Buying a home can be confusing, especially if it's your first experience.  Are you interested in buying a home on Philadelphia's prestigious Main Line?   I have provided the following articles to give you insight into making one of the biggest decisions of your lifetime.  Feel free to browse these articles that were written especially for my website here at homesonmainline.com.  And remember to call me with any questions: 

Cathy Reimel Hamilton  610 527 0900 office, 215 527-2506 cell, 610 520 9011 fax

763 Lancaster Ave, Suite 200, Bryn Mawr, PA. 19010 

Email:cathy.hamilton@prufoxroach.com

Advantages of Buying a Home

Everyone, at some point, should eventually consider buying a home rather than renting. Given that the reasonable expectation is that a renter’s payments will increase at a rate of approximately 4% per year, owning a home will help you attain your financial goals more easily.

While homebuying costs increase gradually over the years, a fixed-rate mortgage provides the security of knowing that the bulk of your monthly housing costs will never increase. The only housing costs that are affected by inflation are the homeowner’s property taxes, insurance, and maintenance, which comprise a much smaller portion of the overall housing expense.

The financial stretch to purchase a home will pay off in the future. There is a financial danger in long-term renting. For example, a current monthly rental payment of $750, with 4% inflation per year, will be a $3600 payment 40 years from now. If you are going to continue renting, be prepared for inflation and prepare your finances with the expectation of high payment increases.

Being a tenant in a rental property subjects one to the requirements of a landlord. Unlike homeowners, who have the autonomy to paint, decorate, and alter their properties however they would like, renters must adhere to the guidelines and restrictions set forth by their landlords. Not all landlords are prompt to make necessary repairs, either. Some are reluctant to make improvements and upgrades, but they will continue to increase rental prices every year. Renting can be risky, too, in that a landlord might suddenly decide to sell the property you’re living in and give you very little notice to vacate.

Home ownership is an integral part of your net worth. As the value of your home increases over the years, the debt you owe on your mortgage decreases. Even if your home value does not appreciate dramatically, you still have the potential benefit of being mortgage-free in your retirement years.

Home equity (the difference between the market value of a home and the outstanding balance due on it) can provide financial and personal security. A home’s equity can be borrowed from, and the loan interest is tax-deductible. While saving money is often difficult, homeowners have this option of equity loans to rely on, while renters do not.

Decide whether this is the time for you to buy, and consider how the advantages and disadvantages of homebuying apply to you.

 

Real Estate Commission Basics

A real estate agent's commission is usually paid by the seller of a property, since that is, after all, who is going to benefit from the profit of the sale. The rates of an agent's commission are not set by law, and therefore vary among different areas. The percentage an agent earns is also determined by the selling price of the property and the type of property that is being sold. The average percentage on houses usually ranges from 4 to 7%, but commissions on vacant land can go much higher, even up to 10%. It is important to note that since commissions are not legally set, they are negotiable.

There is the option of hiring a discount broker to sell your house, rather than a full-service broker, but this requires substantially more time and effort on the part of the seller and might not be worth the small percentage cut in the broker's fees. Overall, a full-service broker determines the value of your home, aids in the preparation of the sale, and handles all advertising, including hosting open houses and private showings. Your broker will also negotiate with the prospective buyer to get you the best price possible and will work closely with you right up to your settlement day.

Discount brokers will either charge an hourly fee for whatever the aspects of selling the home you require assistance with, or they will charge a flat fee for whatever particular services are rendered.

Before negotiating commissions, be informed of the going rate from commissions in your area. The current real estate market will also affect your ability to negotiate a lower commission. If it is currently a buyer's market, and the agent has many listings but few buyers, there is not much room for negotiation. In a seller's market, however, agents are more likely to reduce commissions since they are working with few listings.

A seller can save money by negotiating a good commission reduction, but commission reductions can also have an adverse effect--they can delay the sale of your home if the broker does not have a significant incentive to work toward selling your home.

Another way in which a commission cut can work against you is if the broker offers to sell the house at a very low percentage but refuses to cooperate with any other agents. This drastically reduces your home's exposure on the market and can greatly prolong the length of time it takes to sell.

