How to make the best deal in real estate

By paying close attention and finding the loan that best suits your needs, you minimize the odds of a negative outcome.

Person putting last piece of a jigsaw puzzle down.

Home may be where the heart is -- but it's not always where the head is.

Even though almost all of us are involved in real estate at some point in our lives -- whether through buying a home or investing in property -- we often make shortsighted decisions that have negative financial implications. We choose the wrong loan, buy the wrong property or simply fail to grasp basic real estate fundamentals. One doesn't have to look any further than last decade's notorious U.S. housing bubble to see the costs of misguided or under-informed thinking.

To help keep your future real estate transactions profitable, let's review some of the basics of financing a home or investment property.

Finding the Right Financing

Remember the U.S. housing bubble we just touched on above? When home prices plummeted and foreclosures skyrocketed like they were perched on separate sides of an incredibly unbalanced see saw? Part of the blame can be assigned to basic mortgage choices.

Fixed-term mortgages carry an interest rate that stays the same over the course of the loan, whether it's 15 years or 30 years. This means the monthly payment remains relatively predictable. An adjustable-rate mortgage, however, features an interest rate that can rise dramatically over the course of the loan -- potentially making the monthly payment unaffordable, and leading to foreclosure. Adjustable rate mortgages can be a solid choice, however, if you plan to move again quickly or if you're buying in a high interest rate environment.

When you apply for a mortgage, it's also important to realize what's in your payment every month. Typically, the amount you pay will include your principal, interest, insurance and property taxes. Your taxes and insurance will typically be held in escrow and paid by the mortgage holder. As these costs rise, your payment will reflect this.

Once you're ready to start looking, it's advisable to get pre-approved by a mortgage lender. This will let you know the kind of price range you can work with and signals to the sellers that you are serious about any transaction.

It's also important to note that many lenders may require you to make a down payment of 10 or 15-percent of the purchase price. There are government-backed loans, including those from the VA and FHA, that allow homebuyers to buy a home with little to no money down.

The Takeaway

Buying a home is an exciting experience -- so exciting, that people often get wrapped up in the thrill of the chase and neglect to pay full attention to their financing options. By paying close attention and finding the loan that best suits your needs, you minimize the odds of a negative outcome.

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