What to Expect After Your Purchase

If you properly calculated your finances before buying your new home, you should be able to meet your monthly housing obligations. Most people will have higher costs now than they did before, whether or not they rented previously. You will feel even more stretched if you go out and buy all the things you feel that you must have for your new home. Do not succumb to this temptation. It is important enough for now that you have a roof over your head. There are several things you need to keep in mind after you move into your dream home. Pay Your Mortgage on Time If you continuously make your mortgage payments late, you will be sorry. There are two main reasons why this could be a costly mistake. Late payments incur terribly high late charges. The typical late charge is around 5% of the monthly payment. In addition, late payments on a mortgage loan hurt your credit. A lender may forgive an occasional late payment on a credit card here and there, but make a late mortgage payment and it sends up a red flag. Make more then a couple of payments late and you could have a difficult time trying to refinance or obtain a mortgage loan for another home. You might want to consider having your mortgage payment automatically deducted from your checking account and paid directly to the lender. Continue to Add to Your Savings Most people deplete a large portion of their savings when buying a home. You should have made sure you would have emergency money available after close. If you don’t have at least 3 months worth of living expenses after you move into your home, you will need to build up your savings again. This should be done before you buy anything for the house. It is almost impossible to save when you keep thinking of new things you need. There will be time later to think of slowly buying things for the house, after you have your savings in order. Keep Your Receipts When you start to buy things for the home, start a file for all your receipts. All capital improvements can be used to lower the capital gain you will pay when you sell your home. A capital improvement is an improvement that actually adds to the value of your property, such as a new roof. Beware of Offers by Mail for Insurance Protection You will receive solicitations to purchase disability insurance, life insurance, and mortgage payment protection insurance. The problem is the protection usually being offered is not a very good value. Most people need only term life insurance and disability protection. The payments on these should not be very high. Check into this yourself before allowing anyone who offers you insurance to sign you up. Also beware of companies offering to set you up on a bi-weekly payment system. For a fee they will set you up to pay 13 payments each year rather then the standard 12. Over the life of a 30-year loan you would pay your mortgage off 8 years faster. The problem with this is you pay them a fee for doing something that you can easily do yourself. You can always pay extra to your principal, as long as you do not have a mortgage with pre-payment penalties. Keep Track of the Value of Your Property Property tax assessments are based on the value of your home. When you bought your home the property tax was re-evaluated based on the new sales price. If values go down in your area, it might be a good idea to appeal your assessment and lower your property taxes. Contact the Assessors Office and find out about the procedure for appealing your property tax. If the assessor requires recent sales data it might be a good idea to contact the Realtor who sold you the home. Be sure to explain why you need this information. Your agent may be hesitant to offer information showing a decrease in value. Keep Track of Interest Rates Once you’ve done everything recommended here and you now have the best mortgage available, don’t forget that things are constantly changing. If rates go down after you buy your home, you may be in a position to refinance. It is very important that you keep up with interest rates. When rates have dropped a full percentage point it is time to assess your mortgage situation. The information you will need to know is the interest rate you could get, and the costs involved in obtaining that rate. Once you have an array of figures, calculate the months of lower payments required to recoup the cost of refinancing. To figure how much you will really be saving on your new mortgage, after tax considerations, you need to do the following: Take your tax rate and decrease your monthly payment savings you expect from the refinance by that amount. Let’s say you’re in the 28% tax bracket. If your mortgage payment were to decrease by $150 you need to reduce that amount by 28%. 28% of $150 = $42. $150 - $42 = $108. Now you can use the $108 figure to calculate how many months of savings it will take to recoup costs. Take the total cost of refinancing and divide it by $108. If it will cost you $3000 to refinance and you divide that by $108, it will take a little over 2 years before you have made up the cost. If you will be staying in your house for at least that long, refinancing is probably a good idea. Homeowners Insurance The lender will require it anyway so there is no getting around paying for insurance. Even if you were paying for your home with cash, you would want to carry insurance. Not to insure such a large investment would be foolish. Another major consideration is possible legal action that could occur if someone were to injure themselves on your property. The insurance will cover the cost of rebuilding the home. It is based on the square footage of your home. The lender might only require that you cover the amount of the loan. You will need to make sure you have a policy that covers guaranteed replacement. This guarantees your home will be rebuilt even if the cost to rebuild exceeds the amount of your insurance. Guaranteed replacement does not always mean guaranteed replacement. Ask any insurance company you are considering exactly what they mean. Some companies guarantee no matter what the cost. Others guarantee up to a certain percentage (such as 120%) of the policies total dwelling coverage. You should carry as much liability insurance that would cover at least two times the value of your assets. If