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What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

The biggest mistake is over-reaching and buying a bigger house than they need or can afford. Another mistake is using an interest-only loan (which have declined in popularity since the financial crisis), or being tempted to go for a mortgage that has a low introductory (teaser) rate, only to see the rate and associated payment rise later. These mistakes are also the most costly.

If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?

They should seek to refinance their mortgage, if lower rates are available. Depending on their lender, they may be able to negotiate alternative payments. In extreme cases, they should consider selling their house.

Is there any way for an individual to tell if their local housing market is overpriced?

This is not easy for individuals to determine. Two possible measures of a “hot” market are the average number of days a property is on the market, and the percentage of the listing price that houses sell for -- in hotter markets, properties sell quickly, and for close to (or sometimes, even above) their asking price. In addition, note that most real estate agents have incentives to execute deals, so they are unlikely to provide unbiased advice.

Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?

In my opinion, too much leverage is never good. You never hear stories about people going bankrupt because they borrowed too little.

Is this a good time to buy a home?

Whether it is a good time to buy a house depends on many personal factors, for example when one expects to move in the near future one should probably not buy a house; however, assuming that it makes sense to buy a house for personal reasons, then yes it is a fairly good time to buy since interest rates are still low. Now it is likely that as interest rates increase (which is fairly certain), house prices will stagnate or perhaps even decline (higher interest rates will lead to lower demand for buying a house since the costs are going up). However, if one wants to stay in the house for a long time and doesn't care about the stagnation in value and can afford it, then the cost of owning the house is low. This comes with two requirements: get a fixed rate mortgage (not a variable one, although they are even cheaper at the moment) and you should be able to continue to pay the debt service in the future (i.e., don't lose your job), because if you cannot make the debt service payment and you need to sell your house, you might have to sell it at a loss.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

Buying "too much house" and thus taking on too much debt that they cannot afford; not having enough savings (typically 6 months of monthly costs are recommended in savings) to have as a buffer in case something "bad" happens, such as losing a job.

If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?

Talk to the bank. Banks have no incentive to foreclose: it is messy and they prefer to work with the borrower to find a solution. The mortgage can be restructured with lower payments. Don't wait until it is too late, but be pro-active.

Is there any way for an individual to tell if their local housing market is overpriced?

No, probably not.

Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?

In my opinion, no. The risk is not worth it.

Is this a good time to buy a home?

Not in many markets. As Greenspan would say, we are getting frothy. You are probably fine in those markets which have not risen as much in price over the last several years, but in coastal markets and those depending on tech companies we are near the upper limits of this cycle.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

It seems that many people do not do that much research on their own. They can find out what a seller paid for their home and ask what they did to improve it. This is easy to find on line. There are also some sites out there that provide free appraisals. Zillow is one but one academic study suggested consistent over valuation by 9 or 10%. There are others, but the best thing you can do is research the home prices of similar property in the neighborhood. This is possible now with just a little effort. At worst, you can enter an address into the county assessor website and find out what someone paid and if they did any legal improvements to the home.

Second, it seems that many people do not shop around for mortgages. Another recent study suggests that U.S. consumers could save $9 billion a year if they shopped around.

If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?

Go talk to your lender. See if any refi packages are available. Some loan mod programs may also be available. Of course, if you are severely underwater, the typical U.S. borrower walks, but my advice would be to save your credit rating if you can. Unless you have lost a job or have a medical problem, don't just walk away from a mortgage. If you did suffer a medical problem or job loss, talk to your lender. They may be able to work something out, especially if it is a portfolio (in house) loan and not a GSE loan.

Is there any way for an individual to tell if their local housing market is overpriced?

Not easily, since we all go in cycles, and in supply constrained markets the cycles have larger amplitudes. Low interest rates also make housing price go up and stay up until we see rate hikes. The key ratio is home price to income but even that must be tempered by loan to value ratios. In many high priced markets, the LTVs are low and so the income matters less than wealth from previous homes or other financial wealth.

When our debt payments to income ratio is high, then this is a signal that we are near the top, but the markets most sensitive to this are the lower priced and high LTV markets.

Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?

Only if you don't care about your credit rating and want high risk, since you don't have much to lose.

Is this a good time to buy a home?