Ultimately, the quality of service you receive from your broker is far more important than the amount of money you spend on commission.

 

Common Problems with Mortgages

Occasionally, a situation will arise as you embark on the homebuying experience that will cause you to have difficulty in obtaining a mortgage to finance your home. One of the common issues, particularly faced by new homebuyers, is having insufficient income. Your prospective lender might reject your loan application if you appear to be overextending yourself financially. As frustrating as this seems, it might prevent you from perhaps ending up with a financial burden that you cannot handle.

If your income turns out to be lower than your lender's requirements, be patient, and delay purchasing a home for a year or two, while your income increases and you have time to acquire more savings for a larger down payment. Another alternative would be to enlist the aid of a co-signor who is financially stable. If you pursue this option, be aware that late payments or a loan default will adversely affect this person's credit as well as your own.

Other obstacles that buyers encounter are appraisal problems. Sometimes an appraiser will deem the value of a property to be lower than what you have agreed to pay the seller for it. This can potentially save you from paying more than the property was realistically worth.

An appraisal that turns out to be less than the price you negotiated can turn out to be a means of renegotiating with the seller. Sometimes, though, an appraiser is not entirely familiar with the market price of homes in your area, and if surrounding homes' values are comparable to the selling price you have agreed to, you might want to think about having a reappraisal done.

The most common issues that interfere with mortgage approvals are credit problems and errors. The first thing you can do to protect yourself is to write to the lender explaining any credit flaws you are aware of and what circumstances caused them, such as a period of unemployment due to illness. Lenders will be more empathetic with an applicant who is proactive in explaining credit flaws and ensuring that they were caused by temporary circumstances.

A mortgage broker can be very helpful in steering you toward a lender who is more lenient regarding credit flaws. Sometimes even the property sellers themselves will provide you with a loan, especially if you demonstrate current financial stability.

Be sure that if there is erroneous information on your credit report that you file a dispute with the credit reporting agency. They are usually required to respond to your dispute within 30 days. Your loan officer can go over a checklist with you and let you know exactly what items need to be explained, disputed, or corrected.

If your credit card debt and auto loans have piled up, you might be declined your mortgage loan. As unfortunate as this may seem, you are avoiding taking on more financial responsibility than you can handle.

Take this opportunity to pay off as much of your outstanding debt as possible. Sometimes this is a condition of approval. Otherwise, you might want to start out with a less expensive home, or use some savings to pay down your debt.

 

Effective Advertising of Your Home

Some real estate advertising is highly effective, while some turns out to be ineffective and a waste of resources. Among the most obvious means of advertising your home is the display of a sale sign on the property. Overall, more calls are placed to real estate brokers from people who have seen "For Sale" signs than by people who have come across written advertisements. Sign callers also tend to be more serious about buying since they have already seen at least the exterior of the property.

Multiple Listing Service (MLS) is a computer database that brokers use to advertise homes. Since a vast majority of brokers participate in MLS listing, your house is give widespread exposure through this method of advertising.

Sunday open houses are a popular way to draw prospective buyers into your home, and it is helpful to have a listing statement to give to everyone who visits your property. These statements provide detailed information about your home, highlight the special and outstanding features, and perhaps include photographs.

A broker, in addition to scheduling weekend open houses for the general public, might also arrange to have a broker's open house, available only to other realtors. The advantage of this is that it greatly broadens your base of potential buyers.

Regardless of the advertising you and your broker utilize, the only way anyone will consider bidding on your home is to actually see it in person first. A good broker will handle the showings to prospective buyers, thereby lessening your responsibilities in the selling process. You do not even need to be present when the showings are taking place.

Lockboxes are a convenient means of providing access to your home when you are not there. Allowing agents this convenience ensures that they will be likely to show the house as frequently as possible, and this will expedite the sale of your home.

It might be to your benefit to leave the home when you know it is going to be shown so that the prospective buyer does not feel intimidated by your presence. Conversely, your presence might deter the buyer from making negative comments or objections about the house.

Whether you are present for a showing or not, always be sure the house is tidy and presentable, and make it look as appealing as possible.

