Mortgage Interest and Home Equity deductions !
Deducting mortgage interest is a great tax benefit that can make homeownership more affordable. Your first mortgage isn’t the only loan that qualifies, either. In many cases, you can also deduct interest on home equity loans, second mortgages, and home equity lines of credit, or HELOCs.
If you want to deduct all of your mortgage interest, there are limits on both how much money you can borrow and on what you do with the money you get. You also need to itemize your return to reap the benefits of these deductions. Calculations can be complicated, so consult a tax adviser.
Know your loan limits
A good place to check out what you can deduct before you borrow is the chart on page 3 of IRS Publication 936. It’ll walk you through the requirements you must meet to deduct all of your home loan interest. It’s an hour well spent.
The first hurdle you’ll run into is the total amount of your loan or loans. In general, individuals and couples filing jointly can deduct the interest on up to $1 million ($500,000 if you’re married and filing separately) in combined home loans, as long as the money was used for acquisition costs, that is the cost to buy, build, or substantially improve a home, explains Scott O’Sullivan, a certified public accountant with Margolin, Winer & Evens in Garden City, N.Y. Any interest paid on loan amounts above the $1 million threshold isn’t deductible.
The same $1 million limit applies whether you have one home or two. Buying a vacation home doesn’t double your loan limits. And two homes is the max; you can’t deduct a mortgage for a third home. If you have a mortgage you took out before Oct. 13, 1987, you have fewer restrictions on claiming a full deduction. The calculations for “grandfathered debt” can get complex, so get help from a tax professional or refer to IRS Publication 936.
Whatever you do, don’t forget that you can also deduct the points and fees associated with a first or second mortgage when you initially buy your home, says Jeff Rattiner, a CPA with JR Financial Group in Centennial, Colo. If you refinance the same house, you have to deduct those costs over the entire term of the loan. If you refinance again, you can deduct all the costs from the earlier refi in the year you take out the new loan.
Spend loan proceeds wisely
The other limitation on how much you can borrow and still get your deduction comes into play when you take out a home equity loan or HELOC that you don’t use to buy, build, or improve your home. In that case, you can deduct the interest you pay only on the first $100,000 ($50,000 if married filing separately). This loan limit also applies in a so-called cash-out refi, in which you refinance and take out part of the equity you’ve built up as cash, says John R. Lieberman, a CPA with Perelson Weiner in New York City.
That means if you decide to take out a $115,000 home equity loan to buy that Porsche, you can deduct the interest on the first $100,000 but not on the $15,000 that exceeds the limit. Use the same $115,000 to add a new bedroom, however, and the full amount is allowable under the $1 million cap. Keep in mind, though, that the $115,000 gets added into the pot of whatever else you owe on your other home loans. In many cases, points and loan origination costs for HELOCs are deductible.
Consider this simplified scenario: You borrow $250,000 against your home at 8% interest. That means you’ll pay $20,000 in interest the first year. Spend the $250,000 on home improvements, and all of the interest is deductible. Spend $150,000 on improvements and $100,000 on your kids’ college tuition, and all the interest is still deductible.
But spend $100,000 on improvements and $150,000 on tuition, and the improvement outlays are deductible but $50,000 of the tuition expense isn’t. That’ll cost you $4,000 in interest deductions. Preserve the $4,000 deduction by coming up with the extra money for tuition from another source, perhaps a low-interest student loan or by borrowing from a retirement plan. In 2009, lowering your taxable income by $4,000 to $96,000 would’ve cut your tax bill by $988.
Beware the dreaded AMT
Even if you’ve followed all the loan limit rules, you can still get stuck paying tax on mortgage interest. How come? It’s all thanks to the Alternative Minimum Tax. Congress created the AMT, which limits or eliminates many deductions, as a way to keep the wealthy from dodging their fair share of taxes.
Calculating the AMT can be complex, but if you make more than $75,000 and have several kids or other deductions, you might well be subject to it. Problem is, if you fall into the AMT group, you may not be able to deduct interest on a home equity loan, even if the loan falls within the $1 million/$100,000 limit. If you’re subject to the AMT and borrow money against the value of your home, you’ll have to use it to buy, build, or improve your place, or you may not have a chance to deduct the interest, says Rattiner, the Colorado CPA.
Home vs. Condo - Are condo fees worth it?
A common objection for condos is thinking that a condo fee is throwing money away. One must first understand what a condo fee covers.
Often, a condo owner will not have to pay for water or sewer costs, this is paid by the condo association. Also, the condominium association will carry a homeowners insurance policy on the exterior and/or structure of the condominium building. The condo owner will only be responsible for insurance on the interior of the unit and personal property. This will save the condo owner approx. 50% of the cost of the typical homeowners insurance policy for a home.
Typically a condominium association will cover:
- Maintenance, paving, and plowing of the driveway, sidewalks, and curbs.
- Roof replacement and repair.
- Exterior siding/gutters maintenance or repair
- Landscaping / mowing / trimming
As an example, let’s take a $150,000 condo with a $140 monthly condo fee for a first time buyer.
While owning a house you might average a water/sewer bill of $25 per month. With a condo you save $20 per month on homeowners insurance costs compared to a house. Thats $45 saved per month. When you think about the actual costs of maintaining the exterior of a home, landscaping, paving, fertilizer, purchasing a lawnmower, weed-wacker, hedge trimmer, etc… Most homeowners would spend more than $95 a month on average. This isn’t even taking into account eventual big ticket items like roof($5000) and siding ($5000) replacement. There is also quite a value to living a low maintenance, care-free lifestyle. So in my opinion, the notion that a condo fee isn’t worth it is false.
