How Much Money it Takes to Purchase a Home

Buying a home is the American Dream and it is also the largest purchase we will make during our lives.  Buying a home isn’t quite as simple as having a down payment and getting a loan.  There are several pieces to the puzzle, especially when you are obtaining a mortgage.  The goal in this post is to touch on the most common costs so that you are well prepared and know about how much it’s going to cost to get into a home.

The first thing I want to mention is that buyers do not pay their real estate agents a commission.  The seller of the home is the one who pays the selling commission that is split between the buying and the selling agents for a transaction.  That being said, there are a lot of different fees for buyers that come together for your closing costs.  

 

Let’s take a closer look.  I like to break the costs up into 4 categories based on when you actually have to have the money:

 

  • Down Payment
    • Earnest Money Deposit–this is the money you put down when you are making an offer.  Typically 1%  or so of the offering price, but if you are in a competitive market, you may put more money down to show the seller that you are serious.  When writing the contract, you can put certain contingencies in the contract such as home inspection and financing contingencies–basically you can get out of the contract and get your earnest money deposit back within these contingency deadlines.  Otherwise, if you don’t follow through with the contract, then the seller gets to keep your earnest money deposit.
    • Down Payment–this is the down payment on the entire purchase.  This isn’t due until closing time and your earnest money deposit counts towards this.  It is worth mentioning, that if you put 20%, you shouldn’t have to pay any mortgage insurance premiums.  You can put less than 20% down, but you will usually have mortgage insurance costs on a monthly basis.  Talk with your lender because there are so many different lending options available. 
  • Up Front Costs–you pay these after you have a contract, but before closing.  These costs are the ones that you cannot get back if you do not make it to closing. 
    • Appraisal–if you are getting financing, you will be required to have an appraisal because the lender is not going to lend you money on a house that costs more than what it is worth.  If the appraisal comes back for less than the contract price, then you will have to make some adjustments in either price or more money down to meet the lender’s requirements.  If you have a contingency built in, then this is where you can walk away as well.
    • Home Inspections–even if the lender isn’t requiring a home inspection, most people want a thorough inspection to know what they are actually buying. Some insurance companies require certain reports from the home inspection in order to obtain insurance as well.
    • Surveys of the land–this depends on the type of property
  • Closing Costs–these are the most shocking costs that buyers face.  There are so many different things that need to happen in order to transfer ownership.  These differ from state to state and typically range from 3-4% of the sales price of the home.  Some of these costs may include the following:
    • The remainder of your down payment
    • Title search fees 
    • Initial escrow amounts like a year’s worth of homeowners insurance and/or half a year’s worth of property taxes
    • Transfer taxes–city, county, state, any special assessments 
    • Lender costs–all fees associated with getting the loan which includes the commission for the lending agent, credit checks, document processing fees, etc.
    • Settlement agent representation fees–these are the people preparing the settlement documents between the buyer and the seller.
  • Monthly Costs–this is what your monthly payment will consist of which is PITI (Principal, Interest, Taxes, Insurance)
    • Loan–PI–this is the monthly payment for the term of your loan.  If you have a fixed rate and term, such as a 30 year fixed loan, then your P&I stays the same for the life of the loan.  You don’t have to worry about inflation, because this is fixed.
    • Escrow–TI–this is your annual taxes and insurance.  These items do change on an annual basis and your mortgage company typically ‘escrows’ this and pays it on your behalf.  This way you are paying a little every month, then when your annual insurance or semi-annual property taxes are due, then money is in the escrow account and the lender pays this directly.  Each year, you will get a notice of how much the taxes and insurance are estimated to increase and the TI portion of your monthly payment goes up a little.  
    • Association Fees–these are HOA (Homeowners Associations) or Condo Fees.  Your lender does not escrow these payments, you will pay these directly to the association
    • Maintenance & Repairs–you’re a homeowner now, so this means you will have to maintain the property yourself and fix anything that breaks

Hopefully this information gives you a better idea of what home ownership costs.  There’s a lot of other information that comes into play with these costs and planning to prepare for these.  

 

If you need help navigating one of the biggest purchases in your life, please schedule a call and see how we can help.  

 

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Alabama, Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice. 

How Interest Rates and Mortgages Affect Each Other

Interest rates can have a big impact on your monthly mortgage payment. One item that will come up when you borrow money for a mortgage is the interest rate. Interest rates can affect your monthly mortgage payment and, in turn, will affect how much money you have each month to pay other bills, buy food, travel, and pay for entertainment.

