Tag: Tricks

A Guide for Buying a Home

Buying a house requires a lot of time and effort, but these 10 steps can help make the home buying process manageable and help you make the best decisions possible.

Step 1: Work with a Mortgage Banker to Select Your Loan

Lenders have a wide range of competitively priced loan programs and a reputation for exceptional customer service. You will have many questions when you are purchasing a home, and having one of our experienced, responsive mortgage bankers assist you can make the process much easier.

Every home buyer has their own priorities when choosing a mortgage. Some are interested in keeping their monthly payments as low as possible. Others are interested in making sure that their monthly payments never increase. And still others pick a loan based on the knowledge they will be moving again in just a few years.

Step 2: Start Your Research Early

As soon as you can, start reading Web sites, newspapers, and magazines that have real estate listings. Make a note of particular homes you are interested in and see how long they stay on the market. Also, note any changes in asking prices. This will give you a sense of the housing trends in specific areas.

Step 3: Determine How Much House You Can Afford

Lenders generally recommend that people look for homes that cost no more than three to five times their annual household income if the home buyers plan to make a 20% down payment and have a moderate amount of other debt.

But you should make this determination based on your own financial situation. Use our Affordability Calculator to see how much house you can afford.

To help you save for your down payment, try Discover Bank’s AutoSavers Plan, which makes it easy to put aside money each month.

Step 4: Find the Right Real Estate Agent

Real estate agents are important partners when you’re buying or selling a home. Real estate agents can provide you with helpful information on homes and neighborhoods that isn’t easily accessible to the public. Their knowledge of the home buying process, negotiating skills, and familiarity with the area you want to live in can be extremely valuable. And best of all, it doesn’t cost you anything to use an agent – they’re compensated from the commission paid by the seller of the house.

Step 5: Shop for Your Home and Make an Offer

Start touring homes in your price range. It might be helpful to take notes  on all the homes you visit. You will see a lot of houses! It can be hard to remember everything about them, so you might want to take pictures or video to help you remember each home.

Make sure to check out the little details of each house. For example:

  • Test the plumbing by running the shower to see how strong the water pressure is and how long it takes to get hot water
  • Try the electrical system by turning switches on and off
  • Open and close the windows and doors to see if they work properly

It’s also important to evaluate the neighborhood and make a note of things such as:

  • Are the other homes on the block well maintained?
  • How much traffic does the street get?
  • Is there enough street parking for your family and visitors?
  • Is it conveniently located near places of interest to you: schools, shopping centers, restaurants, parks, and public transportation?

Take as much time as you need to find the right home. Then work with your real estate agent to negotiate a fair offer based on the value of comparable homes in the same neighborhood. Once you and the seller have reached agreement on a price, the house will go into escrow, which is the period of time it takes to complete all of the remaining steps in the home buying process.

Step 6: Get a Home Inspection

Typically, purchase offers are contingent on a home inspection of the property to check for signs of structural damage or things that may need fixing. Your real estate agent usually will help you arrange to have this inspection conducted within a few days of your offer being accepted by the seller. This contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage.

Both you and the seller will receive a report on the home inspector’s findings. You can then decide if you want to ask the seller to fix anything on the property before closing the sale. Before the sale closes, you will have a walk-through of the house, which gives you the chance to confirm that any agreed-upon repairs have been made.

Step 7: Have the Home Appraised

Lenders will arrange for an appraiser to provide an independent estimate of the value of the house you are buying. The appraiser is a member of a third party company and is not directly associated with the lender. The appraisal will let all the parties involved know that you are paying a fair price for the home.

Step 8: Get Prequalified and Preapproved for credit for Your Mortgage

Before you start looking for a home, you will need to know how much you can actually spend. The best way to do that is to get prequalified for a mortgage. To get prequalified, you just need to provide some financial information to your mortgage banker, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much we can lend you. This will tell you the price range of the homes you should be looking at. Later, you can get preapproved for credit, which involves providing your financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) so your lender can verify your financial status and credit.

Step 9: Coordinate the Paperwork

As you can imagine, there is a lot of paperwork involved in buying a house. Your lender will arrange for a title company to handle all of the paperwork and make sure that the seller is the rightful owner of the house you are buying.

Step 10: Close the Sale

At closing, you will sign all of the paperwork required to complete the purchase, including your loan documents. It typically takes a couple of days for your loan to be funded after the paperwork is returned to the lender. Once the check is delivered to the seller, you are ready to move into your new home!

Homeowner Tips: Tax Deduction

Owning a home is a big financial responsibility, and it’s one of the largest investments you’ll probably ever make. Knowing the tax deductions and credits available to homeowners can help ensure your big investment pays you back a bit at tax time.

“Many homeowners miss out on a lot of deductions every year because they aren’t aware of all the savings opportunities available to them,” says Josh Zimmelman, president of Westwood Tax and Consulting.

These tax tips could help you make the most of the many tax breaks for homeowners and maximize any income tax refund you may be owed.

1. Save your tax records

Here’s one tax tip for homeowners: Once you take advantage of all the available tax benefits you’re able to claim in the current tax year, hold onto the documentation for those expenses.

“You never know when you might get audited,” Zimmelman says. “It’s important to have the documentation to back up your deductions.”

The law requires that you keep all the records you use to file your tax returns for three years from the date a return was filed. That’s typically how far the IRS goes back when doing an audit. But keep in mind that the IRS can go back further (usually no more than six years back) if it identifies a substantial error in a return.

2. Make energy-efficient updates

Adding a solar energy system to your home is not only good for the environment — it can also be good for your tax refund. The IRS allows you to take a tax credit worth 30% of the cost of installing a solar energy system.

