7 Things Financial Planners Wish You Knew About Buying a Home

On December 11, 2017   /   Home Buying  
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buying a home

By: Daniel Bortz

Financial planners don’t just help people balance their budgets or plan for retirement; they also help their clients buy homes. After all, a house is very often the biggest financial investment you’ll ever make—so, it makes sense that these professionals would have some strong opinions on just how to go about it.

Curious what they want you to know? Read on for their top, no-nonsense tips.

  1. Buy only if you plan to stick around

When you purchase a house, you have to shell out a significant amount of cash for closing costs—fees paid to third parties that helped facilitate the sale. Closing costs can vary widely by location, but they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. That’s a serious chunk of change!

Consequently, Craig Jaffe, a certified financial planner at United Capital in Boca Raton, FL, says it’s important to calculate your break-even point—i.e., how long it will take for you to recoup those costs.

“Typically, you want to own a home for at least three years in order to recoup the initial costs of buying the home,” says Jaffe. You can use realtor.com®’s rent or buy calculator to see whether purchasing a house makes financial sense for you.

2. Factor in the full costs of homeownership

When weighing whether it makes more sense to buy a house or continue to rent, don’t focus solely on your mortgage payments—you’ll also have to pay property taxes, interest, home insurance, utilities, and other expenses.

“A lot of people don’t budget for hidden costs” such as maintenance and repairs, says Jaffe.

You should also have an emergency fund set aside in case something goes wrong with the house.

“If your roof gets damaged or a major appliance breaks, you want to have cash on hand to pay for those costs,” Jaffe says. (If you don’t have a rainy day fund in place for those kinds of expenses, you could be forced to take on high-interest credit card debt.) Jaffe recommends building an emergency fund of 1% to 2% of your home’s value.

3. Try to make a 20% down payment

Unless you qualify for a Department of Veteran Affairs loan or Federal Housing Administration loan, you’re going to need to obtain a conventional home loan from a private mortgage lender.

When doing so, “you want to aim to make at least a 20% down payment,” says Jaffe. Why? Because if you put down less, you’ll have to pay private mortgage insurance, an additional monthly fee that protects the lender in case you default on the loan.

PMI can be pricey, amounting to about 1% of your whole loan—or $1,000 per year per $100,000. The good news? You can typically get PMI removed once you’ve gained at least 20% equity in your home.

4. Don’t raid your retirement funds

While it’s tempting to borrow from your IRA or 401(k) to amass a down payment on a home, “a retirement account is the last place you’d want to go for your down payment,” says Jaffe.

Indeed, if you borrow from either plan before age 59½, you’ll get slapped with a 10% excise tax on the amount you withdraw, on top of the regular income tax you pay on withdrawals from traditional defined contribution plans. Making early withdrawals also obviously prevents the money from accruing interest in these accounts, which could force you to delay retirement.

A better alternative? You could qualify for one of over 2,200 down payment assistance programs nationwide, which help out home buyers with low-interest loans, grants, and tax credits. Home buyers who use down payment assistance programs save an average of $17,766 over the life of their loan.

5. Make sure your credit score is up to snuff

You need to have solid credit—typically at least a 650 credit score—to qualify for a conventional home loan, and you need to have excellent credit (think 760 or above) to qualify for the lowest interest rates.

Hence, “you want to get pre-approved for a loan when your credit is at its strongest point,” says Jaffe.

To assess where you stand, pull a free copy of your credit report from each of the three major U.S. credit bureaus (Experian, Equifax, and TransUnion) using AnnualCreditReport.com. Your report doesn’t include your credit score—you’ll have to go to each company for that, and pay a small fee—but it shows your credit history, including any black marks (e.g., missed credit card payments, overdue medical bills).

If you notice errors on your report, contact the credit-reporting agency immediately, Jaffe says.

6. When buying a home, watch your spending carefully

In the months leading up to your home purchase, make sure you don’t take any actions that could hurt your credit score. These mistakes include closing old credit card accounts, opening a new credit card, maxing out your credit cards, and making a large purchase such as a new car, says Jeremy David Schachter, mortgage adviser and branch manager at Pinnacle Capital Mortgage in Phoenix.