Top Ten Tax Breaks For Your Home
Your home offers a score of tax deductions and credits designed to help offset the cost of housing and to keep the housing market fueled with new buyers. Some federal-level politicians would like to separate you from some of those benefits and they may or may not be successful, so take advantage of them while you can.
1. Mortgage Loan Interest
We pay a lot of interest in the first few years of a mortgage and this is the mother of all write offs. You can deduct all the interest you pay on your loan for the year for loans under $1 million filed jointly and half of that if you file single. Home equity loans interest is also deductible up to $100,000 for couples filing jointly and one half of that if you are single.
2. Home Improvement Loan Interest
The interest on a home improvement loan is also deductible, but calculated differently. You can deduct all the interest on a home improvement loan provided the work is a “capital improvement” rather than repairs, maintenance, or cosmetic upgrades. Capital improvement typically increase a home’s value: a room addition, a new roof (prolonging the life), or adapt it to new uses (universal design improvements to assist older people or people with disabilities). You get tax benefits from repair work (painting, repairing, etc.) only when you sell your home but you can use a home equity loan to make repairs and deduct the interest-up to the limits.
Points, each equal to 1 percent of the loan principal, are charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage brokers commission. Refinanced mortgage points are deductible too, only when they are financed.
4. Property taxes
Property taxes or real estate taxes are fully deductible.
5. Capital Gains Exclusion
Home buying investors’ best tax shelter is one that allows married couples who file jointly to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for 2 out of the last 5 years. Under $250,000 for those of us filing separately.
6. Home-Based Biz Deduction
Home offices that use a portion of your home exclusively for business could qualify you to deduct a percentage of costs related to that portion. Included are a total of your insurance and repair costs, utility bills and depreciation. If you sell your home you may have to recapture tax if you have taken a depreciation deduction due to your home based biz.
7. Selling Costs and Capital Improvements
When you sell your home you can reduce your taxable gain by the amount of your selling costs, which include real estate commissions, title insurance, legal fees, advertising and inspection fees. Cost typically stemming from decorating or repairs-painting, wallpapering, planting flowers, maintenance, and the like-are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more salable.
Selling costs are deducted from your gain. Selling costs are only relevant if you will have to pay capital gains when selling your home (investment prop. or you lived there less than 2 years).
8. Moving Costs
A move triggered by a new job comes with some deductible moving costs. To qualify, you must move within 1 year of starting a new job as well as some other criteria. Deductions include travel or transportation costs and expenses for lodging and storing your household goods.
9.Mortgage Tax Credit
Mortgage tax certificates allow qualifying, low income, first time homebuyers to take a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home. Unlike a deduction that reduces your income, the credit is subtracted, dollar for dollar from the tax owed. The remaining 80% of your mortgage interest is taken as a normal mortgage interest deduction.
10. Energy Tax Credits
The newest home based tax credit were made possible last year by the Energy Policy Act of 2005. Tax credits of up to $500 in 2006 and 2007 are available for upgrading heating and air conditioning systems, insulations, windows, doors and thermostats, caulking leaks and for otherwise putting the bite on energy waste in your home.
You should always consult your accountant before making any tax related decisions or for any additional questions. After all, we are just lousy Realtors.
7 Terms to Watch for in a Purchase Contract
These are the most important considerations for most buyers and sellers.
1. The closing date. See if the date the buyer wants to take title is reasonable for you.
2. Date of possession. See if the date the buyer wants to move in is reasonable for you.
3. The earnest money. Look for the largest earnest money deposit possible; since it is forfeited if the buyer backs out, a large deposit is usually a good indication of a sincere buyer.
4. Fixtures and personal property. Check the list of items that the buyer expects to remain with the property and be sure it’s acceptable.
5. Repairs. Determine what the requested repairs will cost and whether you’re willing to do the work or would rather lower the price by that amount.
6. Contingencies. See what other factors the buyer wants met before the contract is final—inspections, selling a home, obtaining a mortgage, review of the contract by an attorney. Set time limits on contingencies so that they won’t drag on and keep your sale from becoming final.
7. The contract expiration date. See how long you have to make a decision on the offer.
Negotiating to Yes
These tips can help you turn a negotiation into a win-win agreement.
Negotiating a purchase agreement is perhaps the trickiest aspect of any real estate transaction. Most home buyers and home sellers want to arrive at a win-win agreement, but that’s not to say either side would regret getting a bigger “win” than the other. Successful negotiating is more than a matter of luck or natural talent. It also encompasses the learned ability to use certain skills and techniques to bring about those coveted win-win results.
Here are six tips and suggestions to turn negotiation into agreement:
1. Start with a fair price and a fair offer.
There’s no question that significantly overpricing your home will turn off potential buyers. Likewise, making an offer that’s far lower than the asking price is practically guaranteed to alienate the sellers. Asking and offering prices should be based on recent sales prices of comparable homes.
2. Respect the other side’s priorities.
Knowing what’s most important to the person on the other side of the negotiating table can help you avoid pushing too hard on hot or sensitive issues. For example, a seller who won’t budge on the sales price, might be willing to pay more of the transaction costs or make more repairs to the home, while a buyer with an urgent move-in date might be willing to pay a higher portion of the transaction costs or forgo some major repairs.
