Column: Feeling the crunch: Unstable market affects home buyers, remodelers

August 1, 2008

The subprime mortgage crunch is rippling through our economy in a variety of different ways. Many homeowners are postponing plans to sell until the market stabilizes; others, with hopes for trading up to a bigger home, are opting to stay put, turning instead to remodeling or enlarging.

Key Points

The subprime mortgage crunch is rippling through our economy in a variety of different ways.

Many homeowners are postponing plans to sell until the market stabilizes; others, with hopes for trading up to a bigger home, are opting to stay put, turning instead to remodeling or enlarging.

Avoid remodeling pitfalls

If you're considering remodeling, it may not be possible to insulate yourself entirely from deception. However, these guidelines should help to keep you out of serious trouble:

• Never hire a contractor who knocks on your door or says his prices are good for only a few days.

Reputable remodelers don't cut prices just because they happen to be "in your neighborhood."

Always check out a potential contractor by calling several of his past clients and your local consumer affairs agency.

Check beforehand to make sure that the contractor and any subcontractors have adequate insurance coverage.

These simple steps could save you not only big money, but emotional stress as well.

• Don't pay too much up front.

If a contractor asks for more than one-third of the contract price as a deposit, there's a good chance that something's amiss.

At worst, he's a scam artist with no intention of returning after he takes your money. At best, he's undercapitalized and can't afford to purchase materials on his own.

In between these extremes is the possibility that he's using your money to pay workers on another job.

Any of these circumstances is likely to spell headaches for you.

• Finally, never give a remodeling contractor a deposit in cash. If you're not smart enough to know that already, shame on you.

Thinking of buying?

If remodeling is not your thing, if you're looking for a new home - whether you're trading up or looking for your first home - the current home market is offering some tempting prices.

However, it has also generated new reasons to beware. The road to successful financing, like most of our other highways, has more potholes to avoid than ever.

Choose carefully

Investigate all of your mortgage options; then, do the math.

Look carefully at initial interest rates, future interest rates, payments (if different) and the possibility of prepayment penalties.

Be especially cautious about signing up for an adjustable rate mortgage (ARM).

Considering today's circumstances, chances are that at least one of your neighbors can tell you why.

'Pre-approved, qualified'

These are questionable terms in real estate deals, because not all lenders apply the same definition to each expression.

In fact, one leading real estate dictionary contains neither expression, because their definitions are uncertain.

According to one school of thought, when you are "pre-qualified," the lender is making an educated guess about how much you can borrow based on information you've provided.

When you are "pre-approved," the lender has verified everything you have told him or her and is offering to lend you up to a given amount at current interest rates, under certain conditions.

Whether your loan is "pre-qualified" or "pre-approved," final clearance is always subject to an appraisal satisfactory to the lender, good title, a last-minute credit check and other verifications.

When you meet with lenders, always ask how they define each term and what additional steps will be required to obtain a loan.