Smart Moves by Ellen James Martin

TRADE-OFFS WHEN TRADING PLACES

Despite exceedingly low mortgage rates and more affordable property prices, some families seeking to buy a first home must scale back their expectations. That's because their household income has also declined due to lower salaries or reduced overtime at work.

"Nearly all homebuyers must make tradeoffs. But this is especially true for folks who need to stay within a tight budget due to economic conditions," says Merrill Ottwein, a real estate broker and former president of the National Association of Exclusive Buyer Agents (www.naeba.org).

He tells the true story of a cash-tight couple he recently helped to find a home. They wanted to live near the university where the wife -- who'd lost her higher-paid position at another college -- had just been offered a job teaching English. The husband worked from home as an IT specialist.

At the top of their original wish list, the couple cited their desire for a yard with at least half an acre of land where the man could plant a large vegetable garden. Plus they hoped for a spacious kitchen with granite countertops and solid maple cabinetry.

Early in their search, they fell in love with an English cottage with a dream kitchen that opened onto a screened porch. But the yard was only an eighth of an acre.

"They were really torn. For more than two weeks they debated whether to buy that cottage with the tiny yard. It took many conversations and visits back to the house before they decided to go for it," Ottwein says.

Sometimes buyers come to regret the trade-offs they made to get what they want for a lower price.

For example, some purchasers make the mistake of accepting a grueling commute from a distant suburb in exchange for the chance to own a much larger property than they could otherwise afford.

"From time to time we hear from buyers that they don't care how far they have to commute to get that huge house with every single feature on their wish list. Then they call us back a year or two later to complain that the long drive isn't worth it," Ottwein says.

"Any commute that takes more than 50 minutes is punishingly long," he says.

He urges homebuyers to think through their lifestyle preferences before narrowing the scope of their property search.

"At almost every phase of the property search you're confronted with trade-offs. Very few people get everything they want in a house," Ottwein says.

Here are a few pointers for homebuyers:

-- Consider your feelings about your current living quarters.

"First write down what you like and don't like about your present home. Then list all the features you absolutely must have, would like to have, or are willing to forgo in the new house," Ottwein says.

Suppose the townhouse where you now live has you feeling cramped because it lacks side windows. That could tell you that buying a detached house with large windows would be more important to you than a townhouse with extra living space.

"People with a strict cost ceiling should be doubly mindful about what's critical for them versus what they're willing to give up," Ottwein says.

-- Select features early when buying a brand-new home.

Those buying in a new subdivision face lots of trade-offs before the sales contract is even written.

"Most builders give you a lump sum allowance for all the basic options -- everything from kitchen cabinets to lighting fixtures, appliances and landscaping choices. Usually anything else you select costs extra," Ottwein says.

It's important to make as many selections as possible before you sign the builder's contract. For instance, if you want a sunroom, bargain for that additional feature to be included in the original contract.

"After your sales contract is signed, you lose your leverage with the builder. Because he knows you've already agreed to buy the house, anything you purchase later will cost a lot more," Ottwein says.

-- Don't trade off a fixed-rate mortgage to get more home for the money.

Keith Gumbinger, a vice president at HSH Associates (www.hsh.com), which tracks mortgage markets throughout the country, says some homebuyers are still drawn to adjustable-rate mortgages.

It's true that at the front end the monthly payment on one of these loans is lower than on a traditional fixed-rate mortgage for the same amount. But Gumbinger says the savings you enjoy during the early years are likely to be more than wiped out over the term of the loan.

"The always-present downside of taking an ARM is that interest rates will undoubtedly rise at some point in the future," says Gumbinger, noting that nearly all variable rate loans have at least one automatic upward adjustment built in during the early years of the term.

Moreover, taking an ARM now could mean years of discomfort not knowing if your rate will rise or fall.

"For the vast majority of buyers, knowing your rate can't double while you're still living in the house is comforting. They sleep better at night," Gumbinger says.

Some purchasers, particularly those who think they will move again soon, are drawn to what's known as a "hybrid ARM," which is typically guaranteed to stay level for a minimum of the first five years before it's subject to adjustments. Gumbinger thinks such a move risky, given the vicissitudes of life

"You need to have a lot of confidence that you'll definitely have a short tenure in the house to warrant taking an ARM of any kind," Gumbinger says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)