After You Buy
Should I setup electronic mortgage payments?
Mortgage lenders want to be paid and to be paid on time. And you should want to pay them on time. Late payments can cost you dearly -- many mortgages have stipulations for penalties equal to 5 percent of the amount of the mortgage payment if your payment is late. If your payment is one whole month late, a 5 percent penalty works out to an annualized interest rate in excess of 60 percent! Even being one day late can trigger this penalty. Late charges also show up on your credit report.
Sign up for your mortgage lender's automatic-payment service to have your mortgage payment sent electronically from your checking account to the lender on the same day each month.
What should I have on hand in an emergency cash reserve?
Most people clean out their emergency reserve in order to scrape together enough cash to close on their home purchase. Ideally, you should have ready and available an emergency cash reserve equal to at least three months' worth of living expenses. If your employment is unstable and you lack family to lean on financially in a pinch, aim for six months' worth of living expenses. Keep the emergency money in a high-yielding money-market mutual fund.
As with saving money to accomplish other important financial goals, rebuilding your emergency reserve requires you to go on a financial diet and spend less than you earn. Easier said than done, especially with all the tempting things to spend money on for your home.
What are real estate property taxes based upon?
In most communities, real estate property taxes are based upon an estimate of your home's value. If home prices have dropped since you bought your home, you may be able to appeal your assessment and enjoy a reduction in the property taxes that you're required to pay.
How do I go about trying to get my real estate property taxes reduced?
Contact your local Assessor's Office to inquire as to the local procedure for appealing your property taxes. Generally, the process involves providing comparable sales data in writing to the assessor to prove the reduced value of your home. If you need help with this exercise, contact the real estate agent who sold you the home. Just be aware that your agent may want to make you feel as though your home hasn't decreased as much in value in order to make you (and perhaps himself) feel better. Explain that you're trying to save money on your property taxes and need comparables that sold for less than you paid for your house.
When should I refinance?
Keep half an eye on interest rates. If interest rates decrease from where they were when you took out your mortgage, you may be able to refinance your mortgage and save yourself some money. Refinancing simply means that you take out another new (lower cost) mortgage to replace your old (higher cost) one.
If rates have dropped at least one full percentage point since you originally took out your loan, start to contemplate and assess refinancing. The key item to calculate is how many months it will take you to recoup the costs of refinancing (loan fees, title insurance, and the like). For example, suppose that your favorite mortgage lender tells you that you can whack $150 off your monthly payment by refinancing. First, you won't save yourself $150 per month just because your payment drops by that amount -- don't forget that you'll lose some tax write-offs if you have less mortgage interest to deduct.
To figure how much you will really reduce your mortgage cost on an after-tax basis, take your tax rate and decrease your monthly payment savings you expect from the refinance by that amount. If you're a moderate-income earner, odds are that you're in the 28 percent tax bracket. So if your mortgage payment would drop by $150, and if you were to reduce that $150 by 28 percent (to account for the lost tax savings), then (on an after-tax basis) your savings would actually be $108 per month.
Now $108 per month is nothing to sneeze at, but you still must consider how much refinancing the loan will cost you. If the refinancing costs total, for example, $6,000, it will take you about 56 months ($6,000 divided by $108) to recover those costs. If you plan on moving within five years, refinancing won't save you money -- it will actually cost you money. On the other hand, if it costs you just $3,000 to refinance, you can recover those costs within three years. If you expect to stay in your home for at least that long, refinancing is probably a good move.
Why should I keep the receipts related to the improvement of my home?
Sooner or later, you will spend money on your home. Some of what you spend money for should be tracked and documented for tax purposes in order to minimize the capital gain that you may owe tax on in the future. Capital gain simply means the difference between what you receive for the house when you sell it less what it cost you to buy the house -- with one important modification. The IRS allows you to add the cost of improvements to the original cost of your home in order to calculate what's known as your adjusted-cost basis.
Capital Gain = Net Sale Price - (Purchase Price + Capital Improvements)
For example, if you buy your home for $150,000 and, over the years, it appreciates so that (after paying the costs of selling) your net selling price is $200,000, your capital gain is $50,000. Remember, though, that the IRS allows you to add the value of the capital improvements that you make to your home to your purchase price.
A capital improvement is defined as money you spend on your home that permanently increases its value and useful life -- putting a new roof on your house, for example, rather than just patching the existing roof. So if you made $10,000 worth of improvements on the home you bought for $150,000, your capital gain would be reduced to $40,000. Money spent on maintenance, such as fixing a leaky pipe or replacing broken windows, is not added to your cost basis.
Before you sell your home, please be sure to understand the tax consequences of such a transaction. Many homeowners are eligible to shelter a large chunk of their home's capital gain from taxation when the time comes for them to sell.