3. Be prepared to compromise.
“Win-win” doesn’t mean both the buyer and the seller will get everything they want. It means both sides will win some and give some. Rather than approaching negotiations from an adversarial winner-take-all perspective, focus on your top priorities and don’t let your emotions overrule your better judgment.
4. Meet in the middle.
Can’t decide who will pay the recording fee? Can’t agree on a close-of-escrow date? Arguing over cosmetic repairs? Splitting the difference is a time-honored and often successful negotiation strategy. Pay half the fee. Count off half the days. Fix half the blemishes.
5. Leave it aside.
Politicians and corporate executives are famous for their “for future discussion” agreements. If you have a major sticking point that’s not material to the overall contract (e.g., the purchase of furniture or fixtures), finish the main agreement, then resolve the other difficulties in a side agreement or amendment. This technique allows both sides to recognize and solidify basic areas of agreement, then move ahead toward a fair compromise on other terms and conditions. Summarizing the points of agreement in writing is another helpful strategy.
6. Ask for advice.
Successful Realtors® tend to be experienced negotiators. They’ve seen what works and what doesn’t in countless real estate transactions, and they’ve established a track-record of bringing buyers and sellers together. Consult your Realtor® about negotiating strategies, win-win compromises and creative alternatives.
Buying a home? These eight tips can help make your house-hunting experience positive and rewarding.
1. Its all about location…
You’ve probably heard the old real estate joke about “location, location, location,” but the point still bears repeating. Location is crucial. How far are you really willing to commute to your place of employment? How good are the local schools, shopping centers, public transportation, seniors services and other public amenities? Will your new home be next to a vacant lot or a commercial property? Even a picture-perfect dream home can be a mistake if it’s in an undesirable location, and a poor-location home can be a particularly bad choice if you anticipate reselling the home within a few years.
2. Make a list.
Do you (and your spouse, if you’re married) really know what you need and want in your home? You’ll save yourself many hours of shopping (and potentially arguing) if you make a list ahead of time. Zero in on the features you must have, would like to have, definitely don’t want and would prefer not to have. Your goal is to find the right home for your family without falling in love with one that doesn’t suit your needs. Tip: Start compiling your wish list by thinking about what you like and dislike about your current home.
3. Do your homework.
Not long ago, consumers had very little access to information about recent home sales prices, market trends, homes on the market, neighborhood statistics and the home-buying process. Today, all this information and more is available on the Web. Go surfing. Get educated. Become empowered.
4. Get preapproved for a mortgage.
Your top-dollar home price is a function of your household income, your creditworthiness, interest rates, the type of loan you select and how much ready cash you have for the down payment and closing costs, among other factors. Rather than guessing or estimating how much you can afford to spend, ask a lender or mortgage broker to give you a full assessment and a letter stating how much you’re qualified to borrow. The true amount may be much more or much less than you think.
5. Take notes.
Touring multiple homes is a confusing experience for most people. Rather than relying on memory, make notes about the homes you visit. Turn your priorities into a personalized home-shopping checklist and use it track the features of each home.
6. Wear comfortable clothing and sturdy shoes.
House-hunting can be tiring, especially if you’re relocating to a distant community and want to see a dozen homes in one day. There’s no sense in torturing your feet unnecessarily.
7. Be prepared to make an offer.
House-hunting can also be frustrating, especially if you know in your heart you’re not really emotionally or financially ready to buy a home. If you’re not ready, don’t put yourself through the exercise. If you are ready, go through a blank purchase contract ahead of time so you’ll know what decisions you’ll face when you make an offer.
Granted, buying a home is a major life-altering event. But it’s not worth making yourself insanely crazy or super-duper stressed. Save time at the end of your house-hunting expedition to unwind, calm your thoughts and emotions and keep the whole experience in perspective.
How Much Can I Afford?
As you think about applying for a home loan, you need to consider your personal finances. How much you earn versus how much you owe will likely determine how much a lender will allow you to borrow.
First, determine your gross monthly income. This will include any regular and recurring income that you can document. Unfortunately, if you can’t document the income or it doesn’t show up on your tax return, then you can’t use it to qualify for a loan. However, you can use unearned sources of income such as alimony or lottery payoffs. And if you own income-producing assets such as real estate or stocks, the income from those can be estimated and used in this calculation. If you have questions about your specific situation, any good loan officer can review the rules.
Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. If it is revolving debt like a credit card, use the minimum monthly payment for this calculation. If it is installment debt, use the current monthly payment to calculate your debt load. And you don’t have to consider a debt at all if it is scheduled to be paid off in less than six months. Add all this up and it is a figure we’ll call your monthly debt service.
In a nutshell, most lenders don’t want you to take out a loan that will overload your ability to repay everybody you owe. Although every lender has slightly different formulas, here is a rough idea of how they look at the numbers.
Typically, your monthly housing expense, including monthly payments for taxes and insurance, should not exceed about 28 percent of your gross monthly income. If you don’t know what your tax and insurance expense will be, you can estimate that about 15 percent of your payment will go toward this expense. The remainder can be used for principal and interest repayment.
In addition, your proposed monthly housing expense and your total monthly debt service combined cannot exceed about 36 percent of your gross monthly income. If it does, your application may exceed the lender’s underwriting guidelines and your loan may not be approved.
Depending on your individual situation, there may be more or less flexibility in the 28 percent and 36 percent guidelines. For example, if you are able to buy the home while borrowing less than 80 percent of the home’s value by making a large cash down payment, the qualifying ratios become less critical. Likewise, if Bill Gates or a rich uncle is willing to cosign on the loan with you, lenders will be much less focused on the guidelines discussed here.