If you’re thinking about holding off on taking advantage of this federal tax credit, don’t wait too long. The credit amount for residential improvements decreases to 26% in the year 2020, and then to 22% in 2021, after which it’s set to go away entirely.

3. Stay organized

Many of the federal income tax deductions or credits you can take as a homeowner require you to keep detailed records of your home-related expenses. Start saving receipts and other information right away — don’t wait for tax time to roll around.

“If you take a few minutes to set up an organization system for your tax paperwork and financial records, it should be quick and easy to maintain,” Zimmelman says.

To stay organized, keep hard copies of all your financial documents and receipts. Or if you’d rather go paperless, you can scan and store your documents digitally.

4. Hold onto home improvement receipts

If you make any improvements to your home, the expenses aren’t deductible for the current tax year. But when you sell the home in the future, they can help lower your tax burden then.

That’s because you can add home improvements expenses to your adjusted basis. This is generally what you paid to buy the house, plus the cost of construction, renovation or other improvements you’ve made, minus any losses you’ve experienced from damage to the home.

For the tax year in which you sell the home, your taxes on the sale are based on the sale price plus any concessions you get from the seller (such as them paying closing costs) minus your selling expenses. If the amount you gain from that equation is higher than your adjusted basis, you have a capital gain on the sale. So the higher your adjusted basis, the less taxes you may have to pay on your profit from the sale.

5. Track your home office expenses

If you’re self-employed and work from home, you may be able to deduct some of the expenses you incur for your business use of your home.

“Not every person who works from home can claim a home office,” Zimmelman says. “The home office must be used regularly and exclusively for business and be the primary site of the business.”

Because tax reform suspended certain deductions, including unreimbursed employee expenses (with some exceptions), until Dec. 31, 2025, you can’t take a home office deduction if you work from home as an employee.

Types of expenses you can deduct include the actual expenses you incur for the home office and depreciation for the portion of the home used.

6. Think ahead about deduction options

Deductions can help you lower your total tax obligation by reducing your taxable income. For the 2019 tax year, the federal standard deduction is $24,400 if you’re married filing jointly, $12,200 if you’re single or married filing separately, and $18,350 if you’re filing as head of household.

As a homeowner, though, you may have enough in eligible expenses to itemize your deductions. If those itemized deductions add up to more than the standard deduction, you could lower your tax bill even more.

Eligible expenses could include the following:

  • Charitable contributions — If you made a tax-deductible donation to a qualified charity, you can add it to your total itemized deductions. In most cases, you’re allowed to deduct cash contributions that equal up to 60% of your adjusted gross income.
  • Medical expense deduction — You may be able to write off some medical expenses that insurance didn’t pay for.
  • Home mortgage interest — If you took out a mortgage on or after Dec. 15, 2017, you may be able to take a mortgage interest deduction on up to $750,000 of mortgage debt for your primary residence. If your mortgage predates Dec. 15, 2017, the limit is $1 million. Interest paid on your home equity loan or line of credit may also be deductible if you used the money to buy, build or substantially improve the house that secures the loan.
  • State and local taxes — Real estate taxes can be high in some areas, but you may be able to deduct some (or all) of your property taxes. For federal tax returns, the law allows taxpayers to deduct up to $10,000 ($5,000 if married filing separately) of the total of your state and local property taxes plus either income taxes or state and local sales taxes.

Keep in mind that the Tax Cuts and Jobs Act of 2017 limited the amount of certain deductions, which may make it harder to come up with an itemized deduction total that will exceed your standard deduction amount. In that situation, itemizing might not give you the most tax benefit. That said, if you have deductible expenses that exceed your standard deduction amount, there’s no longer an income-based limit on the amount of itemized deductions you’re allowed to claim (though there may be other limitations).

Bottom line

Owning a home can be expensive — but fortunately, the tax breaks can help make up for the extra costs. As a homeowner, it’s critical to know which deductions and credits you qualify for and to make sure you maximize them to your benefit. Using Credit Karma Tax to file your taxes for free, and following these tax tips for homeowners could help.

The Real Question: Buying or Renting?

Millennials accounted for the largest share of home sales last year, with 24- to 35-year-olds making up a full quarter of all homebuyers. Another 20% of buyers were 35 to 44 (older Millennials and younger Gen Xers). But will the next up-and-coming generation of Gen Zers follow in their footsteps? Recent data seems to suggest so.

Furthermore, economists expect Gen Zers to have a higher homeownership rate when they’re age 35 to 44 than Millennials did at the same age. Still, the renting versus buying debate is never clear-cut despite where current trends seem to point. There are pros and cons for both situations. The right choice depends on your budget, location, long-term plans, and many other factors.

The Pros and Cons of Renting a Home

Pros

One of the biggest advantages of renting is that you don’t have as much financial responsibility to your home as a homeowner would.

Generally, your landlord or superintendent will handle the bulk of your unit’s maintenance and repair needs.

Renting is a more flexible option for moving, too. If your job changes or you simply want to move to a new place, it’s just a matter of putting in notice with your landlord.

Also, the startup cost of renting is usually the more affordable option. The cost of your application fee or security deposit is generally much lower than a down payment, closing costs, and other up-front costs of buying a home.
Cons

Renting isn’t without its faults:

  • You have to deal with a landlord
  • You may have to live in close proximity to your neighbors
  • Usually, you can’t make any updates or customizations to your property
Most importantly, though, you won’t be building equity. While you may get your security deposit back, you won’t see a large portion of your renting costs ever again.