7. Don’t bite off more house than you can chew

This one might sound obvious, but a lot of people make the mistake of buying a house that’s simply outside what they can comfortably afford.

“You don’t want to stretch yourself so thin that your housing expenses are going to stress you out each month or prevent you from saving for retirement,” says Jaffe. You can use realtor.com’s home affordability calculator to determine a price range that fits your budget.

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7 Things to Never, Ever Do When Buying a Home

On July 31, 2017   /   Home Buying  
Tags: , , ,
home buying

By: Daniel Bortz

Buying a home is exciting and terrifying. After all, this is the biggest financial move most people ever make. As such, there’s a lot of room for error, and even tiny mistakes can translate to tens of thousands of dollars.

The lesson here: Even the most intrepid home buyer should get some guidance not only on what to do, but also what not to do. Look no further than this list, which highlights the most common mistakes buyers make so you can avoid the same fate.

  1. Don’t shop for homes without an agent

By all means, start out by looking online at pictures of pretty houses—the more the better. It’s a vastly useful way to get the lay of the land. But when it comes time to get serious about buying a house, you should find a professional to help you out.

Think of a buyer’s agent as a fairy godparent who’s here to turn your homeownership dreams into reality. This person will guide you through every step of the home-buying process—from finding the right property and writing a winning offer to negotiating home inspection repairs and sailing through to closing.

“You want an advocate who is going to look out for your best interests in the transaction,” says Bellevue, WA, real estate agent Holly Gray.

2. Don’t meet with just one mortgage lender

Once you’ve found a real estate agent, your next step should be to get pre-approved for a home loan. To do that, you’ll have to meet with a mortgage lender and provide a good amount of paperwork, including two years of W-2 forms, two years of tax returns, and proof of funds for the down payment (among other documents).

That mountain of forms is one of the things that prompts many to meet with only one lender, says Richard Redmond, a vice president at ACM Investor Services in Larkspur and author of “Mortgages: The Insider’s Guide.” That’s a potentially big mistake!

Redmond recommends getting at least three quotes from different lenders so that you can survey your options and find the best loan for you. One option you have when shopping around is to meet with a mortgage broker—basically an intermediary who presents you with options from a variety of lenders. No matter what, “you need to feel comfortable with the lender you choose,” says Redmond. “You want a lender who asks probing questions, listens to your answers, and presents you with intelligent options.”

3. Don’t understate your budget

It might sound strange, but a number of home buyers make the mistake of hiding their true budget from their real estate agent.

“Some people are afraid that their agent is going to make them buy the most expensive house that they can afford, so they understate their price range,” says Daniel Gyomory, a real estate agent in Northville, MI.

However, if you’re not upfront with your agent about your price range, you might miss out on a great house.

“If you tell me your budget is $300,000 maximum but you’re actuallywilling to pay $400,000, I may not send you listings that could actually be a good fit for you,” Gyomory explains.

4. Don’t hold out for the ‘perfect’ house

People throw around the words “dream home” a lot. (Heck, we’re guilty of it.) However, here’s the not-so-harsh truth: “There’s no such thing as a perfect house,” says Gyomory. And that’s why he has clients create a list of “musts” and “wants” to identify their criteria and focus on what really matters to them.

5. Don’t make ridiculously lowball offers

You obviously want to get a bargain, but you could lose out on a home that you love by making an absurdly low offer. In fact, a recent survey from Inman found that 15% of real estate agents say the third-largest mistake people make when buying a home is offering too little for a property (that’s behind not talking to a lender first and waiting too long to make an offer).

“When you overlook market data and make a lowball offer, you’re pretty much slapping the seller in the face,” says Gyomory. And if you offend the seller, the person might not even be willing to make you a counteroffer.

Bottom line: Trust your agent to help you assess the value of a house and write a winning offer, says Karen Elmir, a luxury real estate agent in Miami.