Remember that there are hundreds of loan programs available in today’s lending market and every one of them has different guidelines. So don’t be discouraged if your dream home seems out of reach.
In addition, there are a number of factors within your control which affect your monthly payment. For example, you might choose to apply for an adjustable rate loan which has a lower initial payment than a fixed rate program. Likewise, a larger down payment has the effect of lowering your projected monthly payment.
Condos in Worthington by Price Range
All condo developments in Worthington listed by price range.
- Selby Condos (next to St. Michaels Church)
- Riverlea Condos (on High)
- Residences at Worthington (age 55+)
- Village at 17 (Dub Gran.)
- Ville Charmante (across from Worthington Square Mall)
- Worthinglen (behind Worthington Firestation)
- Toll Gate Square (next to Orange Johnson House)
- Ville Charmante
- Strathaven (off 161clsoe to Linworth)
- Simsbury Place (Proprietors Rd/161)
- Worthington Inn Condos
- North Street Village
- Bainbridge (Olentangy River Rd.)
- Simsbury Place
- Village Green (SW corner of Village Green)
The Dept. of Housing and Urban Development (HUD), guarantees no/low down payment loans for banks. Meaning if an FHA loan is foreclosed upon, HUD protects the bank by buying the foreclosed property and taking the loss the bank would have incurred.
I like HUD’s better than most foreclosures because you tend to see a better profit margin between the asking price and the potential fixed-up value. I have purchased a few HUD’s over the years for myself and with clients. Sometimes the newer properties don’t need that much work, other times homes need 10’s of thousands of dollars put into them. One of the reasons you can find a better deal with HUD’s is that they give preference for the first 10 days the property is listed, to owner-occupant buyers (buyers that will live in the home for at least 1 year). This allows the savvy buyer to avoid the competition of the investors that buy 90% of all foreclosures.
With that 90% out of the picture it equates to a bigger potential for profit. Investors are allowed to bid on properties that are on the market for 10+ days. My experience has been that just about all of the homes that would make it 10+ days are not homes you would want to buy anyway. Most decent properties are sold within 5 days of being listed. The homes will sit vacant from 1.5-2years. They come in a wide price range of $12k-$220k. This is due to the wonderful bureaucracy of our govt. These homes are not for all buyers. Buyers are expected to bid on homes that do not have the utilities and mechanicals running. Leaky pipes and holes in the walls are also common.
An example of a good HUD buy might be a condo that has the potential to be worth $120,000. HUD has it listed for $92,000 but you bid $93,500 because you know it’s a popular area. When you placed the bid you figured you would need to spend approx. $5000 for paint/carpet/drywall repair/etc…You also budgeted another $1000 for misc. So in the end the buyer has approx. $99,500 invested in a condo that is potentially worth $120,000. That $20,500 is equity that you created by having a vision and seeing it through. This is the basic formula.
I encourage you to do it over and over every two years, each time plugging your profits back into each deal. To get the first one, you will need to have some savings set aside for closing costs and improvements. All buyers are required to be pre-approved before bidding and will need a $1000 deposit. I encourage all clients to live in the homes for at least two years as you would have to pay capital gains tax if you resold the property under a two year period. Overall HUD’s can be a great fit for the handy/savvy buyer that is trying to target a once out of reach neighborhood or wants to build equity fast.
10 steps to homeownership
The home-buying process doesn’t need to be scary. Our step-by-step guide will walk you through the process and answer your questions on what you should expect from you’re Realtor®, where to look for loans, and what to watch out for when closing the deal.
1. Are You Ready?
Knowledge and experience are the keys to successful real estate transactions. Preparation and research combined with the expertise, experience and training of The Parsons Group can be the essential keys to your success.
One of the keys to making the homebuying process easier and more understandable is planning. In doing so, you’ll be able to anticipate requests from lenders, lawyers and a host of other professionals. Furthermore, planning will help you discover valuable shortcuts in the homebuying process.
Do You Know What You Want? Whether you are a first-time homebuyer or entering the marketplace as a repeat buyer, you need to ask why you want to buy. Are you planning to move to a new community due to a lifestyle change or is buying an option and not a requirement? What would you like in terms of real estate that you do not now have? Do you have a purchasing time frame?
Whatever your answers, the more you know about the real estate marketplace, the more likely you are to effectively define your goals. As an interesting exercise, it can be worthwhile to look at the questions above and to then discuss them in detail when meeting with your Realtor®.
Do You Have The Money? Homes and financing are closely intertwined. (Financing is the difference between the purchase price and the downpayment, commonly referred to as debt or the mortgage.) The good news is that over the years new and innovative loan programs have evolved which require a 5 percent downpayment or less. In fact, a number of programs now allow purchasers to buy real estate with nothing down.
In addition to a down payment, purchasers also need cash for closing costs (the final costs associated with closing the loan). Several newly emerging loan programs not only allow the purchase of a home with no money down, but also underwrite closing costs.
Not everyone, however, elects to purchase with little or no money down. Less money down means higher monthly mortgage payments, so most homebuyers choose to buy with some cash up front.
As to closing costs, in markets where buyers have leverage, it may be possible to negotiate an offer for a home that requires the owner to pay some or all of your settlement expenses. Speak with The Parsons Group for details.
Is Your Financial House in Order? Those great loans with little or nothing down are not available to everyone: You need good credit. For at least one year prior to purchasing a home, you should assure that every credit card bill, rent check, car payment and other debt is paid in full and on time.