 

Financing for First Time Buyers

The last few years have helped reinforce the maxim that the best real estate investment you can make (and one of the best investments of any kind) is simply buying your own home. Even for those who had to accept a higher interest rate because of credit issues, ownership has paid off. Demographics suggest that this trend should continue over the long term, making entry into the housing market a priority for most people.

 Lenders are trying to make the process easier by creating new programs and expanding the eligibility for existing ones. It is usually not a question of “can” you qualify; instead the question is “which program is best?” For most people with an average credit history, having a job and a three digit bank balance (after bills are paid) is sufficient to get a home mortgage. The question then becomes, “what is the right mortgage?”

Among the major programs available are government loans such as through the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). These loans offer a variety of low/no down payment loans for first-time and move-up buyers. The FHA mortgage insurance program is the bedrock upon which the nation’s homeownership foundation was built. The program requires a small down payment and mortgage insurance premium (MIP), but its liberal qualifying standards are responsible for its enduring appeal.

There are mortgage programs for virtually every circumstance, but you want to try to qualify for the most advantageous mortgage programs and the best rates you can. There are pitfalls that can torpedo a loan application, even after it has been approved, and possibly sink your home purchase. You should try to take the time to get your finances in order BEFORE you start the homebuying process. Addressing the following items can help improve you odds of maximizing your options and avoiding problems:

  • Do see that you have a credit history. Your credit history is probably the most important single factor in determining if your loan is approved and at what interest rate. Surprisingly, paying for everything in cash or with a debit card doesn’t help improve your creditworthiness. Get credit, even if you have to apply for a secured or high interest rate card…and charge something!
     
  • Do keep credit lines open to optimize your credit score. It is not true that  having lots of open credit lines hurts your credit score. It’s the relationship between your available credit and what you owe, along with how long you have been managing that credit, which determines your score. Consolidating several credit cards into one shows up as a “maxed-out” credit card. Having lots of available credit  and using little of it scores high. When accounts are closed, often they are the ones with the longest (and most valuable) credit history.
     
  • Do put off buying a new car (or making any other major purchase) until after you are in your new home. Getting a new car will usually significantly (and unfavorably) alter your debt ratios.

 

Homeowner's and Title Insurances

In almost all cases, your lender will require that you purchase homeowner's insurance to protect you from any type of catastrophic loss related to your property. Additionally, the coverage protects you from the liability of being sued in the unfortunate event that someone becomes injured in your home. In the event your home is destroyed, such as by fire or flood, your homeowner's policy will cover the cost of rebuilding your home.

The dwelling coverage section of the homeowner's policy relates to the rebuilding costs due to destruction. The cost is directly related to the rebuilding cost, which is based on the home's square footage. Always be sure to obtain a policy that provides replacement cost provision. This ensures that even if the cost of rebuilding your home turns out to be more than the policy coverage originally stated, you will still be guaranteed replacement cost.

Your liability coverage should be equivalent to a least twice the value of your assets, and your personal property coverage should be approximately 50 to 75% of the dwelling coverage amount.

Having photographs or videotape of your personal belongings (located somewhere outside of your home, in case of a fire), will help you to provide documentation if you ever need to file a claim for such a loss.

Title insurance protects the ownership of your home, and there are two types to choose from: standard title insurance and extended title insurance.

Standard policies are the less expensive option because they offer limited coverage. The ensure that there are no defective or fraudulent recordings against the title of your house, nor liens or judgments against the title.

Extended policies include the aforementioned coverages plus unrecorded liens, leases, or contracts of sale.

Along with the type of coverage you select, the cost of your title insurance will also be influenced by the price of your home and the area in which you live. Whether the buyer or seller pays for the title insurance is negotiable, and a buyer offering to pay for title insurance sometimes has an advantage over competing bidders.

 

Negotiating for the Best Deal

When you receive an offer on your house, assume that the prospective buyer is well-informed of the comparable real estate prices in your area. If the offer is reasonable, you want to be sure that the buyer is financially capable of buying your home. A mortgage pre-approval is ideal in this case. Keep in mind that the buyer's offer might change and require re-negotiation, pending the results of a property inspection.