This is always a crystal ball question. It is not so much is it a good time to buy a home now, but how will the investment be viewed in the near future or, more importantly, when the purchaser wants to/needs to sell. We have not seen the bubble burst yet and may not for a while. Investing in real estate is different from investing in any other vehicle, if it is for residency. We have to pay something for a place to live. The best question to answer is how much more will it cost to own the home than what was paid for a rental. If that answer is not a material amount, then it does not make sense not to purchase a home, especially if the goal is to hold onto the property for a while where realized appreciation is typically a result.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

When people purchase a home, "kicking the tires" in a home inspection is crucial. If there will be a need for a capital expenditure (i.e., a new roof, boiler, leaking foundation, etc.), these can change the expectations of the purchaser in what they budgeted. Similarly, during the purchaser's due diligence, an examination of the municipality’s increases in real estate taxes should be considered. Again, this is to avoid any surprises. Many home buyers have a choice of a fixed rate mortgage or a variable rate mortgage. Although we have had incredibly low rates for the recent past, rates could increase materially and that too will affect the "budget," which could result in the home owner having difficulty meeting the mortgage interest/principal payments.

The last thing a purchaser should know (and here is where their attorney who wears both "the attorney-at-law and counselor-at-law hats) is what is the true purchase price of the property. For example, if the property is selling for $500,000 and a bank is willing to lend, on a loan-to-value ratio of 80%, $400,000, that does not mean that the purchaser is receiving the entire $400,000. Banks have fees that come out of the loan proceeds such as appraisals, attorneys' fees, etc. Furthermore, the attorney should be informing the client at the outset of the transaction that there are closing costs that will need to be paid above and beyond the property sale price -- title insurance (unless in a jurisdiction like Florida where the seller pays for this), mortgage recording taxes (where applicable), insurance premiums (they may be used to a low renter's insurance premium and not a homeowners premium), attorneys' fees, and other costs.

If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?

During this time, when real property values are still on the rise, the borrower "under water" should consider selling the property as they will probably not lose as much as if the value starts to decrease. I usually recommend looking for a replacement lender for a possible refinance. Keep in mind, trouble affording the debt service does not mean missing mortgage payments. If is more difficult to refinance if a borrower has a history of defaults than if they do not. Downsizing is also a solution. It could be that the property was a stretch to begin with and the borrower had hoped for increases in salary, etc., but it never was realized. As I tell my kids, in budgeting it is not how much one makes but rather how much one spends.

Is there any way for an individual to tell if their local housing market is overpriced?

That is a difficult question to answer as we get back to the crystal ball answer. It may be overpriced in one person's mind, but if the market is paying the overpriced amounts, that is the market. Today this is easier than it was in the past to find out what selling prices are. There is a ton of information online. Companies like Street Easy, Property Shark and national brokerage websites afford the prospective purchaser what homes are selling for.

Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?

This is an answer I would not go near touching. Being over-leveraged is a gamble in any circumstance. It means that the borrower is borrowing more than they can afford. That does not mean it does not happen -- it does all the time. With an expectation of having personal economic changes for the better happening, people buy today "more than they can afford today," but hope they will be able to afford tomorrow. My practice has always been to discuss with a client prior to the acquisition, best scenario and worst scenario. If they will find themselves or even plan for an over-leveraged situation, what is the escape plan. Keep in mind that real estate developers in a rising real estate market doe this all the time. Being over-leveraged today with increasing values quite often is not over-leveraged tomorrow. But that is a business decision that real estate investors (residential home buyers and commercial developers) make, not their attorneys.

Is this a good time to buy a home?

Generally, I think most Americans have too high expectations about housing. New houses have been getting bigger again: according to the U.S. Census' most recent study of new housing, which concluded with the year 2015, homes on average continue to grow in square footage, though families simultaneously continue to get smaller. Nationally, the average square footage for a single-family home was about 2500 in 2015, compared with about 1600 in 1980. European homes are typically about half that size. We've become a bit spoiled.

The move back to the city from the suburbs by empty-nesters and Millennials is leading to smaller units. But prices are through-the-roof, because urban land and building construction are more expensive and the supply of housing in desirable cities lags demand.

My advice would be to downsize and live in the city, where a household get by with one car, maybe no cars. Walking, biking and transit saves enough money to make a more expensive downtown unit more affordable.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

People so often fail to take the total cost of buying, maintaining, fueling, insuring and parking a car when they move further out to find cheaper housing.

Is this a good time to buy a home?

It is never a "bad" time to purchase a home. Interest rates are at historic lows, though prices are also approaching historic highs. Given that a developer is President of the United States, it is unlikely that interest deductions will be reduced.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

Lack of understanding of the home's expense items and long-term costs. Purchasing at the bottom of a hill when that is where all the water accumulates. Not understanding the amortization of the home and/or pursuing an interest only loan that provides no amortization. Using the Home Equity line for non-emergencies and/or capital improvements that add value to the home, e.g., purchasing a new car. Over buying a home, i.e., buying the maximum home one can finance rather than one can afford.