2. Call a Realtor®
Why? Buying and selling real estate is a complex matter. At first it might seem that by checking local picture books or online sites you could quickly find the right home at the right price.
But a basic rule in real estate is that all properties are unique. No two properties—even two identical models on the same street—are precisely and exactly alike. Homes differ and so do contract terms, financing options, inspection requirements and closing costs. Also, no two transactions are alike.
In this maze of forms, financing, inspections, marketing, pricing and negotiating, it makes sense to work with professionals who know the community and much more. Those professionals are the local REALTORS® who serve your area.
What should you expect working with a Realtor®?
Once you select a Realtor® you will want to establish a proper business relationship. You likely know that some Realtors® represent sellers while others represent buyers. Each Realtor® will explain the options available, describe how he or she typically works with individuals and provide you with complete agency disclosures (the ins and outs of your relationship with the agent) as required in your state.
Once hired for the job, the Realtor® will provide you with information detailing current market conditions, financing options and negotiating issues that might apply to a given situation. Remember: Because market conditions can change and the strategies that apply in one negotiation may be inappropriate in another, this information should not be set in stone. During your time in the marketplace Realtors® will keep you updated and alert you to each step in the transaction process.
3. Get Loan Preapproval
Few people can buy a home for cash. According to the National Association of Realtors® (NAR), nearly nine out of 10 buyers in 1999 financed their purchase, which means that virtually all buyers—especially first-time purchasers—required a loan.
The real issue with real estate financing is not getting a loan (virtually anyone willing to pay lofty interest rates can find a mortgage). Instead, the idea is to get the loan that’s right for you—the mortgage with the lowest cost and best terms.
We suggest that consumers start the mortgage process well before bidding on a home. By meeting with lenders—either online or face to face—and looking at loan options, you will find which programs best meet your needs and how much you can afford. Caution: In our experience we have found that most online mortgage companies can make big promises with little follow-through. There aren’t programs on the internet that can be found or duplicated here in our wonderful city of Columbus. Having that said, we suggest you work with a reputable mortgage company or bank that is local and accountable.
We also recommend pre-approvals for another reason: Purchase forms often require buyers to apply for financing within a given time period, in many cases, seven to 10 days. By meeting with loan officers in advance and identifying mortgage programs, it won’t be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option
What is it?
“Preapproval” means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which shows your borrowing power.
Although not a final loan commitment, the preapproval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.
How do you get preapproval? Real estate financing is available from numerous sources, including lenders, mortgage brokerages, as well as the bank down the street. Based on our experience, The Parsons Team can suggest one or more lenders that would compliment your specific financial needs and criteria with a history of offering competitive programs and delivering promised rates and terms.
The loan officer will carefully review your financial situation, including your credit report and other information. The lender will then suggest programs which most-closely meet your needs. For instance, a first-time buyer may qualify for state-backed mortgage programs with little money down and low interest rates, while a repeat purchaser (someone who has bought a home before) with more equity (money invested in the home) might want to get a 15-year loan and the lower overall interest costs it represents. Typically, first-time buyers opt for the traditional 30-year loan, with either a floating interest rate or a fixed rate of interest over the life of the loan.
4. Look at Homes
Over 100,000 new and existing homes are sold each year in Columbus. There’s no shortage of housing options, but with so many choices the challenge becomes finding the property which best meets your needs.
The housing market is complicated because the stock of homes for sale is always in flux. If it were possible to have a complete list of every home for sale at this very moment in a given community, such a list would become obsolete within seconds as new homes become available and properties now for sale are put under contract.
In effect, buyers are looking at a moving target in a marketplace that is never static. Because of this, it is important to know as much as possible about the choices in preferred markets, and the way to do that is by working closely with The Parsons Team who have their “eyes and ears in the market” 24/7.
What are you looking for?
A home is more than just a collection of bedrooms and bathrooms. Several properties—each with four bedrooms, three baths, and the same price—may well represent radically different designs, commuting distances, lot sizes, tax costs, interior dimensions, and exterior finishes.
Each of us is different and so it’s important to list the features and benefits you want in a home. Consider such things as pricing, location, size, amenities (extras such as a pool or extra-large kitchen) and design (one floor or two, colonial or modern, etc.). Next, it’s important to consider your priorities. If you can’t get a home at your price with all the features you want, then what features are most important? For instance, would you trade fewer bedrooms for a larger kitchen? A longer commute for a bigger lot and lower cost?
Lastly, consider your needs in several years. If you’ll need a larger home, maybe now is the time to buy a bigger house rather than moving or expanding in the future. If you expect your income to increase, perhaps you should consider a more expensive home financed with a loan program where monthly payments increase in the future. Where should you look?
All neighborhoods and communities have a special nature that gives them identity and value. One community may be well known for historic homes while another offers both suburban living as well as easy access to downtown office areas.
How do you find a house?
Some buyers like to search our site by looking at listings on the basis of location or price; others prefer to have their Realtor® suggest properties; and many buyers prefer both approaches.
Regardless of your choice, it’s important to target your search. By using basic measures such as general location and affordability, you can refine your search and focus on homes that offer the most desirable features.
As a guide, you should maintain a file with information on each of the homes you like. If you see any home in the city of Columbus that you like, The Parsons Team can arrange a private showing for you. If you would just like a little more info about a property we would be more than happy to research your question and get back to you asap! We are here to serve you!
5. Choose a Home
There’s no doubt that choosing a home is a big decision and you want to do it right.