How your mortgage is affected by the interest rate

Interest is the money that you pay on top of your mortgage balance. Your interest rate is determined by the terms of your mortgage, and the higher your interest rate, the more money you’ll have to shell out each month. 

The best way to keep your interest payments affordable is to keep your interest rate low. You can do this by looking around for a mortgage with favorable interest rates or by refinancing your current mortgage. 

The interest rate is one factor that determines how much you’ll pay each month. Your payments also depend on the amount of money you borrow, the term of your loan, and any escrow or insurance payments. If you keep this in mind, you can make sure that your mortgage payments are affordable.

When you’re shopping for a mortgage, be sure to compare interest rates from different lenders. This way, you can get the most competitive rate possible and save yourself some money each month.

Mortgage Points Can Make a Huge Difference in your Finances

Interest rates may not seem like a big deal, but even a small difference can add up to a lot of money over the life of the loan. 

For example, let’s say you have a $200,000 mortgage with an interest rate of 3.1% over the life of the loan, you would end up paying $215,607 in interest. If your interest rate was just 2.7%, though, you would only pay $193,258 in interest – that’s a difference of more than $22,000! 

Here’s how to get lower interest rates

Typically, the people who have better credit and who can pay more for their down payment will enjoy lower interest rates. If you’re thinking about buying a home soon, you can get lower interest rates by investigating down payment options, getting your credit report, and improving your overall credit. To improve your credit:

  • Pay your bills on time
  • Fix any credit report errors
  • Pay down your debt
  • Avoid high credit card balances
  • Limit your number of credit cards

Having good credit could help you get approved for loans with lower interest rates and can help you get approved for credit cards with better terms, such as lower interest rates and higher credit limits. 

In addition, landlords and employers often consider credit when making decisions about rental applications and job offers. Therefore, it’s important to understand how your credit works and how you can improve it. 

A financial planner can help you assess your current situation and develop a plan to improve your credit. By understanding your credit history and making smart financial decisions, you can take control of your credit and safeguard your financial future.

What factors influence interest rates?

The Federal Reserve is just one of the organizations that set interest rates. They look at several different factors, such as how much money is being borrowed and the state of the economy. The Federal Reserve also looks to see what other banks are doing to get an idea of where interest rates should be. 

Should I still buy a home when interest rates are high?

Interest rates are a big factor to consider when buying a home, but there are other things to think about, too. Your financial stability, job security, and credit score all play a role in whether or not now might be a good time for you to buy a house.

You also have to consider how much money you have saved up, how much you can afford to borrow, and what your monthly payments will be.

My recent blog post Buying or Selling Your Home may be of interest to help you along with your decision.

Fixed-rate -vs- Adjustable-rate mortgages

A fixed-rate mortgage is a loan where the interest rate stays the same for the life of the loan. This type of mortgage is a popular choice because it is predictable. Your monthly payments are the same each month, making it easier to budget for your home. They can last 15 years or 30 years and are ideal when Federal interest rates are low. 

Adjustable-rate mortgages (ARMs) are popular because they offer lower interest rates than fixed-rate mortgages in the beginning. This type of mortgage is riskier because as the interest rates go up or down, it makes the monthly payments more or less expensive. 

ARMs are popular because in the beginning they offer lower interest rates than fixed-rate mortgaging and can be refinanced for better rates. If interest rates rise, your monthly payments will go up, which could make it difficult to afford your mortgage payments. However, if interest rates fall, you may be able to refinance for a lower interest rate and save money on your monthly payments.

The best mortgage rates take a proactive approach

When you’re looking for a new home, it’s important to find a lender that you can trust. A good lender will be able to answer any questions you have about interest rates, your credit history, and how the interest rates will impact your monthly mortgage payment. They can also help you find ways to save money on your mortgage to make it more affordable. 

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

Inflation

Inflation is the general increase in price level which corresponds to a reduction in purchasing power. Why do we care about it? We care about inflation because our dollars buy less. For example, remember when you could buy a gallon of gas for $1? Now it’s $3 a gallon. The same amount of money that would fill out tanks up will only fill up one third of a tank now!

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What Happens if you Die without a Will?

Many of our clients don’t know what probate is, and that isn’t necessarily a bad thing. If you’ve never had a loved one die, you may never have experienced it. Probate is the legal process by which a will is validated. If there’s no will, it’s the legal process of settling a person’s affairs. In other words, if you didn’t write your own will, the state has one for you.