According to Apartment Guide’s 2020 Annual Rent Report, the average monthly rent for a two-bedroom apartment in 2019 was $1,808.70. Over the course of a one-year lease, your rent payments would total $21,704.40.

With a home, the money you pay into your mortgage likely will come back to you in part or in full when you sell the home.

The Pros and Cons of Buying a Home

Pros

There are some big benefits to buying a home, too. For one, you build equity. You can use that equity later with a home equity loan, HELOC, or just in cold, hard cash when you’re ready to sell the house.

You also get a number of tax benefits as a homeowner. You can deduct your mortgage interest and a portion of your property taxes. In some cases, you can reduce your tax bill with a mortgage credit certificate, too.

Owning your home creates peace of mind and pride. It’s all yours, there’s no landlord you answer to and you can truly make the place your own.

Cons

Owning a home comes with significant up-front and ongoing costs.

The two main financial commitments you’ll face are your down payment and closing costs. Your expenses for maintenance and emergencies likely will be higher, too:
  • Average yearly home maintenance/improvement spending: $1,521
  • Average closing costs in 2018: $5,779
  • Average down payment in 2018: $15,490
Additionally, owning a home makes it harder to do a quick move. Homes were on the market for an average of 65 to 93 days in 2018.

If you want to move or your job changes, it might not be as easy to pick up and leave as it would if you rented.

Making Your Decision to Rent or Buy

Your location will play a big role in the rent-vs.-buy debate.

A recent report from real estate and property data firm ATTOM Data Solutions shows that buying a home is more affordable than renting in just over half of U.S. markets. Conversely, renting is the more budget-friendly choice in 47% of markets.

In addition to location, finances play a role in your buying-versus-renting decision, too

Buying a home requires you to make a down payment, cover closing costs, and foot the bill for things like homeowner’s insurance, property taxes, maintenance, and more.

With the average down payment and closing costs totaling more than $25,000, homebuying’s financial demands are high. If you choose to buy a home instead of renting, make sure your finances are prepared for the up-front costs.

The Bottom Line

It’s clear there are arguments for both renting and buying. Recent trends do point toward a higher interest in homeownership among younger generations. Future trends indicate Gen Z homeownership rates will outpace Millennials.

However, trends shouldn’t dictate your choice. The buying-versus-renting decision is a very personal one. It’s one you should make with careful thought and consideration of your finances, goals, and needs as a household.

How to Budget

Budgeting for new homeowners starts with understanding the true costs of owning a home.

Ready to buy your first home? While open houses, mortgage paperwork and the planning of your housewarming party may have you busy, creating your budget as a new homeowner and uncovering the hidden costs of owning a home should be top of mind as you take this big financial step.

“It’s extremely important to determine how homeownership will affect your monthly budget before you purchase a home and not afterwards,” says Emily Graham Stroud, president and owner of Stroud Financial Management, Inc. in Fort Worth, Texas. “One of the biggest mistakes people make financially is house hunting and falling in love with a home before they’ve analyzed their monthly budget.”

“How do I adjust my budget after buying a home?” is a question to tackle as soon as possible during the buying process. Learning the rules of budgeting for new homeowners can help you avoid money headaches once the ink is dry on your mortgage.

Plan regular budget reviews

Once you add up the hidden costs of owning a home and the not-so-hidden ones, budgeting for new homeowners means regularly reviewing and adjusting your spending and savings plan.

“It’s important to review your home’s budget and expenses at least four times a year, perhaps even monthly if you bought an older home,” Bodrozic says.

Checking in with your budget regularly can help you track things to budget for after buying a home, like maintenance and repairs and seasonal changes that may affect your utility bills. It’s also a good way to stay on top of all of your expenses, not just homeownership costs, and monitor your savings progress, which can help you avoid overspending and taking on debt.

Break down the costs of owning a home

When adding up homeownership expenses, your mortgage payment is just the tip of the iceberg. There are other things to budget for after buying a home beyond what you pay to your lender each month.

John Bodrozic, co-founder of HomeZada, a digital home management app, says budgeting expenses for a first home usually fall into four categories:

  • Mortgage, insurance and property taxes
  • Utilities, including electric, water, pest control, garbage collection, internet and phone services
  • Maintenance and repair costs
  • Remodeling expenses

In addition to the principal and interest on your home loan, your mortgage payment may also include escrow for your annual property taxes, homeowner’s insurance and homeowner’s association dues (if you live in a condominium or neighborhood with an HOA). If not, you’ll need to separately include these hidden costs of owning a home in your budget.

“If you don’t escrow for property taxes and homeowner’s insurance, then you need to create your own escrow savings account that’s earmarked specifically for these expenses,” Stroud says.

For example, if your annual homeowner’s insurance premium totals $2,400, you could budget $200 per month toward this cost and stash that money in a high-yield online savings account. You’ll need to do the same for your property taxes. When it’s time to pay for these hidden costs of owning a home, you’ll have the cash on hand to cover all of it.

Determine your new disposable income

The hidden costs of owning a home could affect how much money you have left over each month after your bills are paid. While your monthly mortgage payment could be less than your previous rent, your property taxes, homeowner’s insurance and other home-related expenses may mean you’ll pay more on housing each month.

Stroud says if owning a home means having less disposable income each month, then you need to be clear about distinguishing between your wants and needs to better adjust your spending plan.

On the other hand, budgeting for new homeowners could mean monthly housing costs that are less than or equal to what you previously paid in rent. If you have more wiggle room in your budget, you could funnel any “extra” cash into your emergency fund or home maintenance savings.

Once those are fully funded, you could find room in your budget to pay down credit card or student loan debt, or increase the amount you’re saving for retirement each month. As you’re working toward your financial goals, be mindful of purchases you may be tempted make as a new homeowner—especially if lower housing costs mean you have more discretionary spending to play with in your budget.

