when purchasing a home within a city is the home location in relation to consumer activities, (i.e. grocery stores and points of interest) as well as school districts in which the consumers might bring their children through.

Understanding the various mortgage products while going through the application process for purchasing your home is vital. A very few percentage of Americans have the cash flow to make an “all cash” purchase, so it is essential to evaluate the loan market and possible risk involved. It is also crucial to interview different loan officers who might originate your loan, not for the lowest interest rates, but an individual who will put your best interest before their own. With a plethora of different loan types available, a fixed-rate, 30 year loan is often deemed the most popular and likely the safest for a homeowner looking to stay put for lengthy duration. Further research into different loan types for what is suitable for a specific consumer’s need might determine otherwise. Overall, an extensive knowledge of home lending is crucial to protect the consumer of numerous risks and possibility of default.

The aforementioned tips are only a basic foundation of the overall consumption activity. There are many other underlying factors that might swing the decision of where, when and why to purchase a home. Consumers should be aware of job security in relation with the duration of the mortgage payment. Simply put, if you predict there is a possibility of struggle in making the mortgage payments throughout the life of the mortgage, maybe it is not the appropriate time for you to buy.

References;

Hansz, Andrew J, and Julian Diaz III. “Real Estate Analysis: Environments and Activities”. Dubuque, Iowa: Kendall Hunt, 2010. Chapter 13.

King, Michael. “Housing Bust Makes Location More Important for Home Buyers”. Total Mortgage Services. January 6, 2010. Retrieved 4/19/2011.

“Owning vs. Renting”. Home Loan Learning Center. Mortgage Bankers Association, 2008. Retrieved 4/19/2011.