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Buying or Selling Your Home

With interest rates so low, many people are taking advantage of this time and buying new homes so that they can lock in a low mortgage rate for 30 years. The advantage to locking in a low interest rate when purchasing (or refinancing) is that the principal and interest is fixed. You may have seen a notice each year from your mortgage company increasing your monthly payment slightly. This is because your total mortgage payment is made up of PITI—Principal, Interest, Taxes, and Insurance. Generally, your property taxes and your home insurance costs go up a little each year. The majority of your monthly payment is tied to your principal and interest which is why it is a good idea to lock that interest rate portion in as low as you can.

Capital Gains

With the increase in housing prices this past year, many people are capitalizing on this and selling their homes. If you have a large gain on your home, it is possible that you may owe capital gains taxes. Many years ago, the rule was that if you used the sale proceeds from your primary residence to purchase another primary residence, then you did not owe any capital gains tax. The current rule with proceeds from the sale of your primary residence has limitations. First, you must have lived in the home for at least 2 out of the last 5 years. If this applies, then you can exclude $250,000 from capitals gains tax if you are filing single or $500,000 if you are married filing joint. These are large numbers but depending on how long you have lived in your home and where you are located, you may still have a taxable gain on your property. If you have ever rented your property, you have other rules with depreciation recapture to consider as well.

Cost Basis

If you think you may be above the excludable limits, then you should look at all your costs to make sure you are including everything allowable in that gain calculation. How do you do that? Start with your cost basis. Your cost basis is the purchase price of your home plus any costs associated with that purchase, such as certain closing costs—title fees, legal fees, recording fees, surveys, transfer taxes and title insurance. Then add to your cost basis any improvements you made to your home. Improvements add value to the property or adapt it to new uses. Some improvements are adding rooms, putting in a new system, adding a roof, etc. What is not included in your cost basis are repairs. Check out Publication 523 on the irs.gov site for more guidance with improvements versus repairs.

Cost Basis = Purchase Price + Purchase Fees + Improvements-Depreciation recapture

Your sales price is the selling price less fees paid to sell it (including real estate commissions and fees associated with selling).

Sales Price –Cost Basis = Gain or Loss

If have a gain in excess of the $250K/$500K limits, then you may have to pay capital gains taxes.

Reporting

Also, note that sometimes your gain or loss is reported on a 1099-S Form for tax purposes. This form, like other 1099’s, is sent to the IRS. So, if you did not report the sale along with your costs, you could receive a bill from the IRS. Do not panic, often times it is just a reporting issue. Make sure you go back to your tax return to see if you have a Form 8949. If you do not, you may have to complete that form, or it could just be a response to the IRS letter you receive.

This was a lot of information but can be an important factor in your Financial Plan. If you have any questions or need assistance with your financial life and goals, schedule an appointment with us today—this is what we do!

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

Refinance

Interest rates are low and house prices are soaring—so, should you refinance?

What Factors Should You Consider?

There are many factors involved in the refinancing decision—your current interest rate and term, where you are in the lifecycle of your loan, what loan you want to apply for, the cost to refinance, your breakeven for recouping that cost and your monthly cash flow considering your new payment are just to name a few.  Of course, this also assumes you plan on staying in your home for the near term as well.  

Compare Your Amortization Schedule

There are different ways to analyze all these factors.  You can go to websites that have amortization calculators (such as bankrate or nerdwallet) to look at your current amortization schedule and compare it to a new one with the new terms.  It is not always about the total monthly payment.  Look at the breakdown of the monthly payment and see how much is going to principal and interest.  When you start a new loan, the interest is front loaded-meaning most of your payment goes to interest, not reducing your loan balance.   If you think you are only going to stay in your home for another 5 years, then look at your principal balance at the 5-year mark and factor in the cost for obtaining the new loan.  

PMI Insurance

In today’s housing market, home values are soaring.  If you did not have a 20% down payment, you may be paying PMI (mortgage insurance).  With increased home values, you might be able to refinance and have your PMI removed.  This could be savings in your pocket in addition to an interest savings.  

The moral of the story is that there are different reasons to look at refinancing options–both financial and emotional—and there are different factors involved with these decisions.  No situation is the same.  Navigating these types of decisions, in line with your unique personal goals, is what we do here at Financial Journey for our clients.  If you are looking for a trusted partner to help you navigate these types of decisions, we are here to help.  Schedule a meeting with us today to see how we can help you with your own financial journey. 

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.