“Many first-time homeowners find that their first home causes lifestyle changes,” Bodrozic says. That could mean buying new furniture, upgrading your TV, purchasing an expensive lawn mower or rushing into costly renovation projects.

Include a line item in your budget for home savings

You likely already know that an emergency fund can help you cover unexpected expenses, like a flat tire or an unplanned visit to the doctor. When buying a home, budgeting for new homeowners should also include setting up a separate savings account for unplanned home maintenance and repairs.

“A good rule of thumb is to save between 1 and 4 percent of the purchase price of your home for annual preventative maintenance and repair costs,” Bodrozic says.

When considering things to budget for after buying a home, Bodrozic says if you’re dealing with a newer home, you may be able to aim for a one percent savings goal, as things like the roof, appliances, and heating and air system should still be in good shape. “If your home is 20 to 25 years or older, a budget of 4 percent is more appropriate because many of the home’s equipment and assets are near the end of their useful life.”

When determining which things to budget for after buying a home, remember that repair costs may increase over time as the property ages, and you’ll need to adjust your budget accordingly. Bodrozic says keeping up with regular maintenance can help preserve your home’s equipment and structural elements, potentially allowing you to delay spending on major repairs.

Think ahead

One final thing to consider is how much you will be chipping away at your mortgage over time. Though it’s not one of the things to budget for after buying a home, Bodrozic recommends being aware of how much equity you’re building up in the home over time because it may influence your future housing expenses.

For example, if you took out a conventional loan with less than 20 percent down and are paying private mortgage insurance (PMI), you can request that it be removed once you reach 20 percent equity in the home. That in turn can reduce your monthly mortgage payment. If you think you might consider a cash out refinance at some point to make upgrades or renovations, you’ll need to have equity available that you can draw on later.

25 Tips Every Homeowner Needs to Know

There’s a lot of work involved in moving into your new house and getting settled. It would be nice if your house came with a homeowner’s manual explaining all this. But that won’t happen unless you buy a new house from a very responsible builder. So our new homeowner tips is meant to guide you through your first year in a new house.

Here are recommendations on what you’ll want to do once you’re in your new home. Even if you’ve been in your house for several years, you may find things you missed. Some tasks only need to be done once. Other homeowner tasks should be reviewed every one to two years.

  1. Start building your home maintenance team (listed above). You’ll want to arrange for services like house cleaning, lawn care, pool cleaning and pest control right away. Then you should make needed repairs, starting with …
  2. File a change of address with the post office. Ask about a new resident packet which frequently contains discount coupons to local stores like Lowe’s.
  3. Paint the ceilings while the coast is clear, as they’re the toughest to reach with furniture in the way. This will give you time to pick your wall colors and paint rooms as you decide how you want to decorate.
  4. Review your home inspection report and create a punch list of needed repairs. These should be done before you start home improvements and other decorating. Here are priorities to guide your timeline:
    • Repairs to keep your family and guests safe.
    • Problems that involve water. This includes water penetrating your home from outside and interior leaks.
    • Updates that will reduce your energy bills and extend the life of major home systems.
  5. Research discount programs offered by local utility companies.
  6. Review your homeowner insurance policy with your agent to make sure you have the correct coverage. Don’t be surprised if you’re missing something … or you have more coverage than you need.
  7. Add contact information to your smart phone for your insurance company, utilities and home maintenance team.
  8. Change your driver’s license and car registration. Check state requirements as you may only have 10 days.
  9. Confirm your deed has been officially recorded about two weeks after closing.
  10. Check to see if you’re eligible for any property tax discounts. Often known as homesteading, you may find them for primary residence, seniors or even retired military.
  11. Setup a homeowner budget. Make sure you’re saving enough for property taxes and insurance if your bank didn’t require them to be put into escrow. You should also set aside money for preventive maintenance and repairs.
  12. Change your locks. If you’re considering smart locks, take time to think through your choices. Consider the multiple devices you want to control remotely, and you’ll save money with one shared controller.
  13. Ask your utilities to mark where their lines are, a free service so you don’t accidentally sever a line when installing a mailbox, fence, etc. Make a map with the lines for future reference.
  14. Don’t put your name outside the mailbox. Put it inside for the mailman.
  15. Buy gardening equipment needed to maintain your yard. It’s easier to start right away versus catching up after ignoring shrubs and flower beds for six months.
  16. Find your main water shutoff and learn how to turn your water off.
  17. Check the temperature on your hot water heater. Turn it down to 120º to avoid burns and save money. Your HVAC and/or plumber can help with this.
  18. Review you main electrical panel to make sure it’s properly labeled. Practice shutting off power and buy circuit breakers if needed.
  19. Schedule an HVAC maintenance tune-up to insure your system is running efficiently.
  20. Have your home cleaned before moving furniture into the house. It’s also the perfect time to get your carpeting cleaned or floors refinished.
  21. Meet the president of your condo/homeowners association. Learn about local customs, like getting exterior paint colors approved.
  22. Make a copy of your closing papers and store outside your home. Use an old fashion safe deposit box or scan and store documentation online, in case of a fire.
  23. Make a photo or video record of your home and personal possessions.
  24. Identify high value items and make sure they’re covered by your homeowners insurance. Review your policy now, as you probably didn’t have time before the closing.
  25. Meet your neighbors. Introduce yourself and learn what hobbies and interests you have in common. Share contact information with immediate neighbors (8 recommended).

