Buying a Home

Buying a home is probably the biggest investment you will make, with long-term financial ramifications. It calls for many informed decisions and for good advice from a real estate professional. When buying a home, you can learn from the knowledge and skill of a Real Estate Agent.

What can Real Estate Agents do to help you buy the right home for you?

 

• They will help you determine how much home you can actually afford. Often, they can suggest additional ways to accrue the down payment and explain alternative financing methods. They can also introduce you to a mortgage counselor and arrange to have you "pre-approved" which can improve your negotiating position and enable you to achieve your home-buying objectives faster and with less stress.
• Providing client level services, they can work for you as a buyer's agent and help negotiate the best price and terms for you. Or, they can serve as a seller's sub-agent (or disclosed dual agent), acting as a liaison between you and the seller to present offers and counteroffers until an agreement is reached.
• They will help you work out a realistic idea of the home best suited to your needs - size, style, features, location, accessibility to schools, transportation, shopping, and other personal preferences.
• They have access to a listing of all available homes in the multi-list system, can evaluate them in terms of your needs and affordability, and will not waste your time showing you unsuitable homes.
• They can often suggest simple, imaginative changes that could make a home more suitable for you and improve its utility and value.
• They can supply information on real estate values, taxes, utility costs, municipal services and facilities, and may be aware of proposed zoning changes that could affect your decision to buy.
• Although the law does not normally require an attorney to review documents or oversee real estate closings, they can provide you with a list of law practitioners to choose from if you would like to use the services of an attorney.
• They can help familiarize you with the closing process and they will obtain closing figures in advance of closing for your review.
• They can provide you with a list of qualified home inspectors, pest inspectors, surveyors, and help to coordinate inspection appointments.

 

Top 10 Tips to Successful Home Buying

Tip #1: Research Is The Key To Discovery

Home sellers won't call you with an offer to buy a maintenance-free home with a wonderful mortgage. You have to find the gems yourself! Only by reading available materials, talking to friends and experts, and spending time looking at different homes, schools, and neighborhoods will you end up with your American dream. Avoid the nightmares by learning how best to buy and maintain a home.

Tip #2: Make A Plan And Get Pre-Qualified

Every important decision needs to be clearly thought out. Developing a home buying plan can help you focus on the important factors and organize the entire process. You may even want to use a binder with sections on house hunting, home financing, service providers, etc. Loan pre-qualifying helps you determine the home price you can afford and presents you as a genuine prospect to the seller. A lender typically uses the 28% formula (your monthly mortgage can't exceed 28% of your monthly income) in approving your loan. Planning your actions and getting pre-qualified will keep you out of the panic mode and allow you to take advantage of opportunities. A thorough plan will save both time and money!

Tip #3: Value, Value, Value

The days of 10-30% annual appreciation have passed. Homebuyers in the 1970's benefited tremendously from what seemed like ever appreciating home prices. Nowadays, you're looking at slow growth while guarding against the possibilities of falling prices, skyrocketing ARM rates and corporate layoffs that can dramatically affect your home values. The classic rule of buying the worst house in the best neighborhood still applies. If you buy with an eye towards improvement, you can customize the home to fit your needs. The saying, "make money buying a home, not selling one," should keep you focused on the long-term importance of the purchasing price.

Tip #4: Create A Top 10 List Of Amenities

When shopping for a home, list the features (fireplace, fenced-in yard, new appliances, etc.) that are most important to you in deciding on which home to buy. Establishing "your criteria" early on will save time shopping for inappropriate homes and may keep you from buying a home on a whim. As detailed in Tip #3, your top reason for buying a home should be the value you are getting. Some of your top 10 amenities should logically be sacrificed if an incredible value is available.

Tip #5: Fixed vs. Adjustable Rate Mortgages

Adjustable rate mortgages have an initial fixed rate, which is followed by a period of adjustment intervals during which the rate adjusts based on the performance of several key indexes. Typically the initial fixed rate on an ARM is slightly lower than the comparable rate of a fixed rate mortgage.

Fixed rate mortgages allow buyers to take out a long term loan without having to worry about changing interest rates or monthly payments. Most fixed rate loans are offered in either 15 or 30 year terms.

Most buyers will be well served by a fixed rate loan, but each situation is unique. While ARM loans have become less popular in recent years, they can still be a viable option for some buyers - especially those who plan on selling again in the short term.