If you agree to the offer that has been presented to you, you can tentatively approve it with your signature. Remember that this is not a binding contract and is highly conditional.

An offer that you receive might contain contingencies. These are clauses that allow a buyer to back out of the deal under certain circumstances, such as is their mortgage is not approved. There might also, of course, be property inspection contingencies, as previously mentioned.
Do not be discouraged by an agreement that is full of contingencies. The buyer will have placed a significant deposit on the house when the offer was presented. They are also going to spend probably hundreds of dollars to obtain a property inspection. So even an offer with contingencies is an offer from someone who is likely a serious buyer.

If you receive several offers, the challenge is selecting the best one. Be careful not to accept an offer solely because it is the highest price--that offer might be coming from someone who is on the verge of bankruptcy. Also, refrain from playing buyers against each other; you risk scaring them of altogether.

Consider the creditworthiness of all of your prospective buyers, as well as the contingencies, terms, and conditions set for by each one's offer. If you have multiple offers and you wish to make counter-offers, only make one counter-offer at a time. Counter-offering to each buyer simultaneously could be disastrous if you end up inadvertently contracting to sell to all of them.

Counter-offers must also be made carefully or you can lose the deal. Do not worry about petty, insignificant items within your counter-offer. Do not be unreasonable in your counter-offer, either. If a buyer bids below your asking price, do not counter with your  full asking price. Analyze your house's fair market value, and you might realize that by coming down a bit in your price, you've made a sale.

 

Preparing to Shop for a Home

Evaluating various neighborhoods and determining how each neighborhood’s houses fit into your budget is an important first step in the homebuying process. In deciding what is most important to you, there are many considerations such as the local economy, recreational activities and parks, school districts, and crime rates.

Some reliable sources of neighborhood information can come from a local library or chamber of commerce. It might also be helpful to speak directly to residents of a particular area to hear their opinions. Driving through the neighborhood in the evening is important to ensure that what you observe during the day remains at night.

Your real estate agent can give you days-on-market (DOM) statistics that will tell you how long an average house in an area sits on the market before being sold. Quick sales are evidence of a neighborhood in high demand, and likely, a favorable place to live. Your real estate agent or an appraiser can provide an analysis of each area’s present and future property values.

What determines a “good neighborhood” depends on an individual’s needs. If you have young children, for instance, you want to purchase a home located near quality schools. If you’re approaching retirement, however, that would not be an issue for you, but you would want to look for amenities such as ocean views and attractive parks in quiet, serene settings.

Once you have established which neighborhood you would like to live in, you are faced with the option of whether to buy a new or used home. Both have advantages and disadvantages, so there is much to think about in making your decision.

New homes afford you the comfort of knowing you are in compliance with current safety and environmental standards. They are also far more energy-efficient than older homes, and therefore less expensive to maintain. New home builders also provide ample phone jacks and electrical outlets for today’s high-tech computer and entertainment equipment.

The downside of new homes is that you often see an impeccably-decorated sample home that has been professionally landscaped and contains every possible upgrade. The actual home that you will buy might not look anything like the sample you fell in love with. Be sure to find out exactly what would be included in your home, and remember that it might be more cost-efficient to purchase a base model home and obtain upgrades from a supplier of your own choosing.

A new home-buyer does not have much room for negotiation; prices are usually set, and developers will more likely throw an upgrade into a deal rather than lower a price. Overall, new homes are typically more expensive than used ones, and they should still be checked out thoroughly by a certified property inspector, as no home is absolutely flawless.

Used homes, which are usually less expensive than new homes, provide the buyer with more bargaining power. Another advantage to buying a used home is the knowledge that it is in a well-established, stable neighborhood. Furthermore, used homes have endured the tests of time and necessary repairs have been made along the way.

There is a certain charm associated with older homes that is not duplicated in new construction. Something to consider, however, is that older homes are less energy-efficient and more expensive to operate, and they might not conform to a family’s need for modern amenities and conveniences such as central air conditioning, multiple bathrooms, ample electrical outlets, etc.