Being a Homeowner: Smart Tips

Few things are more exciting than making the leap from being a renter to being a first-time homeowner. Getting swept up in all the excitement is a wonderful feeling, but some first-time homeowners lose their heads and make mistakes that can jeopardize everything they’ve worked so hard to earn. Following a series of practical steps early in the homeowning experience can save new owners time, money, and effort later down the road.

Get Properly Insured

Your mortgage lender requires you not only to purchase homeowners insurance but also to purchase enough to fully replace the property in the event of a total loss. But that’s not the only insurance coverage you need as a homeowner. If you share your home with anyone who relies on your income to pay the mortgage, you’ll need life insurance with that person named as a beneficiary so that they won’t lose the house if you die unexpectedly. Similarly, you’ll want to have disability-income insurance to replace your income if you become so disabled that you can’t work.

Also, once you own a home, you have more to lose in the event of a lawsuit, so you’ll want to make sure you have excellent car insurance coverage. If you are self-employed as a sole proprietor, you may want to consider forming a corporation for the greater legal protection of your assets.

You may also want to purchase an umbrella policy that picks up where your other policies leave off. If you are found at fault in a car accident with a judgment of $1 million against you and your car insurance only covers the first $250,000, an umbrella policy can pick up the rest of the slack. These policies are usually issued in units of one million.

Get Help With Your Tax Return 

Even if you hate the thought of spending money on an accountant when you normally do your tax returns yourself, and even if you’re already feeling broke from buying that house, hiring an accountant to make sure you complete your return correctly and maximize your refund is a good idea. Homeownership significantly changes most people’s tax situations and the deductions they are eligible to claim.

Just getting your taxes professionally done for one year can give you a template to use in future years if you want to continue doing your taxes yourself.

Don’t Overspend to Personalize

You’ve just handed over a large portion of your life savings for a down payment, closing costs and moving expenses. Money is tight for most first-time homeowners. Not only are their savings depleted, but their monthly expenses are also often higher as well, thanks to the new expenses that come with home ownership, such as water and trash bills, and extra insurance.

Everyone wants to personalize a new home and upgrade what may have been temporary apartment furniture for something nicer, but don’t go on a massive spending spree to improve everything all at once. Just as important as getting your first home is staying in it, and as nice as solid maple kitchen cabinets might be, they aren’t worth jeopardizing your new status as a homeowner. Give yourself time to adjust to the expenses of home ownership and rebuild your savings – the cabinets will still be waiting for you when you can more comfortably afford them.

Don’t Ignore Important Maintenance

One of the new expenses that accompany home ownership is making repairs. There’s no landlord to call if your roof is leaking or your toilet is clogged. To look at the positive side, there’s also no rent increase notice taped to your door on a random Friday afternoon. While you should exercise restraint in purchasing the nonessentials, you shouldn’t neglect any problem that puts you in danger or could get worse over time. Delay can turn a relatively small problem into a much larger and costlier one.

Keep Receipts for Improvements

When you sell your home, you can use these costs to increase your home’s basis, which can help you to maximize your tax-free earnings on the sale of your home. In 2008, you could have earned up to $250,000 tax-free from the sale of your home if it was your primary residence and you had lived there for at least two of five years before you sold it.

This deduction assumes that you owned the home alone—if you owned it jointly with a spouse, you could each have gotten the $250,000 exemption.

Let’s say you purchased your home for $150,000 and were able to sell it for $450,000. You’ve also made $20,000 in home improvements over the years you’ve lived in the home. If you haven’t saved your receipts, your basis in the home, or the amount you originally paid for your investment, is $150,000. You take your $250,000 exemption on the proceeds and are left with $50,000 of taxable income on the sale of your home. However, if you saved all $20,000 of your receipts, your basis would be $170,000 and you would only pay taxes on $30,000. That’s a huge saving. In this case, it would be $5,000 if your marginal tax rate is 25%.

Hire Qualified Contractors

Don’t try to save money by making improvements and repairs yourself that you aren’t qualified to make. This may seem to contradict the first point slightly, but it really doesn’t. Your home is both the place where you live and an investment. It deserves the same level of care and attention you would give to anything else you value highly.

There’s nothing wrong with painting the walls yourself, but if there’s no wiring for an electric opener in your garage, don’t cut a hole in the wall and start playing with copper wiring. Hiring professionals to do work you don’t know how to do is the best way to keep your home in top condition and avoid injuring—or even killing—yourself. Also, be sure to check with the local building authority and pull any necessary permits to complete the work.

Repairs vs. Improvements

Unfortunately, not all home expenses are treated equally for the purpose of determining your home’s basis. The IRS considers repairs to be part and parcel of home ownership—something that preserves the home’s original value but does not enhance its value.

This may not always seem true. For example, if you bought a foreclosure and had to fix a lot of broken stuff, the home is obviously worth more after you fix those items, but the IRS doesn’t care—you did get a discount on the purchase price because of those unmade repairs, after all. It’s only improvements, like replacing the roof or adding central air conditioning, which will help decrease your future tax bill when you sell your home.

For gray areas (like remodeling your bathroom because you had to bust open the wall to repair some old, failed plumbing), consult IRS Publication 530 and/or your accountant. And on a non-tax-related note, don’t trick yourself into thinking it’s OK to spend money on something because it’s a necessary “repair” when in truth it’s really a fun improvement. That isn’t good for your finances.

The Bottom Line

With the great freedom of owning your own home comes great responsibilities. You must manage your finances well enough to keep the home and maintain the home’s condition well enough to protect your investment and keep your family safe. Don’t let the excitement of being a new homeowner lead you to bad decisions or oversights that jeopardize your financial or physical security.