Whichever loan you choose; make sure that you scrutinize all the closing costs. If you are required to have a mortgage escrow account and private mortgage insurance, make sure you understand the terms and cancellation procedures (your Real Estate Agent has publications to assist you). Also, make sure there are no prepayment penalties so that you can utilize an accelerated mortgage plan. A good mortgage reduction plan can save you tens of thousands in interest costs, and shorten your loan term, with only small extra principal payments. If you experience negative changes in your job, health, or marital status, you can revert to the standard payments in your mortgage contract.

Tip #6: Sign A Contract That Protects You

Make sure that the contract you put on a house allows you to arrange financing, inspect the home and negotiate any problems that you uncover. Ensuring that the contract you sign will minimize potential legal battles will let you swim in your new pool with your family and neighbors instead of with the sharks.

Tip #7: Put Yourself In The Seller's Shoes

You are about to make one of the most important decisions that will affect both your life and the life of the seller. If you take time to understand the reasons the seller bought the home, their reasons for selling, and the home improvements they have or have not made, you'll be in a better position to evaluate the home and negotiate a better deal. In the end, the home buying process excludes the professionals and comes down to the individuals buying and selling the home. A closer look at the seller may help you in deciding whether and for how much to buy a particular home.

Tip #8: Develop A Mortgage Shopping Chart

One of the biggest decisions to make before putting a contract on a home is how to finance the purchase. There are 10,000 lenders competing for your mortgage business. The days of simply walking into the community bank and negotiating with the loan department manager are over. Today, you can apply for a loan over the Internet or even use a mortgage broker to shop for your loan with hundreds of lenders. When choosing a lender, you want to avoid apples to oranges contrasts by comparing fixed rates to fixed rates, not fixed to ARM's. Create a chart that lists different types of loans, fees, and at least five mortgage providers (including a mortgage broker).

Tip #9: Get A Quality Home Inspection

Although it is hard to believe, more people pay for inspections before buying used cars than when making the biggest investment of their lives - their homes. Paying for a qualified home inspection before you buy a home isn't just spending "a little extra" for peace of mind; it's absolutely essential for anyone who doesn't want to spend thousands of dollars for repairs.

 

 

Owning a Home

Home Appraisal 

How can I improve the value of my property?

Outside of a homeowner's control, the biggest factor is market conditions. Other important issues are:

• condition of the property
• specific home improvements
• neighborhood stability and safety

The greatest rise in home prices occurs when the economy is strong and the number of home sales is increasing. Specific home improvements can increase the value above the cost of the improvements.

• remodeled bathroom returns, 81 percent to the owner
• bathroom addition, 89 percent
• master bedroom suite, 82 percent

Remember, quality pays. Well-planned and well-executed remodeling jobs are a good investment while bad work seldom enhances value or livability.

The safety and security of a neighborhood can affect property values, too. If you live in a high-crime area, an organized community watch program not only will lower the crime rate but give home values a boost, too.

How can I increase the value of my property?

Specific home improvements can increase your property value above the cost of the improvements themselves, such as remodeling a kitchen, adding a bathroom, finishing a basement or upgrading landscaping. Just be sure that quality pays with remodeling. A bad remodeling job will do little to boost your property value.

If you live in a high-crime area, an organized community watch program not only will lower the crime rate but can enhance property values, too. It also helps to live in an area where other homeowners are upgrading their homes, which can help pull up your property value, too.

The bottom line is to measure the cost of any improvements you want to make against the overall values in your neighborhood. If you over improve for the neighborhood, you may not necessarily recover your costs or boost your property value significantly.

Will buying a bigger home increase my profit?

Consider these questions before making a choice between adding on to an existing home or moving up in the market to a bigger house:

• How much money is available, either from cash reserves or through a home improvement loan, to remodel the current house?
• How much additional space is required? Would the foundation support a second floor or does the lot have room to expand on the ground level?
• What do local zoning and building ordinances permit?
• How much equity already exists in the property?
• Are there affordable properties for sale that would satisfy housing needs?

Ultimately, the decision should be based on individual needs, the extent of work involved and what will add the most value.

 

How do I find out how much my home is worth?

A comparative market analysis and an appraisal are the standard methods for determining a home's value.

Your real estate agent will be able to provide a comparative market analysis, an informal estimate of value based on comparable sales in the neighborhood. Be sure you get listing prices of current homes on the market as well as those that have sold. You also can research this yourself by checking on recent sales in public records. Be sure that you are researching properties that are similar in size, construction and location. This information is not only available at your local recorder's or assessor's office but also through private companies and on the Internet.

An appraisal, which generally costs $200 to $300 to perform, is a certified appraiser's opinion of the value of a home at any given time. Appraisers review numerous factors including recent comparable sales, location, square footage and construction quality.