Regardless of whether you choose to buy a new or used home, remember that no matter what, location=value.

 

Pricing Your Home

Regardless of the price you ask for your house, you need to find a buyer who will consider that price reasonable and is willing to pay it. Factors such as high mortgage interest rates might adversely affect your sale price, but there are still techniques that real estate agents utilize to create a demand for your house.

Overpricing your house will result in having it sit on the market for far too long, and as a consequence, you will end up dropping the price anyway.
If you establish a very realistic sale price for your home from the time you place it on the market, you will sell your house quickly and will probably receive your asking price or close to it. To calculate a reasonable asking price, you need to compare your house to others in your area in terms of size, condition, and age. Take a look at prices of houses that are currently on the market and houses that have sold recently in your neighborhood.

Sometimes even if your house is priced reasonably, you might be forced to offer incentives to entice buyers. There are a couple ways to do this. First, you can offer to pay for a portion of your buyer's closing costs. You might also offer to pay for some repairs that a property inspector might have found necessary. Second, you might offer to finance a portion of your buyer's mortgage. If you choose to do this, be sure that it does not tie up funds that you need for the purchase of your next home.
Even the most appealing homes can sit on the market indefinitely if they are overpriced. A sure sign of overpricing is having many initial showings of your house followed by no second showings.

Another sign is having many showings but no offers.
Avoid going through a series of price cuts by setting your price reasonably from the start. If several months go by, and you do not receive any offers on your home, you can correctly assume that your house is priced at least 10% above its fair market value. The best thing you can do at this point is to cut your price a full 10%. After another six weeks or so, if you still have no offers, you might need to go down another 10%. The best guideline for price-setting and price-reductions will be the local market activity in your neighborhood.

 

Importance of Property Inspections

The last thing any new homeowner wants to discover is that their newly-acquired dream home has serious defects. A property inspection is an absolutely necessary (and often legally required) step in the home buying process.

There are two general categories of property defects. The first is patent defects. These are blatantly obvious things that are visible to anyone who is not even trained in home inspection (i.e. flooded basement, cracked walls, water stains, etc.). The other category is latent defects. These are the hidden problems not visible to the untrained eye. They can include termite damage, faulty wiring, and safety hazards. These are potentially destructive and extremely costly defects that need to be disclosed to a potential buyer.

Should you spend $250. on a property inspection for a home that you might not end up buying? If you do, and you find out nothing is wrong with the home, you have paid for peace of mind. Conversely, if you skip the inspection process, you could find out later that your home needs $25, 000 worth of repairs--ten times the amount you would have invested for the inspection.

Whether a home is new, used (and more likely to contain defects), a condominium, or a townhome, your really need to have a home inspection to protect your potential investment.

The cost of the inspection will usually depend on the size of the property. It should include inspection of the roof, plumbing, electrical work, heating and cooling systems, the kitchen, bathroom(s), and foundation. Sometimes a property inspector will suggest further inspections by specialists, depending on a particular defect or parasite infestation.

If you invest in a property inspection before purchasing a property, be sure the owner knows that the offer you have made is contingent on the results of the inspection. Some necessary repair work costs might need to be negotiated. Also beware of  sellers who offer to provide home warranties or home protection plans. While you should not turn down such offers, do not accept them in lieu of a professional property inspection.

 

Real Estate Lawyers

Most real estate transactions run very smoothly without requiring legal assistance from an attorney. But since your real estate purchase agreement is a legally binding contract, questions might arise as to the legality of it, at which time you might need to contact a lawyer.

The complexity of your particular transaction is often a determining factor in whether you will require legal assistance. If your contract involves complex financial and/or legal issues, an attorney would be best suited to handle it. Even if everything appears to be in order, the money that you invest for an hour or two of legal counsel will provide you with peace of mind.

Another situation that definitely requires legal representation is one in which no real estate agents are involved. If you end up purchasing a home that is being sold by the owners without an agent to assist either of you, a lawyer can prepare the contract as the agent(s) would have.
In the event that you do need a lawyer, make your selection very carefully after interviewing several of them. Find someone whose specialty is residential real estate transactions. Your real estate agent or broker will be a good source of referrals since they are frequently in contact with real estate lawyers.

