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
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.
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.
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.
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
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
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
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
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
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
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
Financing for First Time Buyers
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
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
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!
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.
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
Homeowner's and Title
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
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
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
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
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.
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.
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.
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.
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.
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.
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.
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.