you have substantial assets you might want to look into additional umbrella coverage. The coverage for personal property is usually set at around 50 to 75 percent of the dwelling coverage. That would not usually apply to condominium owners. In that case, you will need to select a dollar figure of coverage you require. It is a good idea to obtain coverage that guarantees the replacement of personal items not just the value at the time of damage or loss. If you ever need to make a personal property claim, it is a good idea to offer some proof of your personal belongings. A good way to do this is to use videotape. You can also maintain a file folder of receipts of major purchases and keep a written account of your possessions. Make sure you hold your inventory somewhere other than your residence. You may want to look at other types of hazard coverage, depending upon the geographical location of your property. Your home could be subject to earthquakes, floods, hurricanes, mud slides, tornadoes, and wildfires. If you are located in a flood zone, your lender will probably require you to carry flood insurance. The U.S. Geologic Survey and the Federal Emergency Management Agency (800-358-9516) offer maps showing earthquake and flood risks. If you decide to purchase an additional rider to cover another possible disaster, consider carrying a large deductible. That will lower your costs. When you shop for insurance, make sure you ask if there is a lower cost for having an alarm system or smoke detection system. There also may be discounts if you carry several different policies with the same insurer or there may be a senior discount. It never hurts to ask. Holding Title to Your Property There are all kinds of risks that can occur and have occurred when taking title to a property. If the seller was dishonest and provided false information, you could be in for a lot of trouble. What if they said they were single, and they were really married? It is not so far fetched to find a spouse that no one ever knew about show up and claim title to someone’s house. What if a property owner dies without a will? Probate courts must decide who the legal heirs are. If a relative who was unaware of the proceeding should show up, the court decision may not be binding. Someone who is mentally incompetent or a minor can not enter into binding contracts. Clerks may overlook something when they are checking the title. Surveyors may have incorrectly established property boundaries. Sellers can be fraudulently impersonated. Signatures can be forged. When you purchase title insurance (which the lender requires) you should know what you are paying for. The insurance covers the marketable title of the property. This protects both you and the lender. If someone comes along saying the property belongs to him or her, you are covered against loss. Because your policy covers all past occurrences of title and is not concerned with the future, you are required to purchase the insurance only one time and will not pay any additional premiums unless you refinance the property. Two Kinds of Policies There are two different types of title insurance policies you can purchase. You can purchase either a standard-coverage policy or an extended-coverage policy. A standard policy is less expensive then an extended policy. The risks they cover are more limited. They cover items such as fraud, competency, and defective recordings. They also cover mechanics liens, tax assessments, and judgments that can be uncovered by checking public records. Extended coverage covers everything previously mentioned as well as items you might discover by actually inspecting the property. It also covers things that went unrecorded and therefore are not part of a public record. How To Take Title One of the most important considerations when buying a home is how to take title. Each type of co-ownership is different and each has its own advantages and disadvantages. Joint Tenancy This is a common form of title if you buy a house together with your spouse. But you do not have to be married to the other party you are buying the house with to take title in this way. If either party dies, the title to the house will automatically transfer to the other living party without going through probate. Joint Tenancy also helps when calculating capital gains tax should you sell the home after the death of the other party you bought the house with. Community Property Only married people can take title as community property. The best advantage to community property is even bigger tax savings after the death of a spouse. Under this form of title, one of the parties involved can also will their share of the house to a party other than the other spouse. Tenants-In-Common or Partnerships Taking title in this manner eliminates the tax advantages you might be able to receive by taking title in either of the other forms. There are some legal advantages, however. One of the parties can will or sell their share of the property to someone else without getting permission from the other owner. Another advantage is that each owner can have a different share of ownership in the property. This can really be advantages if a party only wants to own a small piece of the property. Smart buyers will also have a separate written agreement drawn up between the parties involved that provides provisions for possible occurrences that may happen. It could include the following: Provisions to buy out a co-owner who wants to sell if others do not. Provisions on prorating the maintenance and repair between parties who own different percentages in the property. Provisions to resolve disputes. This can include something as seemingly simple as what color of paint to use. Provisions for penalties if one of the owners can’t come up with the cost of their share of property taxes or mortgage payment. There are other legal issues involved with the purchase of a property and taking tile. Consult a good real estate attorney if you have any confusion or questions. Property Taxes If you buy and own a home you will be paying property taxes. They are typically paid through a county tax collectors office and due twice a year. Because they are semi-annual payments, they can be quite high. If you make a down payment on your property of less then 20 