When you are searching for a lawyer, investigate the track records of your prospects. You should be confident that the person you hire will not ultimately refer you to a more qualified lawyer. You also want to inquire about fees, which can vary greatly. Someone with many years' experience might charge a high hourly rate, but consequently might accomplish much more in a short period of time than someone who is fresh out of law school.

When you speak with lawyers, they should be able to explain your options to you in plain language that you can understand. Do not hire someone who is going to leave you confused in a maze of legalese. A good lawyer will also be able to provide you with a realistic idea of what your success in a particular matter will be.

The investment of hiring a real estate lawyer is well worth the protection it affords you in the deal.

 

Saving for a Down Payment

So that you are not disappointed when it comes time to buy your home, you need to be well-aware, in advance, how much money will be required for a down payment. You need to know how much will be required to cover settlement costs, also.

The ideal down payment for a home is 20% of the purchase price. This is preferable among lenders because it protects them somewhat from default. If a buyer only puts down 10% on a home, and the value of that home decreases by 5%, if the buyer defaults on that loan, the lender will end up losing  a substantial  amount of money after paying for the expenses of the subsequent sale on the home. Thus, 20% of the selling price give lenders a cushion to protect their interests.

If your down payment is going to be less than 20%, you will be required by your lender to obtain private mortgage insurance (PMI). PMI increases your loan expenditure by several hundred dollars per year, but it protects your lender if you default on the loan. PMI is not a permanent expense, however. Once you achieve at least 20% equity in your home, the PMI can be removed following an appraisal (at your cost) to demonstrate that the 20% equity requirement has been attained. Another disadvantage of placing less than 20% down on your home is that you will likely face higher up-front fees and interest rates.

While you are shopping for homes, paying off debts, and waiting to find the perfect house, you will want to consider investing the money that you have set aside for your down payment. What type of investment you choose should be directly related to how soon you need the money back. It's best not to place your down payment funds into a risky investment, however tempting that might seem. Your best bet is to place the funds in a money market mutual fund, where your principal will not be at risk.

Money market funds are advantageous because they offer check-writing, tax-free yields, and electronic funds exchanges with other banks.

If you are just starting to save for your down payment, that 20% figure might seem to be in the far-off distance. Do not be discouraged, though. By boosting the amount you're saving by only a couple hundred dollars per month, you can achieve your down payment goal in a fraction of the time you originally anticipated.

You might also think about setting your goals toward a less-expensive house. The down payment money you've accrued will comprise a much larger portion of the selling price. Another option is to investigate low-down payment programs. If your credit is good, some lenders will qualify you for a loan with as little as 3 to 10% down. It is also possible to obtain assistance from the seller of the property you are looking to buy. If a seller is eager to close the transaction and has the funds available, they might be able to assist with financing in the way of a short-term loan.

 

Selecting a Real Estate Agent

Careful selection of a real estate agent is a key factor in the success of a smooth transaction. Among your agent's responsibilities are: finding a home that fulfills your requirements, negotiating the purchase price of that home on your behalf, supervising property inspections, and overseeing closing on your home. Some agents work closely with lenders and will provide you with leads to acquire your mortgage. With a good agent--someone who has excellent negotiating skills and is very knowledgeable about property values--you could potentially save yourself thousands of dollars.

Your agent should patiently guide you through the homebuying process and explain each step along the way. A sign of a good agent is someone who will always explain your options and will make recommendations to you. Sometimes an agent will advise you to contact experts such as property inspectors or lawyers. A competent agent will not feel threatened by the addition of these people to your real estate team.

While it might not appear obvious to you, real estate agents spend a tremendous amount of time working for you. Much of the work they do is "behind the scenes," and many people do not realize how much time and effort is required of an agent. Just touring new properties and routinely keeping up with what is on the market is time-consuming. Additionally, your agent will prepare and present your offer to purchase, negotiate counter-offers, help you secure a mortgage, assist with all paperwork pertinent to the closing of the deal, and review the home with your property inspectors.