6. Don’t forget to budget for closing costs

The home seller will chip in some money at settlement; however, as the home buyer, you have the (unfortunate) pleasure of shouldering the lion’s share of the closing costs. Your mortgage lender should be able to give you a rough estimate of your closing costs once a seller accepts your offer, but as a rule you can estimate that they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500.

7. Don’t make big purchases before you close

Once you have found the right house and get the seller to accept your offer, your loan still needs to go through underwriting in order for you to obtain the mortgage. One thing underwriters do is look at your credit score from the three major credit bureaus—Experian, Equifax, and TransUnion—to make sure your credit hasn’t changed since you were pre-approved.

Therefore, you’ll want to avoid taking on any new debt while you’re in the process of buying a house. Purchasing a car with an auto loan or maxing out your credit cards, for example, could hurt your credit score, which could potentially raise your loan’s interest rate or—in the worst case—get your mortgage application rejected. (In other words: Bye-bye, new house.)

 

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3 Types of Insurance You Need to Buy a Home (and 4 You Don’t)

On December 12, 2016   /   Home Insurance  
Tags: , ,
homeowners insurance

By: Craig Donofrio

When you buy a home, you will be showered with offers to buy insurance—and not just one type, but many types. Such awesome deals! So which ones do you really need?

There are a few that are downright essential, and others are nice but not necessary. Furthermore, others are total rip-offs to avoid at all costs.

To help you differentiate among them all, here’s a rundown of the types of insurance you’ll likely encounter on your home-buying journey and a reality check on whether you need them.

Title insurance
Do you need it? Absolutely!

Normally, this isn’t even a question because it’s almost always mandatory when you’re getting a mortgage. But if you’re paying all-cash, you have the option of skipping on title insurance. You shouldn’t.

Title insurance “ensures both the lender and the owner’s financial interests in the home are protected against loss due to title defects, liens, or other matters,” says Liane Jamason, a Realtor® and owner of the Jamason Realty Group at Smith & Associates Real Estate in Tampa, FL.

It’s especially important to get title insurance in transactions like short sales and foreclosures, which often carry the high risk of some kind of tax lien being attached to the property. Title insurance is going to safeguard against your needing to pay for liens, and will ensure the title is clear so no one down the road could claim they own the property and file a lawsuit.

If for some reason you’re dead set against getting title insurance, Jamason suggests you should at least get a lawyer to “thoroughly check the property’s history to ensure there could be no future claims to title.”

Homeowners insurance
Do you need it? You bet

Like title insurance, this is another one that’s not required if you own the house outright (you’ll need to have it with a mortgage), but this is necessary. Homeowners insurance covers you for a variety of things like fires and storms. You’ll want it even if you aren’t legally required to have it.

Eric Kossian, agency principal of InsurePro, a Washington state insurance agency, cites an example of a wealthy homeowner who had paid off his house and “figured since he had never had an insurance claim he would save himself the $700 a year in premium.” Then some kids near his home started a fire, which got out of control and burned down several houses—including his. It cost the homeowner about $450,000 in damages. Consider this a cautionary tale.

Extra moving insurance
Do you need it? Yes, if you’re smart.

Bare-bones, federally mandated moving coverage offers just 60 cents per pound of an item, and is known as “released value protection.” So if something breaks and that’s your only coverage, you won’t get back the full cost of the item, just what’s calculated under the coverage limits.

There’s also “full-value protection,” which can be purchased from the moving company, but you need to specify which items are worth more than $100 per pound. The moving company can opt to repair the item back to its original state, or give you the fair market value of the item—not necessarily what you paid for it. Plus, full-value protection excludes items over $5,000. Opt for this instead of released value protection. (Rates vary by moving company—it’ll be more than released value, but it’s worth it.)

If you’re moving some really valuable stuff, you can purchase extra insurance from a third-party insurance provider. This typically costs $100 per $10,000 of coverage.

Flood insurance
Do you need it? It depends on where you live and how lucky you feel.

Flood insurance is a tricky one. Requirement for flood insurance can be mandatory for homes in flood-prone areas. Otherwise, it’s optional. The biggest problem with flood insurance is you don’t know you need it until it’s too late. Last year, flash floods in Texas and Oklahoma washed homes away. In 2012, Hurricane Sandy hit the Northeast and left thousands in low- or moderate-risk flood zones with water-damaged homes.