percent, many lenders require an impound account. These accounts require you to pay your property taxes and insurance costs each month along with your mortgage payment. Property taxes are typically based on the value of your property. The average tax rate is about 1.5% of the value. You should contact the County Tax Collectors office and check what the tax rate is in the county you wish to buy a home in. When looking into the tax rate for the county, also ask about any extra assessments for services. Some counties charge additional assessment charges where other counties may include them in the standard property tax. Do not rely on the real estate listing to provide you with this information. What the current owner may be paying for taxes is not necessarily what you will be paying. Insurance Your mortgage lender will require that you have sufficient homeowners insurance to protect their investment. In most states your home is the lenders security forthe loan and they will want this security protected. You will want to insurenot only the property, but the personal items within the home from being damaged or stolen. Before you even buy a home, you should already have sufficient insurance to prevent financial catastrophe. Make sure you have long term disability insurance through your employer. In smaller companies, or if you are self-employed you may not have this protection. This insurance will replace part of your income if you are disabled. Not to have this coverage is to risk everything should you no longer be able to work. If your family is dependent upon your income, it is also important you have life insurance. Term Life insurance is pure insurance protection, and is the best kind for the majority of people. You should buy coverage dependent on how many years worth of income you wish your dependents to have after you are gone. Insurance brokers usually love to sell whole life. This is insurance with a cash value attached. Mortgage holders also love to sell special mortgage insurance that pays off your real estate loan in the event of your death. You are usually better of passing on both of these offers. The extra money spent on whole life insurance can usually be invested in other savings much more profitably. Mortgage insurance is nothing more then more expensive term insurance. You can obtain your own term policy and use the funds to pay off the loan yourself if that’s what you choose to do. In addition to disability and life insurance, everyone needs to have comprehensive medical insurance coverage. Medical bills can quickly total beyond the financial reach of most people in the event of a medical problem. Without coverage you risk losing everything. No matter what insurance you obtain, it is a good idea to always try and take the highest deductible plan you can possibly afford. High deductibles keep the cost of coverage low and also reduce the hassle associated with filing small claims. Be sure the liability coverage for your auto and homeowners insurance policies covers at least twice the value of your net worth. If needed, it is usually possible to purchase an umbrella to your existing policy to increase your liability coverage. When you buy insurance, you should buy the most comprehensive coverage that you can, and take the highest deductible you can afford. The following table will help to assist you in estimating what homeowners insurance will cost you: What You Can Expect to Pay for Homeowners Insurance Purchase Price of Home Approximate Insurance Cost Per Month $100,000 $40 $150,000 $50 $200,000 $65 $250,000 $85 $300,000 $110 $400,000 $135 $500,000 $160 The cost of your insurance policy is driven by the cost of rebuilding your home. Although land has value, it doesn’t need to be insured because it would not be destroyed in a fire. Considering the annual cost of insurance, you should obtain quotes from different insurance companies and shop around for the best deal for comparable coverage. Maintenance and Other Costs Maintenance is difficult to budget for. You never know when something is going to break down or require repair. As a general rule, you can expect to spend about 1 percent of the purchase price per year on maintenance. That would mean if the purchase price of your home was $150,000, your annual expense for maintenance would be around $1500 or about $125 per month. You will find some years you spend less, and other years you may spend more. A new roof would cost you several years worth of your annual budget for maintenance. Keep in mind that there are other expenses, which you may feel are necessary but are actually not. Neighbors, family, and friends can pressure you sometimes into spending for furniture, home improvements, landscaping and remodeling. You can budget for these expenses, but do not allow your home to siphon any extra cash out of your wallet. You still need to budget for savings too. The amount of money you spend on repairs and improvements will also depend on the age of your home and your own taste and desires. Consider your previous spending behavior and the type of projects you would expect to do when deciding on a property. Tax Benefits of Home Ownership Current tax law still allows you to deduct mortgage interest property taxes on you federal and state tax returns. When you file your federal form these expenses will be itemized on schedule A of your tax return form 1040. A simple way to calculate your home ownership tax savings is to multiply your mortgage payment and property taxes by your federal income tax rate. This generally works well because the small portion of your mortgage payment that is not deductible approximately offsets the overlooked state tax savings so in effect you have approximated the savings for both. 1997 Federal Income Tax Brackets and Rates Taxable Income (Single) Taxable Income (Married Filing Jointly) Federal Tax Rate Less than $24,000 Less than $41,000 15% $24,000 to $59,750 $41,200 to 99,600 28% $59,750 to $124,650 $99,600 to $151,750 31% $124,650 to $271,050 $151,750 to $271,050 36% More than $271,050 More than $271,050 39.6% Now you should be able to compute your monthly housing expense. Don’t forget to use this new housing total in your current monthly spending plan mentioned previously to see if this works in with your other financial goals.