What are the differences between market value and appraised value?

The appraised value of a house is a certified appraiser's opinion of the worth of a home at a given point in time. Lenders require appraisals as part of the loan application process; fees range from $200 to $300.

Market value is what price the house will bring at a given point in time. A comparative market analysis is an informal estimate of market value, based on sales of comparable properties, performed by a real estate agent or broker. Either an appraisal or a comparative market analysis is the most accurate way to determine what your home is worth.

Condos and Home Associations

Are condos a good investment?

Condominiums have held their value as an investment despite economic downturns and problems with some associations. In fact, condos have appreciated more in the past few years than when they first came on the scene in the late 1970s and early 1980s, experts say.

While there are lots of reports about homeowners association disputes and construction-defect problems, the industry has worked hard to turn its image around. Elected volunteers who serve on association boards are better trained at handling complex budget and legal issues, for example, while many boards go to great lengths to avoid the kind of protracted and expensive litigation that has hurt resale value in the past.

Meanwhile, changing demographics are making condominiums more attractive investments for single homebuyers, empty nesters and first-time buyers in expensive markets.

What kinds of rules and regulations do Associations regulate?

Typical covenants, codes and restrictions (CC&Rs), which govern condo associations, give the board authority to make and enforce reasonable rules for the use of common property. But that would not apply to interior spaces owned by smokers themselves.

A homeowners association's board of directors can restrict smoking if it applies to indoor common spaces such as hallways or recreation rooms. Outdoor spaces are a different story, say legal experts. Any restriction would probably hinge on local laws (i.e. if a city banned smoking outdoors, a homeowners association probably could restrict smoking in its outdoor spaces).

The 1990 Americans with Disabilities Act does not require strictly residential apartments and single-family homes to be made accessible. But all new construction of public accommodations or commercial projects (such as a government building or a shopping mall) must be accessible. New multi-family construction also falls into this category.

In all states, the Federal Fair Housing Act provides protection against discrimination for people with physical or mental disabilities. Discrimination includes the refusal to make reasonable modifications to buildings that aren't accessible to the disabled.

What fees can I expect to pay a home association?

Condominium owners pay a fee, usually monthly, to the homeowner's association to cover the costs of managing and maintaining all common areas. In addition, you may pay extra assessments for major maintenance projects. In general these must be voted on by the association board or in some cases by all of the owners. The particular cost of monthly fees and the rules regarding special assessments vary from association to association. When considering a condominium, it's a good idea to thoroughly research the fees and bylaws of the condo association.

Are homeowner association fees tax deductible?

Homeowners association fees are considered personal living expenses and are not tax-deductible. If, however, an association has a special assessment to make one or more capital improvements, condo owners may be able to add the expense to their cost basis. Cost basis is a term for the money an owner spends for permanent improvements throughout their time in the home and is used to reduce eventual capital gains taxes when the property is sold. For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work.

To find out more about how the IRS views condo association fees, look to IRS Publication 17, "Your Federal Income Tax," which includes a section on condos. Order a free copy by calling (800) TAX-FORM.

Improving Real Estate

Are there government programs for rehabilitation?

The U.S. Department of Housing and Urban Development's Section 203 (K) rehabilitation loan program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.

The 203(K) loan is usually done as a combination loan to purchase a fixer-upper property "as is" and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.

Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.

For a list of participating lenders, call HUD at (202) 708-2720.

If you are a veteran, loans from the U.S. Department of Veterans Affairs also can be used to buy a home, build a home, improve a home or to refinance an existing loan. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility.

Another program is the Federal Housing Administration's Title 1 FHA loan program.

How much can I expect to spend on maintenance?

Experts generally agree that you can plan on annually spending 1 percent of the purchase price of your house on repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained over the years.

What repairs should I make before putting a home on the market?

If you want to get top dollar for your property, you probably need to make all minor repairs and selected major repairs before going on the market. Nearly all purchase contracts include an inspection clause, a buyer contingency that allows a buyer to back out if numerous defects are found or negotiate their repair.

The trick is not to overspend on pre-sale repairs, especially if there are few houses on the market but many buyers willing to buy at almost any price. On the other hand, making such repairs may be the only way to sell your house in a down market.

Can neighbor problems de-value the property?

While it may not reduce the actual value, a cluttered landscape next door can detract from the positive aspects of your home. Review your local laws, which should be on file at the public library, county law library or City Hall.

A typical "junk vehicle" ordinance, for example, requires any disabled car to either be enclosed or placed behind a fence. And most cities prohibit parking any vehicle on a city street too long.

