Prepaying Your Mortgage

Paying off your mortgage can provide peace of mind and is a worthy goal but is it the best thing for you to do at this time.

Do you have higher interest rate debt currently?  If you have credit card debt with double-digit rates or personal, car or student loans, you'll probably save more money from interest by paying these things off before you pay off your mortgage which is usually one of the lower rates on debt.

Many financial advisors recommend funding your annual retirement contribution before paying down a mortgage.  If your company offers matching funds for your contribution, you would be leaving money on the table by not making the contribution to your retirement.  For instance, you would be getting a $10,000 value by putting $5,000 into your retirement if your company matches it.

Creating an emergency fund is another favorite of financial advisors.  When the rainy day arrives and you need funds, it may be difficult to get money from the equity of your home, especially if you have lost your job.  Six months' worth of living expenses is a good target to have available should you need it and a year's worth would be even better.

Children's college funds may be another priority that takes precedent overpaying off the mortgage.  Whether you're saving or investing to pay for their education, it is going to cost more than it did when you were in school.

When you are ready to start paying off your mortgage, decide on the best way to do it.  Regular principal contributions on a monthly basis are very predictable and will get the job done.  Setting up an automatic bill pay with your bank will assure that you don't re-prioritize that extra amount every month because there is always going to be something else to do with extra money.

It is important to be sure that the lender applies the additional payment amounts to the principal and not to the escrow account.

Use the Refinance Analysis to see what extra amount you'd have to pay to retire your mortgage in a certain time frame or by making a specific additional amount each payment, you can find out when the loan will be paid.  Regardless of which way you go, prepaying a loan will save interest, build equity and shorten the term on a fixed-rate mortgage.

Lower Your Cost of Housing

Homeowners still have considerable advantages from the amortization of the mortgage and the appreciation enjoyed by most homes even with taking the standard deduction instead of itemizing to take the interest and property tax deduction. 

There is an adage, "Rent or buy, you pay for the house you occupy."  You either pay for it yourself or for your landlord.  The people who have job security, sufficient income, good credit and the funds for the down payment and closing costs can enjoy the many financial and emotional benefits of homeownership.

Looking at a $350,000 home purchased with an FHA mortgage with 3.5% down payment at 3.25% interest for 30-years, the total payment would be $2,420 a month.  During the first year, the average monthly principal reduction is $573 a month which build the owner's equity in the home.

At an estimated 3% appreciation, this home would increase in value at the rate of $875 a month during the first year which again builds the owner's equity in the home.

Even if you consider the buyer will now be responsible for repairs and possibly homeowner's association fees, the monthly net cost of housing in this example is $1,122 or less than half the monthly payment.  The difference goes to equity which a tenant does not benefit from.

If the buyer were paying $2,750 monthly rent, they would be paying $1,628 more each month to rent than to own.  In a year's time, they would lose $19,500 of equity by continuing to rent.  The down payment in this example is only $12,250 which would leave $7,000 to pay for buyer's closing costs.

Purchase Price	$350,000
Down Payment	$12,250
Total Monthly Payment (PITI + MIP)	$2,420
Less Monthly Principal Reduction (average first year)	$573
Less Monthly Appreciation (average first year at 3% annually)	$875
Plus Estimated Maintenance & HOA	$175
Net Cost of Housing	$1,122

The equity for the homeowner in this example at the end of seven years would be almost $140,000 based on the appreciation and amortization of the mortgage.  Whether you rent or buy, you pay for the house you occupy.

Use this Rent vs. Own to plug in your own numbers for the price home you'd like to buy.  If you need help with it, contact me and we can do it over the phone at (973) 251-0100 or in an online meeting.

Annual Advisory

Homeownership is a privilege and a responsibility. Even after decades of owning a home, you may still need some help to handle some of its challenges by focusing on the three "M"s of homeownership: maintenance, minimizing expenses and managing debt and risk.

While many people recognize the benefits of annual wellness, financial, vehicle and equipment maintenance visits, an important checkup that you may not have considered is an annual homeowner advisory or real estate review. Why would you treat the investment in your home with less care than you treat your car or your HVAC system?

Consider exploring the following:

• Do you know the current value of your home? (You can, by obtaining a list of comparable sales in your immediate area, as well as what is currently on the market for sale.)
• Have you compared your assessed value for tax purposes to the fair market value in order to possibly reduce your property taxes?
• Even if you've refinanced in the last two years, can you save money and recapture the cost of refinancing in the length of time you plan to remain in your home?
• Have you considered reducing your mortgage debt with low-earning cash reserves that will not be needed soon?
• Do you have a record of the improvements you've made to your home since you purchased it? Do you know what items can be included?
• Have you considered investing in rental homes in good neighborhoods to increase your yields and avoid the volatility of the stock market?
• When was the last time you updated your home inventory of personal belongings? Do you have pictures as well as written documentation?
• Do you need recommendations of repairmen and other service providers?