As a buyer, here’s what actually happens. A home has been placed on the market for which the seller has established an asking price as well as other terms. In effect, this is an offer. At this point, you have three choices: accept the seller’s offer and create a contract; reject it and not make an offer; or suggest different terms and make a counter-offer. If you choose this last option, the seller may accept, reject or make a counter-offer.
No aspect of the homebuying process is more complex, personal or variable than bargaining between buyers and sellers. This is the point where the value of an experienced Realtor® is clearly evident because he or she knows the community, has seen numerous homes for sale, knows local values and has spent years negotiating realty transactions.
Is it THE house?
A house is shelter, but a home is far more. It’s where you live, relax, entertain friends, raise families, and work. A home is where you spend much of your life, and so choosing a house is an enormous decision.
How do you know if a house is THE one? Probably the best approach is to look at as many homes as possible on the internet, where you can quickly and easily view huge numbers of homes and check prices. Once your choices have been narrowed, you can then contact The Parsons Group to find specific information and options. If you have been working with Parsons Team since the beginning of your search you can rest assured that they can help you filter through all the “dead weight”.
Can you really afford it?
Remember Step 2 - the preapproval process? Getting preapproved means you have a very good idea of how much you can borrow, what loan programs will most likely work best in your situation and how much home you can afford. How reliable is a preapproval? While preapproval is not a loan commitment, it’s still necessary for lenders to check such items as appraisals and the latest credit reports. Despite fluctuating interest rates, preapproval nonetheless provides a reasoned, careful analysis of what you can afford. After all, loan officers are routinely paid only when loans are originated. It doesn’t make much sense for loan officers to suggest high loan limits that later can’t be delivered.
6. Get a Loan Approval
Often the cost of real estate financing is routinely greater than the original purchase price of a home (after including interest and closing costs). Because financing is so important, buyers should have as much information as possible regarding mortgage options and costs.
What kind of loan? There are thousands of loans available out there from a variety of lenders, but in general, the mortgage you choose will likely be determined by at least several key factors:
- How much down? Loans with 5 percent down or less are now widely available—in fact, loans from major lenders with no money down have appeared in recent years.
- If you place less than 20 percent down, lenders will want the mortgage guaranteed by an outside third party such as the Veterans Administration (VA), the Federal Housing Administration (FHA) or a private mortgage insurer (PMI, or private mortgage insurance, is required by lender to protect against any mortgage defaults). More than 2.5 million VA, FHA and PMI loans are generated each year.
- How’s your credit? The best rates and terms are only available to those with solid credit. To get the best loans, make a point of paying credit cards, installment payments, rent and mortgage bills in full and on time.
- Are you a first-time buyer? It might seem that “first-time buyer” means someone who has never owned property before, but under most state programs, the term refers to those who have not owned property within the past three years. State-backed first-timer programs often feature smaller downpayments and below-market interest rates.
How do you get a loan?
To obtain a loan you must complete a written loan application and provide supporting documentation. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the prequalification procedure, the loan officer will describe the type of paperwork required.
Where do you get a loan?
Mortgage financing can be obtained from mortgage bankers, mortgage brokers, savings and loan associations, mutual savings banks, commercial banks, credit unions, and insurance companies.
7. Make an Offer
The Columbus Board of Realtors, working with legal counsel, have developed forms that are appropriate for realty transactions in specific communities. Such documents include numerous sale conditions and their wording should be carefully reviewed to assure that they reflect the terms you want to offer. The Parsons Team can explain the general contracting process in your community as well as his or her role.
While much attention is spent on offering prices, a proposal to buy includes both the price and terms. In some cases, terms can represent thousands of dollars in additional value for buyers—or additional costs. Terms are extremely important and should be carefully reviewed.
You sometimes hear that the amount of your offer should be x percent below the seller’s asking price or y percent less than you’re really willing to pay. In practice, the offer depends on the basic laws of supply and demand: If many buyers are competing for homes, then sellers will likely get full-price offers and sometimes even more. If demand is weak, then offers below the asking price may be in order. How do you make an offer?
In a typical situation, you will complete an offer that the Realtor® will present to the owner’s representative and/or the owner. The owner, in turn, may accept the offer, reject it or make a counter-offer.
Because counter-offers are common (any change in an offer can be considered a “counter-offer”), it’s important for buyers to remain in close contact with their Realtor® during the negotiation process so that any proposed changes can be quickly reviewed.
How many inspections? A number of inspections are common in residential realty transactions. They include checks for termites, surveys to determine boundaries, appraisals to determine value for lenders, title reviews and structural inspections. Structural inspections are particularly important. During these examinations, an inspector comes to the property to determine if there are material physical defects and whether expensive repairs and replacements are likely to be required in the next few years. Such inspections for a single-family home often require two or three hours, and buyers should attend. This is an opportunity to examine the property’s mechanics and structure, ask questions and learn far more about the property than is possible with an informal walk-through.
8. Get Insurance
No one would drive a car without insurance, so it figures that no homeowner should be without insurance. The essential idea behind various forms of real estate insurance is to protect owners in the event of catastrophe. If something goes wrong, insurance can be the bargain of a lifetime.
There are various forms of insurance associated with home ownership, including these major types:
Purchased with a one-time fee at closing, title insurance protects owners in the event that title to the property is found to be invalid. Coverage includes “lenders” policies, which protect buyers up to the mortgage value of the property, and “owners” coverage, which protects owners up to the purchase price. In other words, “owners” coverage protects both the mortgage amount and the value of the down payment.