If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?

Get their head out of the hole -- hiding does not help. Run at the problem. First thing: get a second or third job. Cheesecake Factory waiters can make $1500/month cash. Reduce variable expenses, i.e., no Starbucks. Start counting pennies, nickels and dimes. Start talking, being silent will not help. Yes, it is embarrassing but it is your home. Start asking for help/advice. Beware of financial counselors that charge a fee. Do these "counselors" have a degree in finance? Do they understand real estate? Protect your powder, i.e., do not panic and start hiring people without knowledge of their ability to help.

Is there any way for an individual to tell if their local housing market is overpriced?

YES! Do rents support the mortgage payment? Look at Georgetown townhomes. They are $1.5m and rent for $3,500 - $4,000/mo. These rents only support values of $700,000 - $800,000. The rest is an emotional purchase. From a cash flow perspective, these are grossly overpriced. In personal wealth planning, make certain assets that can support themselves.

Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?

Yes -- if you have a special needs child that requires housing with large hallways and special rooms. The needs of the child come first. Also, if you are brain surgeon with children in residency. Starting salary exceeds $500,000/year base and as a resident are earning $40,000/year. Possibly if starting out in one's career and knowing and/or feeling confident that salary rises will come, e.g., first year attorney at a law firm with annual step ups that was educated at Yale (high probability of success).

Is this a good time to buy a home?

Real estate markets are very regional and location specific, so it can be difficult to state in general terms whether it’s a good time to buy a home. When asked this question, people generally want to know whether housing prices are too high or over inflated. Again, this can be a difficult question to answer as some housing markets are characterized by very short supply and expanding job opportunities which may very well justify year over year housing price increases.

It is important to remember that interest rates are still low and only expected to increase, thus if you are in the market to purchase, waiting may not be in your best interest. Waiting for housing prices to decline may cost you more in the end as any potential gain through lower prices may be offset by a higher interest rate.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?

One of the more costly mistakes made by homeowners is purchasing more home than they can really afford. Homebuyers, especially first time buyers, often focus on whether they can make the mortgage payment, forgetting that homeownership comes with significant additional expenses such as higher utility bills, repair and maintenance costs. Another costly mistake is not getting a home inspected as a condition of the sale. Some homebuyers try to avoid this extra expense (generally $300-600) during the home buying process, but this additional cost may pay for itself many times over in the event that a defect is found. By making the home inspection a condition of the sale, the home buyer can often get the seller to take care of the repairs before closing.

Finally, homebuyers often make the mistake of getting emotionally attached to a home and over bidding for a property. This can especially be the case when inventory is low. It is important to remain objective and stay mindful of your budget so that you don’t write an offer with your emotions instead of your head.

If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?

The first step is to talk with your mortgage company. After the financial crisis, many banks and mortgage companies have programs that help homebuyers restructure their mortgage if they run into trouble such as a loss of employment or reduction in salary. Communication is the key here. It is very important that the homebuyer try to make contact with their bank as soon as they know they are in financial distress so that there is more time to work out a potential solution.

Is there any way for an individual to tell if their local housing market is overpriced?

It can be very difficult to determine whether your local housing market is overpriced. Accordingly, a significant concern of homebuyers is whether they are buying at the peak of a market. No one wants to purchase when prices are at their highest, thus you find a segment of homebuyers that try and “time the market.” Timing the market simply means attempting to figure out when prices will change within a market cycle; buying before you believe prices will rise and selling before prices start to fall. The problem with this is that market cycles are notoriously hard to predict, thus in trying to time the market, homeowners will often delay a purchase and only end up paying more in the long run. This may particularly be the case in this current market where interest rates are rising, which will increase the cost of obtaining a mortgage for borrowers.

The Federal Reserve has already increased interest rates twice in the last 5 months with additional rate hikes expected this year. My overall advice is if you are purchasing a home in your local market and plan to be in it for a significant period of time, then avoid trying to time the market and purchase the home that meets both your budgetary and long term functional needs. This will be a better strategy over trying to determine whether there is overpricing in the market.

Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?

Over leveraging, by definition, is generally not a good financial situation to put yourself in. If you are already cashed strapped and are attempting to purchase a home you may consider renting, until your financial situation has improved, given home ownership often comes with many hidden and unexpected expenses, which can further deplete cash reserves.