Throughout your search for the perfect home, you might encounter homes that are listed as "For Sale By Owner." Sellers sometimes opt to sell their homes without the aid of a real estate agent. Some people do this to avoid paying an agent's commission. While these transactions can run smoothly, you are far better off in acquiring the aid of a real estate professional. Aside from helping you to find a property, the assistance you receive in negotiating, calculating fair market value, and coordinating property inspections, seller disclosures, mortgage financing, etc. is invaluable.

 

Selling a Home, Trading Up, Trading Down



Selling your current house for a bigger or "better" one is an enticing prospect, but you need to carefully assess your budget and determine how much more money you can realistically spend each month on housing costs. Take a close look at your checking account and credit card statements. Also track how much you spend on "extras" each month--miscellaneous expenses that  you don't necessarily budget for.

The reason these things need to be so carefully considered is that most likely, if you trade up, your mortgage payment will increase, but that is only one of many increased costs you will face. Along with your increased mortgage payment comes an increase in property taxes. A call to the local taxing authority in the area where you want to purchase a new home will give you an accurate idea of what the newly reassessed taxes on a home will be.

Other increased expenses in more upscale homes can include monthly utility payments. If you are buying a home with increased square footage, unless the home is more energy-efficient than your current residence, you can expect to pay more in heating and electric bills. With the additional space also comes the need for more furnishings.

Additional increases on more expensive homes are seen in homeowners insurance premiums. An accurate estimate of the increase can be based on the increase in square footage of the home. All of these items combined will help you to estimate your new housing budget.

Conversely, you might one day decide you do not need as much space as you're currently living in, and you might decide to trade down for a less expensive home. This is a common decision made by those approaching retirement age. Fortunately, tax laws now are such that home equity can be converted into investments that retirees can live off of.

Selling your home for a less expensive home or to move into a rental property is a major decision and should be done only if you are well-informed of your options and/or you have sought the advice of a financial advisor.

 

Real Estate Sales and Tax Issues

A benefit of purchasing a home is that the IRS and most states will allow tax deductions for the interest you pay on your mortgage and property taxes. These are listed as  itemized deductions on the IRS Form 1040 when you file your Federal Tax return. Home equity loan interest is also tax deductible.

Usually, the tax collector's office for whatever county you are living in will send you a bill for your property taxes, either once or twice per year. These property taxes are based on your property's value, and they are roughly 1.5% of the purchase price of your home, per year. Quite often, if you put less than a 20% down payment on your home, you will be required to pay your property taxes monthly as part of your mortgage payment, and the funds go into impound accounts.

When you sell a home, you generally receive more money than you originally paid for it. Fortunately, the IRS only requires you to pay taxes on the difference between what you paid for the house and what you sold it for, and they do not include the amount of appreciation that came from home improvements that you made at your expense.
According to the Taxpayers Relief Act of 1997, taxes do not have to be paid on real estate profits of up to $250,000 for a single person and up to $500,000 for a couple. This tax exclusion does have certain stipulations, though. For one thing, the house you have sold must have been your primary residence for at least two of the past five years.
There are no age restrictions now on the tax exclusion, as there were formerly.

You are not immediately obligated to report the sale of your house to the IRS because the firm handling the financial details of the sale will file a 1099-S form, one copy of which you will receive, and one copy will go directly to the IRS. When it is time to complete your Federal Tax return, you will be required to complete a "Sale of Your Home" form (Form 2119).

Filling out Form 2119 is a bit complicated because you need to calculate the expenses of selling your house and also the cost basis of your house. Cost basis is the amount you originally spent on the house plus the money you spent on improvements.

Allowable IRS deductions on the sale of your home include real estate agent's commissions, attorney's fees, title and settlement fees, recording fees, advertising expenses, and buyer's loan fees. Any questions you have regarding allowable deductions should be directed toward an accountant or attorney.
 

 

 

Cathy Reimel Hamilton  610 527 0900 office, 215 527-2506 cell, 610 520 9011 fax

763 Lancaster Ave, Suite 200, Bryn Mawr, PA. 19010 

Email:cathy.hamilton@prufoxroach.com

 

 

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