How to Easily Save Money as a New Homeowner

Just bought a home? Here are 4 money saving every new homeowner should know: from spring maintenance items to DIY home improvements.

Keep an eye on that spending! Whether you’re a homeowner for the first time or you’ve just moved into a larger home, there is a strong tendency to overspend at the outset. Here are some tips to help you avoid this common pitfall of new homeownership.

1. Get down and dirty with DIY

Speaking of decorating, here’s some golden advice for new homeowners: The possibilities are endless — and much less costly — if you’re willing to do a little bit of the hard work yourself. DIY home improvement projects such as painting and switching out hardware can make a huge difference in the look and feel of your new home without sending you spiraling into debt.

Note: Don’t spend time and money on projects that you aren’t qualified to do. Doing a project incorrectly can end up costing you quite a bit more time and money to fix. Play it safe. Stick to fairly simple projects until you get a better grasp of your home improvement skillset.

2. Get the boring stuff out of the way first

You’ve just shelled out for a down payment, closing costs and moving expenses. Your savings account is pretty drained, right? So what would be the worst thing that could happen right now to your home? A costly and unexpected issue — especially one that could have been avoided with some simple maintenance. Unfortunately, it’s not up to a landlord to handle these issues now.

Sure, your home inspector took a thorough look at the house before you purchased it, but that doesn’t mean that you shouldn’t make your own rounds. Before you even consider picking out that new sectional or king-size bed, perform some new homeowner maintenance, including getting a head start on simple spring maintenance items. Then, make sure your budget stays protected by taking advantage of a home warranty — the rest-easy solution to those inevitable system and appliance breakdowns.

Bonus Tip: Was your new home vacant for a while before you moved in? Were some appliances missing, causing you to have to install new ones? Since you’re officially living there now, take a minute to ensure everything is hooked up and functioning correctly throughout the house. Any strange noises or smells? Water leaks? Have them checked out by a professional right away!

3. Get comfortable

Ask yourself: What absolutely must be done now, and what can wait? As exciting as this new lifestyle is, it will take some getting used to. Think about all the new expenses you have now, versus before. And the fact that you didn’t just want to get into the new house — you plan on staying there for a while. The best way to ensure that is to be smart with your money and take your time making this new place your home. Upgrading your master bathroom can wait until you’ve saved up for it. And adding on that deck doesn’t have to be something you do this year. Simply ensure you’re comfortable in your new home. The extra projects will happen. The new items will come. And they’ll be that much more exciting when you can easily afford them.

4. Get thrifty with your décor

Now that you’ve gotten the boring stuff out of the way, it’s time to get excited about adding your personal touch to the home. But how can you do that when your funds are running low? Open your mind to the idea that not everything has to be brand new — just new to you. Have your in-laws been talking about switching out their dining room chandelier? Tell them you’ll take it off their hands! Have your friends been talking about getting together for a group garage sale when the weather gets warmer? See if you can get a sneak peek of the items that they’re wanting to part with. And don’t hesitate to take advantage of all those resale groups online. You can find some incredible items in excellent condition at a fraction of the retail cost. No one will ever know the difference!

How to Easily Maintain Your Home

Whether you are going to be selling your home shortly or years down the road, making sure you keep up with the maintenance of your property is important. A home that does not have proper maintenance will undoubtedly suffer when it does become time to sell.

When you talk to people that are successful in the sale of their homes both quickly and for a good price, you will usually discover that their success was a result of forethought.

They may have been lucky to make as good of a deal as they did, but they likely spent a significant amount of time preparing for that lucky moment as well. Making a home appealing to buyers takes work – much of which occurs before the house ever goes on the market.

There are some home maintenance items that most people do not always think about. Many of the things that make a house stand out are the result of regular maintenance, tasks that may seem a little mundane, but that do a lot to keep up the functioning and appearance of a home.

These little jobs, when performed on a periodic basis, can help you avoid paying costly replacement or repair fees in the months leading up to putting your home on the market. Unless you are planning on selling your home for a bargain to shoppers searching for a fixer-upper, keeping up with the little things is worth the effort.

These home maintenance tips can go a long way in helping that your sale goes smoothly and does not end up going south due to a failing home inspection. Keep in mind that a skilled home inspector can tell when a homeowner has not been keeping up with regular home maintenance items.

You can bet your bottom dollar that while the home inspection is taking place, they will be pointing this out to the buyer. Whether you are selling now or not, use these nine maintenance tips to keep your home running like a well-oiled machine! If you are going to be selling by following this advice, you will keep your negotiating after the home inspection to a minimum.

Vacuum Refrigerator Condenser Coils

Most people do not think of inspecting their refrigerators. They seem like self-contained units, and there is not a lot the average person can do to maintenance them. However, the condenser coils on the back of your fridge will collect dust, and this dust can inhibit its operation.

Pulling the fridge out and cleaning off the dust can help your fridge work more efficiently, and will give you the opportunity to clean behind and underneath it as well.

More than likely if you clean your coils the refrigerator will work noticeably better. Refrigerators are expensive to replace so this is an important maintenance tip for homeowners not to forget.

Change Batteries For Smoke/Carbon Monoxide Detectors

While changing the batteries is a small maintenance item. making sure that you smoke and carbon monoxide detectors are working is not. In fact, your families safety depends on it!

The last thing you ever want to go through is having your home destroyed by fire when it could have easily been avoided. Having working smoke and carbon monoxide detectors is critical.

In some states including mine (Massachusetts), they are a requirement for sale. This is a great law that is designed to reduce casualties from two potentially hazardous situations.

You don’t need to be selling your home to realize that keeping up with your local smoke and carbon monoxide detector regulations can be the difference in saving lives!