Homeowners’ insurance provides fire, theft and liability coverage. Homeowners’ policies are required by lenders and often cover a surprising number of items, including in some cases such property as wedding rings, furniture and home office equipment.
Generally required in high-risk flood-prone areas, this insurance is issued by the federal government and provides as much as $250,000 in coverage for a single-family home plus $100,000 for contents. Local Realtors® can explain which locations require such coverage. Home warranties With new homes, buyers want assurance that if something goes wrong after completion the builder will be there to make repairs. But what if the builder refuses to do the work or goes out of business?
Home warranties bought from third parties by home builders are generally designed to provide several forms of protection: workmanship for the first year, mechanical problems such as plumbing and wiring for the first two years, and structural defects for up to 10 years. Home warranties for existing homes are typically one-year service agreements purchased by sellers. In the event of a covered defect or breakdown, the warranty firm will step in and make the repair or cover its cost.
Insurance policies and warranties have limitations and individual programs have different levels of coverage, deductibles and costs.
Where to look
Realtors® often provide home insurance and such policies are also available from insurance brokers.
How do you get insurance?
The time to obtain insurance and warranty coverage is at closing, so speak with a Realtor® or insurance broker prior to closing. Be sure to ask about limitations, costs, deductibles and “endorsements” (additional forms of coverage that may be available).
Go to any local courthouse and you can find property records detailing real estate ownership in your community—sometimes records that date back hundreds of years.
These records are important because they provide today’s owners with proof that they have good, marketable and insurable title to the property they are selling. Equally important, such records enable buyers to provide proof of ownership when they sell.
The closing process, which in different parts of the country is also known as “settlement” or “escrow,” is increasingly computerized and automated. In many cases, buyers and sellers don’t need to attend a specific event; signed paperwork can be sent to the closing agent via overnight delivery.
In practice, closings bring together a variety of parties who are part of the “transaction” process. For example, while the history of property ownership has been checked, it’s possible that the records contain errors, unrecorded claims or flaws in the review itself, thus title insurance is necessary. At closing, transfer taxes must be paid and other claims must also be settled (including closing costs, legal fees and adjustments). In most transactions, the closing agent also completes the paperwork needed to record the loan.
What to expect.
Settlement is a brief process where all of the necessary paperwork needed to complete the transaction is signed. Closing is typically held in an office setting, sometimes with both buyer and seller at the same table, sometimes with each party completing their papers separately.
Whatever the case, the result is that title to the property is transferred from seller to buyer. The buyer receives the keys and the seller receives payment for the home. From the amount credited to the seller, the closing agent subtracts money to pay off the existing mortgage and other transaction costs. Deeds, loan papers, and other documents are prepared, signed and filed with local property record offices.
What you need to do.
One of the best parts of settlement is that buyers and sellers need to do very little.
Before closing, buyers typically have a final opportunity to walk through the property to assure that its condition has not materially changed since the sale agreement was signed. At closing itself, all papers have been prepared by closing agents, title companies, lenders and lawyers. This paperwork reflects the sale agreement and allows all parties to the transaction to verify their interests. For instance, buyers get the title to the property, lenders have their loans recorded in the public records and state governments collect their transfer taxes.
10. What’s Next?
You’ve done it. You’ve looked at properties, made an offer, obtained financing and gone to closing. The home is yours. Is there any more to the homebuying process?
Whether you’re a first-time buyer or a repeat buyer, there are several more steps you’ll want to take.
Those papers you received at settlement are extremely valuable, so hold on to them! In the short-term they can help establish tax deductions for the year in which the property was purchased. In the future, such papers will be important for tax purposes when the property is sold, and in some cases, for calculating estate taxes.
Also at closing, determine the status of the utilities required by the home, items such as water, sewage, gas, electric and oil service. You want utility bills to be paid in full by owners as of closing and you also want services transferred to your name for billing. Usually such transfers can be done without turning off utilities.
About two weeks after closing, contact your local property records office and confirm that your deed has been officially recorded. Such records are public notices that show your interest in the property.
It is generally understood that sellers will leave homes “broom clean” when moving out. This expression does not mean “vacuumed” or “spotless.” Broom clean makes sense because it means the house is ready to be painted and cleaned.
For most owners a home is the largest single asset they hold, so it makes sense to protect that asset.
Many owners make a photo or video record of the home and their possessions for insurance purposes and then keep the records in a safety deposit box. Your insurance provider can recommend what to photograph and how to secure it.
You want to maintain fire, theft and liability insurance. As the value of your property increases such coverage should also rise. Again, speak with your insurance professional for details.
Lastly, enjoy your home. Owning real estate involves contracts, loans, and taxes, but ultimately what’s most important is that homeownership should be a wonderful experience. Enjoy!
The Parsons Team - Worthington, Ohio Real Estate
Clintonville / Beechwold
What is a Mortgage?
Likely the largest debt you’ll ever take on, a mortgage is a loan to finance the purchase of your home.
Your home is collateral for the loan, which is also a legal contract you sign to promise that you’ll pay the debt, with interest and other costs, typically over 15 to 30 years.
If you don’t pay the debt, the lender has the right to take back the property and sell it to cover the debt. To repay the debt, you make monthly installments or payments that typically include the principal, interest, taxes and insurance, together known as PITI.
The principal is simply the sum of money you borrowed to buy your home. Before the principal is financed you can give the lender a sum of cash called a down payment to reduce the amount of money that will be financed.
Usually expressed as a percentage called the interest rate, interest is what the lender charges you to use the money you borrowed. As well as the given rate, the lender could also charge you points, and additional loan costs. Each point is one percent of the financed amount and is financed along with the principal.
