If you properly figured out your
finances before buying your new home you should be able to meet your
monthly housing obligations. Most people will have higher costs now
then they did before, whether or not they rented. 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 to
that, late payments on a mortgage loan really 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 donít 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 do 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
added to the value of your property, such as a new roof.
Beware of offers arriving in the mail for insurance protection
You will receive solicitations to purchase disability
insurance, life insurance, and mortgage payment protection
insurance. The problem is that 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 just 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 any
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 reevaluated
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 tract of interest rates
Once youíve done everything recommended here and you now
have the best mortgage available, donít 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 what interest rates are doing. When rates have dropped
a full percentage point it is time to start to assess your mortgage
situation. The information that you will need to know is the
interest rate you could get, and the costs involved obtaining that
rate. Once you have an array of figures, calculate the
months of lower payments required to recoup the cost of
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. Letís say youíre 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.
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 that you have a policy that covers guaranteed replacement.
This guarantees that 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 a personal item
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 then
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, flood, 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 has
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 someoneís 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
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
that you can purchase. You can get either a
standard-coverage policy or an extended Ėcoverage
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
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 itís own advantages and
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.
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 party other then 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 just 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 should include the
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.
penalties if one of the owners canít come up with
the cost of their share of property taxes or
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 at all.
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
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
Your mortgage lender will require that you have sufficient
homeowners insurance to protect their investment. In most states
your home is the lenders security for the loan and they will want
this security protected. You will want to insure not
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
that 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 that you have life
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 thatís 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 that you can
possibly afford. High deductibles keep the cost of
coverage low and also reduce the hassle associated with
filing small claims.
Be sure that 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 that 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
Purchase Price of Home Approximate Insurance Cost per
The cost of your insurance policy is driven by the cost of
rebuilding your home. Although land has value, it
doesnít 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
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 that 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
Singles Married-Filling Jointly Federal Tax Rate
|Less than $24,000
||Less than $41,000
|$24,000 to $59,750
||$41,200 to 99,600
|$59,750 to $124,650
||$99,600 to $151,750
|$124,650 to $271,050
||$151,750 to $271,050
|More than $271,050
||More than $271,050
Now you should be able to compute your monthly housing
expense. Donít 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.