Bob and Sally are excited about a buying new home. Wanting to become informed about the process, they sought home buying advice from friends and family. They carefully saved for the down payment and planned to obtain the best home loan possible at the most favorable interest rate. They also set a goal to buy a bigger house in a few years after their home ownership needs changed.

They located a real estate broker to help find their dream home. After meeting with Bob and Sally about their home and financial requirements,the real estate broker defined their buying abilities. Within a few weeks the dream home was finally located. Bob and Sally quickly offered full price, considering the information the real estate broker provided. When the seller accepted the offer, Bob and Sally were relieved that no one else out bid them for the house.

To help obtain the necessary home loan, the real estate broker referred Bob and Sally to a friend at a mortgage company who could help complete the purchase so their dream home would not be lost. All involved seemed eager to help make the deal work. Even the appraisal report ordered by the mortgage broker indicated a value slightly higher than the purchase price. The mortgage broker suggested a particular loan program that only required a small amount of closing expenses and minimal down payment.

Bob and Sally were now on the road to the American dream of home ownership, a significant financial investment and responsibility. The ease with which they accomplished this journey was exciting for them. Financial security through home ownership was no longer a hoped for goal for Bob and Sally, but a reality to enjoy for years to come.

Or, could the dream home turn into a financial nightmare? Could it become a costly money pit that might have been avoided?

Consider the two major financial components in home buying: (1) true home value and (2) objective financial planning. If Bob and Sally paid $100,000 for their dream home, but it only had a true value of $90,000,then the value (equity) of their home investment diminished substantially at the time of purchase. If the house had to be sold the next day, they might easily lose over $10,000, and the savings they had accumulated for years. Similarly, if the loan interest rate was 8%, yet the same loan could have been obtained elsewhere for 7.75%, Bob and Sally would pay a premium in their mortgage payments every single month, possibly for as long as 30 years.

Even though the premium paid for the house seems excessive, the premium paid for the home loan will greatly exceed the high home price. Only a competent real estate broker trained to protect the buyer's best interest will help achieve the best purchase possible for Bob and Sally. However, the home loan is easily the most expensive part of buying home. Careful advance planning with a clearly defined set of goals for borrowing money can avoid a very costly mistake. Problems caused by an inappropriate loan are not easily or quickly solved.

To determine the difference in cost between the uninformed home purchase price with real home value and the range of loan interest rates, compare the following information to see what it really cost Bob and Sally. What is their equity position at the time of purchase (transaction closing)? What is likely to be their future equity position and will there be enough equity to purchase the next dream house? How long will it take for lost financial opportunities to be recovered?