It also may be worthwhile to check into local zoning ordinances. An operator of a home-based business usually is required to obtain a variance or permanent zoning change in residential areas.

In addition, if a neighbor's repair work produces loud noises, he may be breaking local noise-control ordinances, which are enforced by the police department.

Before bringing in the authorities, you may want to make a copy of the pertinent ordinance and give it to your neighbor to give them a chance to correct the problem.

Insurance

What kind of insurance do I need?

A standard homeowners policy protects against fire, lightning, wind, storms, hail, explosions, riots, aircraft wrecks, vehicle crashes, smoke, vandalism, theft, breaking glass, falling objects, weight of snow or sleet, collapsing buildings, freezing of plumbing fixtures, electrical damage and water damage from plumbing, heating or air conditioning systems, according to the Insurance Information Institute, a Washington, D.C.-based nonprofit group for the insurance industry.

Such policies are "all-risk" policies, which cover everything except earthquakes, floods, war and nuclear accidents.

A basic policy can be expanded to include additional coverage, such as for floods and earthquakes and even workers' compensation for servants or contractors. Home-based business-coverage, an increasingly popular rider, does not cover liability associated with the business.

Insurance experts recommend that homeowners obtain insurance equal to the full replacement value of the home. On a 2,000-square-foot home, for example, if the replacement cost is $80 per square foot, the house should be insured for at least $160,000.

For personal items, homeowners can increase their coverage beyond the depreciated value of items such as televisions or furniture by purchasing a "replacement-cost endorsement" on personal property.

Some experts recommend an inflation rider, which increases coverage as the home increases in value.

What is guaranteed replacement cost insurance?

Guaranteed replacement insurance is a more comprehensive policy. It tends to cost more, but it promises to cover the complete costs less deductible of replacing a destroyed house. With these sorts of policies, limits on the policies are not as common, because complete coverage is more explicit.

Taxes

Can property taxes be deducted?

Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.

Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.

How are property taxes configured?

Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate, on average 1.5 percent of the property's current market value. These annual local assessments by county or local authorities help pay for public services and are calculated using a variety of formulas.

How does home mortgage tax deductions work?

The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction.

Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.

What is an impound account?

An impound account is a trust account established by the lender to hold money to pay for real estate taxes, and mortgage and homeowners insurance premiums as they are received each month.

Are points deductible?

If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only. You also can deduct any points you pay when you refinance your home, but you must do so ratably over the life of the loan. Consult your tax or financial advisor.

Are there tax breaks for first-time buyers?

Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time homebuyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier.

Requirements vary from program to program. People wanting to apply should contact their local housing or community development office.

Some things to keep in mind:

• Some credit may be claimed only on your owner-occupied principal residence.
• There are maximum income limits, which vary by locality and family size.

You must be a first-time homebuyer, which means you must not have had any kind of ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas.

 

Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.

Are home improvements deductible?

What you spend on permanent home improvements, such as new windows, can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.

However, the 1997 tax changes virtually eliminate the capital gains tax for most homeowners (the exemption is $250,000 for single homeowners and $500,000 for married homeowners.

Still, it is worthwhile to save all receipts for permanent home improvements just in case. They also can be useful documentation when it comes to marketing your home when you sell.

Refinancing

When is the best time to refinance?

It depends on how long you plan to hold on to your house and if you have to pay anything to refinance. In addition, it also depends on how far along you are in paying off your current mortgage.

If you are going to be selling your house shortly, you probably will not recoup any costs you incur to refinance your mortgage. If you are more than halfway through paying your current mortgage, you probably will gain little by refinancing. However, if you are going to own your home for at least five years, that's probably long enough to recoup any refinancing costs you incur and to realize real savings on lowering your monthly payment. If it is going to cost you nothing to refinance, you can gain even more.

Many lenders will allow you to roll the costs of the refinancing into the new note and still reduce the amount of the monthly payment. Also, there are no-cost refinancing deals available. In any case, it pays to consult your lender or financial advisor, or run the numbers yourself, before you refinance.

What are the advantages/disadvantages of no-cost loans?

In many states, real estate regulatory agencies are cracking down on such advertising. The very term, "no-cost" loan, is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured.

A "no-points" loan is one for which the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.

How does bankruptcy affect my refinancing?

Refinancing may be prudent but could be difficult after a bankruptcy. If you're considering bankruptcy, you may want to go to your current lender first and explain the situation. If you have been current on your payments, the lender may be accommodating and refinance your loan, easing your financial situation.