Home Ownership

Buying or selling a home is an exciting and complicated step in your life. The better prepared and informed you are, the more likely you will be able to make a decision that is right for you and your family. How prepared are you?

For most of us, home ownership is the American dream. Our home is also the most expensive purchase we well likely make in our lifetime. Thats why we need to do our own due diligence in addition to consulting with experts. The recent meltdown in the mortgage industry has shown us that we shouldnt solely rely on the experts, because their motivation may differ from our own needs and expectations. Buying or selling a home can be a very rewarding experience—if you understand the process, your personal purpose for your home ownership, what your long terms expectations are, and how much financial cushion you have when choosing your price point. The devil is in the details—pay attention to the cash flow figures when making your purchase decision and be realistic about your income sources and your ability to pay, not just your mortgage, but also property taxes, insurance, and home maintenance costs over the years.

Whether you are buying or selling a home, there are several things to consider. Here are some things that you should think about and address:

Purpose

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Are you planning to be in the home long term or do you see yourself moving out in a few years to a larger home? Where geographically do you want to live? Are you starting a family? If so, how are the schools in the area? The answer to these kinds of questions will help you determine what type of home you want to purchase, what type of loan you should get, and even how much you should spend.

Commonly asked questions

Cash flow

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If you're buying a new home, can you afford the payments, home insurance, property taxes, and Home Owners Association dues, and will you have money left over for maintenance, routine repairs? Make sure you have enough for at least a 20% down payment to avoid having to pay for Private Mortgage Insurance (PMI), which will be additional cost to you. Also, set aside money for closing costs, insurance premiums, prorated taxes, moving expenses, and maybe new furnishings.

If you're selling, are you buying another home immediately, or are you going to rent?

Taxes

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If you are selling your home, you do not have to pay capital gains taxes on the first $250,000 of gain, and $500,000 is excluded if you are married, the home is in both of your names, and you lived in the home for more than two years. But, if you purchased the home some time ago and your gain is higher, be prepared to pay a capital gains tax on any amount above the stated limits.

If you're buying a home, even though there is a tax benefit at the end of year if you itemize your deductions, you'll still need cash flow during the year to cover all of the expenses. Also, don't forget you have to pay property taxes and the amount of property taxes varies geographically.

Realtor

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Whether you are buying or selling you need to decide if you will use a Realtor? If you are thinking of not using one, make sure you are up-to-date on the laws and that you understand your responsibilities. If you are selling your home and buying a new one, don't rule out negotiating the commission fee with any realtor. There are also several helpful online sites that charge a lower commission, such as www.ziprealty.com. So shop around.

Commonly asked questions

Condition of the home

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If you are buying a home, you need to consider whether or not you're the type who is right for a fixer upper. If you're selling, and your house is not up to date, are you okay with pricing the home lower.

Affordability

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How much can you afford to pay for your home, or how much do you need to sell your home for to pay off your mortgage, equity line of credit, or other financial obligations on the property. Make sure you run several scenarios so you are not caught by surprise. This will also help you make a rational decision rather than an emotional one when negotiating an offer for buying or selling.

Risk

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So you've bought a home. Now you're the landlord, and if the washer floods, you have to deal with it. You are wholly responsible for all of the upkeep and maintenance of the house, so figure out how you will handle those situations. If your life circumstances change, and you are forced to sell, you should understand that it could take a minimum of two to three months before you have cash in hand. It is considerably more difficult to move in and out of a home you own than it would be from a rental unit. If your loan is an adjustable rate mortgage and not a 30-year fixed mortgage, you could face an increase in monthly payments. Finally, let's not forget the past 18 months. Your property could depreciate in value and you may be at risk of owning a home for which the loan amount is larger than the value of the home. The point is, you need to understand how much of a financial cushion you have.

Research

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Don't just rely on your realtor or anecdotal discussions with friends and neighbors. The Internet offers several resources to help you see if you are paying too much or selling to low. For instance, you can get a general understanding of how much a remodeled kitchen adds to the price. There are also several online sites, such as www.zillow.com that can help you estimate the current value of home in a particular neighborhood.

Helpful websites:

  • www.freddiemac.com is one of the largest lenders in the country. The Web site has many useful pieces of literature on home ownership.
  • www.hud.gov is the U.S. Department of Housing site. It provides a lot of information, including the facts about the American Recovery Act of 2009 that allocated billions of dollars to state and local programs.

Fin Tip

First Time Home Buyer Credit of up to $8,000 as a part of the Stimulus package has been extended up to April 2010. Keep looking. Here's a link for more information regarding this credit.

Other commonly asked questions