Inspect and Clean Your Furnace or Boiler

Heating and cooling systems push a lot of dust along with temperature controlled air, and this dust and possibly condensation can lead to degradation of your unit and the ducts it uses. An annual inspection by a certified service professional is always a good idea.

The service person can clean up any accumulated debris, and can verify that your system is functioning as it should. When you have a forced hot water heating system that is serviced by oil, the maintenance requirements are little more stringent.

Oil, unfortunately, does not burn as clean as gas and therefore can cause a system to be cleaned on a more regular basis. Most heating companies recommend an Oil fired heating system be tuned up once a year where gas can typically be done every two years.

Keep in mind that staying up with maintenance on your heating system can extend the lifespan by years. Also, consider that if a buyer sees you have not been maintaining the system, they may take into account offering less for your home thinking they may need to replace it sooner than expected.

Keeping up with your heating system is a maintenance tip you should never neglect as it is one of the most costly items in your home to replace.

Check Your Water Heater

Your water heater may heat thousands of gallons of water a year, and like every appliance, it can only perform well for so long.

A yearly maintenance check is recommended for any water heater, even one you just purchased.

Seals have a way of failing, and drains can clog – especially if you have hard water. If you notice even minor leaks or severe scale build up, consider contacting a plumber or water heater installation company to take a look.

It is far better to catch a failing water heater before it goes out completely than to come home to a flooded room or basement. Water heaters are an area that home inspectors will pay particular attention to. Making sure that you do not have any pipe fittings that are leaking or corroded is important.

At home inspections leaking fittings are quite common because most homeowners do not pay attention to a maintenance item like this until it becomes a bigger problem.

Maintain Your Filters

One of the more important maintenance tips for homeowners is making sure you keep up with changing your heating and cooling filters. Your central heating and air conditioning unit work hard to push air throughout your house. By changing your filters on a regular basis, you help the unit operate efficiently and effectively.

It already requires a significant amount of energy to run air through the various vents – failing to install a clean filter makes this process much more challenging, and can put unnecessary strain on your central air unit. Make sure you pay particular attention to the rating of the filter you are using.

Some filters need to be changed monthly while others are “rated” to last much longer. A quality filter can usually be bought for your system that is designed to be modified far less frequently.

Check Your Toilets and Faucets

Home inspectors and appraisers notice everything, and they are sure to see if you have any problems with your toilets or your sinks. Take a moment every six months or so to inspect your basic plumbing fixtures. Water will find any available avenue to escape, especially when under pressure, and you can guarantee that sooner or later one of these fixtures will begin leaking.

If you are handy, replace the faulty seal. If not, bring in a plumber to tackle the problem before it becomes much bigger.

An Ounce Of Prevention

Taking the time to do these things now, before you ever put your home up for sale, will make the whole selling process easier when you finally begin it in earnest. You and your family will also enjoy the benefits of a cleaner, more livable home right now.

While the above-mentioned home maintenance items are mostly considered small potatoes, there are always other common home selling issues that could derail your sale far more quickly. Things like a failed septic system, not taking out required permits for work, and appraisal issues are potential road blocks.

When selling a home, it is important to stay out ahead of the curve and pay particular attention to all the potential issues that could get in the way. A prepared home seller enjoys the benefit of not having to face those unfortunate things that can surface in a Real Estate transaction!

Spruce Up Your Front Door

It may seem trivial, but your front door is usually the first close look anyone gets at your home and is worth sprucing up on a yearly basis because of this. If you have a hardwood door with a natural look, take the time to clean and polish it. If it is painted, consider touching it up or repainting it as necessary.

Buyers like a welcoming, well-maintained front door. Have an old door handle that is very weathered? Consider upgrading to something that will be visually appealing while also offering good home security.

Keep in mind that maintaining the curb appeal of your home will pay you back when it comes time to sell.

Clean Your Exhaust Hood

Cooks working in professional kitchens are required to clean vent hoods on a regular basis. It is a dirty job, typically involving caked on grease and dust. Your kitchen vent may not be as dirty as one used in a professional setting, but it still poses a fire hazard and is unsightly when not cleaned regularly.

Take a few minutes to wash off any accumulated grime and to replace the filter if there is one. Exhaust hoods are a simple maintenance item that will stick out like a sore thumb if you do not deal with it.

Maintain Your Garage Door

Your garage door and opener also require regular maintenance to operate as intended. The chain on your opener must be lubricated, along with any exposed metal joints, and you should check to make certain the door runs smoothly in its tracks.

Most inspectors will pay close attention to a garage door because of the potential for significant injury to a child or pet. Most newer garage door systems have electronic eyes at the bottom that sense movement. These need to be checked regularly to make sure they are functioning as intended.

Homeowner Tax Benefits

Indeed, there’s no place like home.

Let’s examine how homeownership makes “cents” –  from the tax benefits, to good old fashioned financial stability.  The financial benefits of homeownership are evident year round, but particularly around tax time – they seem to jump off the page!

1. You Build Equity Every Month

Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe.  That reduction of your mortgage every month increases your equity. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans – thanks to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows!

2. Homeownership Builds Wealth Over Time

We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a ‘new market.’ Homeownership can be a very savvy financial move – but only if people buy homes they can actually afford. In 2014, this idea of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old at the same time.

3. You Reap Mortgage Tax Deduction Benefits

  • Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
  • Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable.
  • Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.

4. Long Term, Buying Is Cheaper than Renting

In the first few years, it may be cheaper to rent. But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying. But more importantly, you are not throwing away all that money on rent. You gotta live someplace, so instead of paying off your landlord’s home or building, pay off your own!