This service is part of my point of difference as a real estate professional to provide information to help homeowners not only when they buy and sell but all the years in between too.  My goal is to create lifelong relationships with our customers as their "go to" person whenever they have a real estate question.

My strategy is to provide reliable, consumer-based information about homeownership on a regular basis through email and social networking.  If it benefits you by helping you be a better homeowner, maybe you'll consider us your real estate professional.

When you don't know the answers to real estate questions, you know where to get them.

We're always here to serve your real estate needs. By helping you with the three "M"s of homeownership, we can earn your confidence and trust for the next time you move or a friend of yours needs a recommendation.

If you'd like to have a list of the market activity in your area or any of the other information mentioned, please contact me at (973) 251-0100 or Cheryl@thedarmaningroup.com.  We're happy to provide it along with informative guides regarding the subjects mentioned.

Why homebuying begins with the agent

It takes a team of professionals to buy a home like the lender, the appraiser, the inspector, the property insurance agent, the title officer, and others but the real estate professional may play the most critical role.

Baking bread seems so simple.  There are only four ingredients: flour, salt, yeast, and water; yet, there are steps that should be followed as well as a certain sequence to get the proper results.  Some people mix all of the dry ingredients before adding the hot water to activate the yeast.  Other people will activate the yeast in the warm water first to allow it to "bloom."

Both methods can achieve satisfactory results but one knowledgeable person needs to be in charge of the bread instead of having multiple people to be concerned with just their one ingredient or contribution like mixing, kneading, fermentation, benching, shaping, proofing or baking.

Similarly, in a home purchase, the buyer's agent can be the one who puts things in the proper order and sees that no steps are missed.  The buyer's agent coordinates between the other professionals with the common goal of getting the home closed on time according to the terms agreed in the sales contract.

Even if a buyer has been through the process before and possibly, multiple times, the buyer's agent will most likely have far more experience because it is their job. They perform their job on a daily basis and are not personally or emotionally involved like a buyer is.

Your agent understands what and when the various steps should be done and by whom.  They have worked with enough of the other professionals to know who is good at their job and can offer recommendations.  They have seen the things that make a transaction go smoothly and what can derail one.

Experience is a great teacher, but the lesson does not have to be learned by going through it by yourself.  Take the luxury of using your real estate professional's experience acquired through years of study and practice.  Allow your agent to advise you and coordinate the efforts to achieve the results you are expecting and deserve.

Learn more about the process and different steps by downloading the Buyers Guide

Why Keep Track of Home Improvements

Homeowners receive a generous exclusion on the gain of their principal residence up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly.  Most people probably consider the gain or profit in a home to be the difference between the purchase price and the sales price.

IRS allows a taxpayer to lower the sales price by the selling expenses before calculating gain.  Normal expenses like real estate commission, title policy, attorney fees, and other sales expenses may be included if they are normal and customary.

Another significant adjustment is that capital improvements made during the holding period can be added to the cost basis.  Normal maintenance like repairs are not considered improvements.  IRS says that if the expenditure materially adds value (features) to the property, or appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use, it can be considered a capital improvement.

Examples could include replacing a heating or air conditioning system, storm windows, new permanent landscaping like trees or shrubs or completing an unfinished basement.  They don't necessarily have to be high-ticket items but can include things like adding dead bolts, ceiling fans, video doorbell and other items.  For more information, see IRS Publication 523.

The total amount of the money that is spent on capital improvements increase the cost basis of the home which in turn will reduce the amount of gain when sold.  With the average person staying in a home for 10 ... 12 years, the total improvements could be significant.

As an example, let's say a single taxpayer sold their home for $350,000 more than they paid for it.  If their selling expenses were $25,000 and they had made $75,000 of capital improvements during the holding period, the gain would be $250,000 and within the limits for a single taxpayer to exclude all of it instead of having a $100,000 gain.

It is necessary to be able to prove the amount spent and for that reason, a routine should be established to keep the receipts and cancelled checks for all expenditures on their principal residence.  Even if the owner is not sure whether they qualify as an improvement, by having the receipt available at the time of sale, a tax professional can help a homeowner with the determination.

In addition to receipts and cancelled checks, a contemporaneous register listing the date, description and amount spent will provide accurate information for calculations and serve as evidence should it be needed in the future.

There is more information in the Homeowners Tax Guide that is available for download.