Principal and interest comprise the bulk of your monthly payments in a process called amortization, which reduces your debt over a fixed period of time. With amortization, your monthly payments are largely interest during the early years and principal later.
In addition to your principal and interest, your mortgage payment could include money that’s deposited in an escrow or trust account to pay certain taxes and insurance.
Generally, if your down payment is less than 20 percent, your lender considers your loan riskier than those with larger down payments. To offset that risk, the lender sets up the escrow account to collect those additional expenses, which are rolled into your monthly mortgage payment.
The taxes are property taxes your community levies based on a percentage of the value of your home. The tax is generally used to help finance the cost of running your community, say to build schools, roads, infrastructure and other needs. You must pay property taxes even if you don’t need an escrow account and even after your mortgage is paid off.
Lenders won’t let you close the deal on your home purchase if you don’t have home insurance, which covers your home and your personal property against losses from fire, theft, bad weather and other causes. Even if you pay cash for your home, you should buy home insurance unless you can afford to repair or rebuild your home if it’s damaged or destroyed.
If your home is in a federally designated high flood risk zone within a flood plain and you are signing for a federally insured loan, federal law mandates that you must buy flood insurance. If you are not in a high flood risk zone, you still may buy the coverage.
If you put less than 20 percent down on your home purchase, most lenders will also charge you private mortgage insurance (PMI) premiums. The coverage doesn’t protect you, it protects the lender from you defaulting on the mortgage. Without the coverage, many buyers could not otherwise afford to buy a home. Effective for loans written on or after July 29, 1999, lenders must automatically cancel PMI when your mortgage balance shrinks to 78 percent of the home’s original purchase price.
Understanding Capital Gains in Real Estate
When you sell a stock, you owe taxes on your gain—the difference between what you paid for the stock and what you sold it for. The same is true with selling a home (or a second home), but there are some special considerations.
How to Calculate Gain
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:
- Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed at closing.
- Add Adjustments:
- Cost of the purchase—including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
- Cost of sale—including inspections, attorney’s fee, real estate commission, and money you spent to fix up your home just prior to sale.
- Cost of improvements—including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.
- The total of this is the adjusted cost basis of your home.
- Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.
A Special Real Estate Exemption for Capital Gains
Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria
You have lived in the home as your principal residence for two out of the last five years.
You have not sold or exchanged another home during the two years preceding the sale.
Also note that as of 2003, you may also qualify for this exemption if you meet what the IRS calls “unforeseen circumstances” such as job loss, divorce, or family medical emergency.
How to dispute a tax valutaion on your property in Columbus, Ohio
Do you think your property, or your client’s property, is valued too high by the Auditor’s office for real estate taxes?
If you believe your value is high you will need undisputable evidence to support the valuation. Once you appeal your value, it can go up, down, or stay the same.
Taxes are one year in arrears. Therefore, your tax bill that will come out around December 20, 2007, is for the valuation of your property up to 1/1/07. This means if you have an appraisal for the appeal it should be dated as of 1/1/07. If property values are dropping in your neighborhood in the year 2007, then this will take effect with your 2008 tax bill. The county re-evaluates your property taxes every three years. Therefore, the county will be re-evaluating your tax valuation in 2008 (also upon transfer assessed valuation is adjusted to the sales price).
Instruction on filing a tax complaint and forms are located on the Auditor’s web site. All local Auditor’s web sites are on ColumbusRealtors.com under `Related Links’. Once at the Auditor’s web site look for tax complaint or board of revision. Also you will need to pull up your property record card from the auditor’s office (under property search). This will have information needed to fill out the board of revision tax complaint form (i.e., tax district, parcel number, assessed valuation, owner of property and sales history).
Typically for residential properties, if the form is filled out properly and submitted and received before the deadline (March 31), and with evidence (an appraisal completed by a state certified appraiser) supporting a lower value, the board will make a decision and either will accept the appraisal value or set up a formal hearing.
The board of revision, the school board representative, and the person filing the tax complaint (and their attorney and/or appraiser) are usually the parties at the hearing.
The board will review your evidence (usually an appraisal or recent sales of properties or comparable sales of similar properties) for a lower property value. The school board attorney will also have the right to review the evidence and ask questions. The board then takes the evidence under advisement and will notify by certified mail of their decision.
If the school board is involved they will (1) accept the board’s decision or (2) appeal the case if they are in disagreement. The school board if in disagreement may elect to have the property appraised for the appeal. The school board has a vested interest in real estate property taxes as they receive most of their funds from these taxes.
The appeals hearing is similar to the first hearing except now there is an opposing side.
After all evidence is presented, the board again will take under advisement and notify of their decision later by certified mail.
It is very important to fill out the form completely and properly. If an entity other than an individual is owner of the property the complaint may need to be signed by an attorney. Be careful to meet the deadline, and have substantial evidence to show a reason for a lower value. This form needs to be notarized. Complaints will only be accepted from December to March 31. I have appeared before several boards of revision on numerous occasions and have found them to be very fair in both the complaint process and their decision.
The auditor’s office uses a mass appraisal system to determine the value of your property. The system is good, however, most are expected to be the correct property valuation, but some are also expected to be high and low.
We are currently in a buyer’s market in central Ohio as evidenced by larger inventory of houses, longer selling periods and generally leveling prices. Therefore, tax complaints will probably increase in 2008 even though the county will be doing a complete re-evaluation of properties.