5. Tax Deductions on Home Equity Lines

In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.

6. A Mortgage Is Like a Forced Savings Plan

Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.

7. You Get a Capital Gains Exclusion

If you buy a home to live in as your primary residence for more than two years then you will qualify. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Now, it may sound ridiculous that your house could be worth more than when you purchased it after these past several years of falling house prices. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will come in very handy.

Home Ownership: Financial Benefits to Think About

Home is where the heart is. It’s also where a big chunk of your financial responsibility lies. Home ownership is a pillar of the American dream, and while many of those in younger generations either can’t afford to or actively choose not to pursue it, those who buy in to the housing market often see major financial benefits.

There is no doubt that becoming a homeowner is one of the biggest financial decisions you will make in your entire life. It’s also undeniable that simply getting to that point requires a certain degree of financial success. You need to come up with a down payment and closing costs (generally about 3 percent to 4 percent of the total home purchase price for buyers) before you can even turn the key in the door. But among those who take on the big task of home ownership, many see financial benefits that far outweigh their initial investment, especially during tax season. Here are 5 of them.

  1. Positive perks

    Home ownership has other financial benefits that may come in handy for you someday. For example, a mortgage is considered “good debt,” and as such, it is likely to increase your credit score, provided you always make your payments on time. It also proves your credit-worthiness for other things you may want to consider, like a business loan or a new line of credit. It can even lower your monthly car insurance payments. While perks like these should certainly not be deciding factors when determining whether or not you should purchase a home, they do add up as additional benefits if you choose to opt in to the housing market.

  2. Home ownership tax deductions

    You get a number of tax breaks for owning a home, most notably a deduction for the interest and property tax portion of your mortgage. This deduction is particularly useful for off-setting the initial financial blow that comes with purchasing your property, since in the first years of owning your home you’re mostly just paying off the interest on your mortgage, as opposed to the principal. The first year you buy your home you are also able to write off any mortgage points on your loan, which can lead to pretty considerable savings depending on how many points you claimed. And if you ever decide to refinance your home after building sufficient equity in it, you also have the option of taking out a home equity line of credit, which is itself tax deductible.

    Do keep in mind: the Tax Cuts and Jobs Act, passed in 2017, limits mortgage interest deductions to $750,000 of your total mortgage debt, including any home equity credit you take out. Previously, the limit was $1,000,000 in mortgage interest deductions plus a $100,000 for home equity credit.

  3. Build up a stronger financial future

    The recent recession threw a wrench into the idea that home ownership always builds wealth over time. But the fact remains that owning a home is one of the fundamental means of accumulating wealth as we age. The caveat: you have to buy a house that you can actually afford.
    Asset-wealth is a much more secure predictor of future financial stability than income, which can—and often does, in today’s evolving economy—change from year to year. In a strong economy, home values generally increase by 3 percent to 4 percent every year, thanks to inflation and natural population growth. From 2011 to 2016, as the housing market has recovered from the bubble that contributed to the recession, home values have been increasing even higher at an average rate of 6.3 percent a year. Putting money into home ownership versus a rental is akin to the difference between putting money into an investment account versus a no-interest checking account, with the latter being only as valuable as it is in the moment while the former increases over time.

  4. Amass equity

    Every single month that you pay your mortgage you own just a bit more of your home. This is a big benefit over renting, where you’re paying comparable monthly fees without any comparable stakes. The equity in your home builds in two ways and often concurrently: (1) equity builds as the value of your home increases, and (2) equity builds as you pay off more of your loan. These two factors mean that after the first couple of years (when, again, you’re mostly just paying mortgage interest), every month you pay money toward your loan you are building up your financial resources for the future. It’s why some people refer to mortgage payments as “forced savings.”

    Want to build equity even faster? Take steps to pay off your debt quicker (like financing with a shorter term loan or paying more than you owe every month) or increase your property value (think home improvements and a focus on routine maintenance).

  5. More control over day-to-day housing-related costs

    Unless you change the terms of your mortgage, you know the base cost that you’re going to be spending to live in your home every month, both now and in the future. This affords more stability than rent, which is variable and can (and often does) change over time. And control over costs goes even further than that. As a renter, you don’t have a say over whether your landlord supplies you with energy-efficient appliances that can save you hundreds of dollars every year, but you do have to pay the utility bill either way. As a homeowner, you can make better short and long-term financial decisions that are geared specifically toward your own financial goals and abilities. While this isn’t likely going to help you save for your future in the same way building equity does, it should bring you peace of mind to know that you’re saving money everywhere that you can.

But what about the financial risks?…

Owning a home isn’t all equity building and cost cutting. Aside from the significant payments that have to be made in order to own a home in the first place, there are also some financial risks that all potential and current homeowners need to keep in mind when trying to balance their budgets.

The biggest financial risks for homeowners are in terms of maintenance costs. There’s no landlord to put the responsibility on if the roof starts leaking or the heating system goes out in the middle of winter. While you’re unlikely to face major repairs like this all of the time, they do occasionally come up and it’s important for all homeowners to have savings set aside to deal with them when they happen.

Then there’s the risk of home depreciation. Ultimately, it’s your home’s land that appreciates in value over time, barring any major negative changes in your area like a natural disaster or a school or major business closing. The structure of your home, however, tends to depreciate in value as things get worn out and lived in. While you don’t have a lot of control over what goes on in your neighborhood that may negatively impact the price of your land, you do, fortunately, have some control over maintaining and increasing value on your home’s structure by keeping up with maintenance and putting in certain home improvements. Don’t let your home’s value be something that you just tacitly accept—work toward making sure your home, and not just the land it sits on, is appreciating as the years go on.