Torrential rain and freak storms can happen anywhere.

“If you are not in a designated flooding area, it is still a wise idea to get flood insurance, and typically it is very affordable if you are not in a low-lying area,” Jamason says.

So this one’s sort of a toss-up. If you have it, you may never need it. But it’s worse to really need it, and then not have it. A similar argument can be made for earthquake insurance.

Private mortgage insurance
Do you need it? Hopefully no.

For most loans, private mortgage insurance is mandatory if you don’t have a 20% down payment. But if you can put down at least that amount, it’s well worth doing to avoid PMI. The reason: Mortgage insurance benefits only the lender—it does nothing for you, so get rid of it as quickly and cheaply as possible. Some options to avoid PMI include piggyback loans, lender-paid PMI, and single-payment PMI.

Mortgage protection life insurance
Do you need it? Not really.

In case you die while you’re still paying off a mortgage (bummer, we know), this insurance is supposed to make sure your family is financially covered when it comes to paying your mortgage. But it’s basically pointless.

“I would say as a general rule that mortgage life insurance or mortgage protection insurance is unnecessary,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School. Reiss says consumers “are generally better served by a cheap term insurance policy from a well-rated insurance company,” and “you will generally get more protection per premium dollar with a term life insurance policy.”

Umbrella insurance
Do you need it? Usually not.

Umbrella insurance is basically insurance for your insurance. It vastly expands the amount of damages your insurance will cover. But it’s not necessarily worth it.

“One common rule of thumb is that an umbrella insurance policy should equal the net worth of the insured,” Reiss says. So for the average middle-class American homeowner, Reiss notes that an umbrella policy is generally “less relevant,” probably because your regular insurance covers enough. For the rich, or those who are “reasonably expecting” a rise in income, Reiss says it can be a good idea and worth researching further.

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What Is Escrow? How It Keeps Home Buyers and Sellers Safe

On September 19, 2016   /   Home Buying  
Tags: , , , ,
escrow sign

By: Cathie Ericson

Buying a house can involve big and scary terms, and “escrow” ranks near the top. So what is escrow, anyway?

The good news is that escrow is not as ominous as it sounds. In the home-buying process, escrow is a financial tool that allows you to set aside important items such as the buyer’s earnest money check and purchase agreement document in an impartial holding area, where it will stay until all of the details are worked out between a buyer and a seller, says Andy Prasky, a real estate professional with Re/Max Advantage Plus in Twin Cities.

The escrow officer is a third party—perhaps someone from the closing company, an attorney, or a title company agent (customs vary by state). How much does escrow cost? That varies too—as well as whether the buyer or seller (or both) pays—with the fee for this service typically totaling about 1% to 2% of the cost of the home.

How escrow works

The third party is there to make sure everything during the closing proceeds smoothly, including the transfers of money and documents. Escrow protects all the relevant parties by ensuring that no funds and property change hands until all conditions in the agreement have been met.

Along the way, proper documentation is filed with the escrow officer as each step toward closing is completed. Contingencies that might be part of the process could includehome inspection, repairs, and other tasks that need to be accomplished by the buyer or seller. And every time one of those steps is completed, the buyer or seller signs off with a contingency release form; then the transaction moves on to the next step (and one step closer to closing).

Once all conditions are met and the deal is finalized, the money due to the sellers is transferred to them. Meanwhile an escrow officer clears (or records) the title, which means the buyer officially owns the home.

How escrow protects buyers and sellers

Escrow may seem like a pain, but here’s how it can work in your favor. Let’s say, for example, the buyer had a home inspection contingency and discovered that the roof needed repairs. The seller agrees to fix the roof. However, during the buyer’s final walk-through, she finds that the roof hasn’t been repaired as expected. In this case, the sellers won’t see a dime of the buyer’s money until they fix that roof. Talk about a nice safeguard for the buyer!

Sellers benefit from escrow, too: Let’s say the buyers get cold feet at the last minute and bail on the deal. This may be disappointing to the seller, but at the very least, buyers have typically ponied up a sizable chunk of change for their earnest money deposit. This money, often totaling 1% to 2% of the purchase price of a home, has been held in escrow. When buyers back out with no legitimate reason, they forfeit that money to the seller—a decent consolation for the sale’s failure.

Escrow, in other words, is the equivalent of bumpers on cars, keeping everyone safe as they move forward in a real estate transaction. Odds are, no one’s trying to swindle anyone. But isn’t it nice to know that if something does go wrong, escrow is there to cushion the blow?

Deirdre Woollard and Broderick Perkins contributed to this article.

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6 Reasons You Should Never Buy or Sell a Home Without an Agent

On June 27, 2016   /   Home Buying, Selling a Home  
Tags: , , , ,
never buy sell without an agent

By: Rachel Stults

It’s a slow Sunday morning. You’ve just brewed your Nespresso and popped open your laptop to check out the latest home listings before you hit the road for a day of open houses.

You’re DIYing this real estate thing, and you think you’re doing pretty well—after all, any info you might need is at your fingertips online, right? That and your own sterling judgment.

Oh, dear home buyer (or seller!)—we know you can do it on your own. But you really, really shouldn’t. This is likely the biggest financial decision of your entire life, and you need a Realtor® if you want to do it right. Here’s why.

1. They have loads of expertise

Want to check the MLS for a 4B/2B with an EIK and a W/D? Real estate has its own language, full of acronyms and semi-arcane jargon, and your Realtor is trained to speak that language fluently.

Plus, buying or selling a home usually requires dozens of forms, reports, disclosures, and other technical documents. Realtors have the expertise to help you prepare a killer deal—while avoiding delays or costly mistakes that can seriously mess you up.

2. They have turbocharged searching power

The Internet is awesome. You can find almost anything—anything! And with online real estate listing sites such as yours truly, you can find up-to-date home listings on your own, any time you want. But guess what? Realtors have access to even more listings. Sometimes properties are available but not actively advertised. A Realtor can help you find those hidden gems.

Plus, a good local Realtor is going to know the search area way better than you ever could. Have your eye on a particular neighborhood, but it’s just out of your price range? Your Realtor is equipped to know the ins and outs of every neighborhood, so she can direct you toward a home in your price range that you may have overlooked.

3. They have bullish negotiating chops

Any time you buy or sell a home, you’re going to encounter negotiations—and as today’s housing market heats up, those negotiations are more likely than ever to get a little heated.

You can expect lots of competition, cutthroat tactics, all-cash offers, and bidding wars. Don’t you want a savvy and professional negotiator on your side to seal the best deal for you?

And it’s not just about how much money you end up spending or netting. A Realtor will help draw up a purchase agreement that allows enough time for inspections, contingencies, and anything else that’s crucial to your particular needs.

4. They’re connected to everyone

Realtors might not know everything, but they make it their mission to know just about everyone who can possibly help in the process of buying or selling a home. Mortgage brokers, real estate attorneys, home inspectors, home stagers, interior designers—the list goes on—and they’re all in your Realtor’s network. Use them.

5. They adhere to a strict code of ethics

Not every real estate agent is a Realtor, who is a licensed real estate salesperson who belongs to the National Association of Realtors®, the largest trade group in the country.

What difference does it make? Realtors are held to a higher ethical standard than licensed agents and must adhere to a Code of Ethics.

6. They’re your sage parent/data analyst/therapist—all rolled into one

The thing about Realtors: They wear a lot of different hats. Sure, they’re salespeople, but they actually do a whole heck of a lot to earn their commission. They’re constantly driving around, checking out listings for you. They spend their own money on marketing your home (if you’re selling). They’re researching comps to make sure you’re getting the best deal.

And, of course, they’re working for you at nearly all hours of the day and night—whether you need more info on a home or just someone to talk to in order to feel at ease with the offer you just put in. This is the biggest financial (and possibly emotional) decision of your life, and guiding you through it isn’t a responsibility Realtors take lightly.

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