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Many people in American consider home ownership as a major part of realizing the American Dream. In this article we will cover the basic concepts you need to understand about owning a home.
Mortgages
- Conventional Conforming Non-Jumbo Mortgages – 20% Down, 15, 20 or 30 Year Fixed Rate Mortgages
- Conventional Non-Conforming Non-Jumbo Mortgages – Less Than 20% Down, 15, 20 or 30 Year Fixed Rate Mortgages. The Bank will require you to pay something called PMI (Private Mortgage Insurance) on these low-down payment Mortgages in an effort to reduce their Risk. PMI ranges from .5% to 1.5% of the Mortgage Amount. For example, PMI on a $300,000 Mortgage can cost you as much as $4,500 a year or $375 per month on top of your monthly Mortgage Payment. Once the Equity in your home rises to 20%, you can petition the Bank to remove the PMI. Your Equity can go up if the value of your home increases or it can go up as you pay down the Mortgage Loan Amount. In a low growth real estate market, it will take you about five years to create enough Equity in your home to warrant petitioning the Bank to remove the PMI.
- Conventional Jumbo Mortgages – The FHFA (Federal Housing Finance Agency) sets the “Jumbo Loan Amount” each year. And the Jumbo Amount is different from State to State. In 2024, for most of the U.S., the Jumbo Mortgage Amount is $766,550.
- Adjustable Rate Mortgages (ARMs)- These Mortgages do not have a Fixed Rate of Mortgage for 15, 20 or 30 Year Loans. Most ARMs do have a fixed five year rate. After five years, in a rising interest rate environment, the ARM Rate will be increased.
- Veterans Administration Mortgages (VA Loans) – VA Loans have a lower interest rate, no down payment options and capped Closing Costs. Another Benefit is you can roll Closing Fees and Funding Fees into the Loan Amount.
- Interest Only Mortgages – Here the borrower pays Interest Only for between Five to Seven Years. After this Five to Seven Year Period lapses, the Mortgage Payment will Increase significantly, as you will be required to begin paying back the Loan amount on top of the Interest.
- Balloon Mortgages – The typical Term of a Balloon Mortgage is Seven Years. The Banks typically calculate your Monthly Mortgage Payment using a 30 Year Amortization Table. After the Seven Years lapses, you will need to Pay Off The Loan. Most people wind up Refinancing the Loan. There are Loan Ceilings the Bank is willing to Loan out on a Balloon Loan. These can be between $600,000 – $850,000 depending upon the area in which you live.
- Construction Loans – These are typically one – three year Loans used to Finance the Construction of a Home. After the Construction is completed, the Bank will require that you either Pay off the Loan Amount or Refinance that Loan.
Home Equity Loans
If you have Equity in your home, you can borrow money from a Bank/Lender in the form of a Loan called a Home Equity Loan. The maximum amount a Bank/Lender will lend you is between 80% and 85% of your CLTV, which is the ratio of your home’s value to your total loan balance. The lower your CLTV, the more you can borrow.
Banks/Lenders generally allow you to pay off your Home Equity Loan over a period of five to twenty years. The monthly payments you will be required to make include Interest and Loan Principal.
the Interest % on a Home Equity Loan is typically 2% to 3% higher than the rate on a Home Mortgage.
There are many reasons to take out a Home Equity Loan. The most common reasons are:
- To purchase something – vacation home, boat, car
- To pay College costs for your children
- To make a home improvement
- To cover medical costs for some major, unexpected health issue of a family member
- To pay off outstanding credit card debt
- Business purposes
Reverse Mortgages
A Reverse Mortgage is a loan that allows eligible homeowners age 62 or older to borrow money against the Equity in their home. They can receive the loan proceeds either as a lump sum, a fixed monthly payment, or a line of credit. A Reverse Mortgage is similar, in many ways, to a Home Equity Loan with one difference – you are not obligated to make monthly payments to pay back a Reverse Mortgage. Instead, upon the sale of your home, refinancing of your home or upon your death, you are required to pay back the loan balance. The loan balance increases over time as interest and fees are added each month on the money you borrowed.
The primary reason individuals take out a Reverse Mortgage is because they need additional money to pay for their living expenses while in Retirement. They are essentially funding their Retirement with the Equity in their homes.
There are certain Eligibility Requirement associated with a Reverse Mortgage:
- You must be at least 62 years old
- You have at least 50% of Equity in your home, meaning you’ve paid off a significant amount of your Home Mortgage.
- Mandatory Counseling explaining the workings of a Reverse Mortgage is required for anyone who wants to take out a Reverse Mortgage.
Reverse Mortgages are costly and complex. The PMI discussed above, is one of the many costs associated with a Reverse Mortgage.
Costs of Home Ownership
Below is a list of most of the common costs of Home Ownership:
- Monthly Mortgage Payment – The mortgage payment typically includes Loan Amount, Interest, Real Estate Taxes, PMI if applicable and Home Owners Insurance.
- Monthly Electricity and Gas Usage
- Quarterly Sewer and Water Usage
- Repairs – Roof, HVAC (Heating, Ventilation, Air Conditioning,, Paint, Washers, Dryers, Refrigerators, Hot Water Heaters, Carpeting, Doors, Windows are all typical things that either need to be repaired or replaced. Heating means Furnace or Boiler. If you have any Water Damage, the damaged part of the home (Drywall, Flooring, Concrete) will need to be repaired. If things go wrong with your plumbing, you’ll need to pay a plumber, if you are unable to fix it yourself. Toilets, Faucets and Lighting Fixtures man need to be repaired or replaced periodically. Foundation cracks or buckling will need to be repaired. Pest damage (i.e. Termites) can cause internal damage to the wood in your home and require repairs. Decks and Patios may need repair or replacement.
- Maintenance – For DIY types, they will need to spend money on Lawn Mowers, Leaf Blowers, Snow Blowers, Rakes, Snow Shovels, Chainsaws, one or more Hoses and a few other miscellaneous items. For Non-DIY, they will have to pay someone to mow their lawn, rake their leaves and maintain their yards. The Furnace will need periodic maintenance to keep it working properly. You’ll also have to invest in furnace/air conditioner filters to keep both working properly. Pest Control is typically an annual cost.
- Home Liability Insurance – Some homeowners want to have Liability Protection to protect them from lawsuits if someone gets hurt on your property.
- Home Owners Association (HOA) Fees – if you live in a Condominium, Townhome or a single-family home within an Association, you will have a pay a monthly HOA Fee.
Tax Benefits of Owning a Home
- Capital Gain Exclusion – The #1 Tax Benefit of owning a home is non-taxation of Capital Gains when you sell your home. After two or more years of living in a home, the IRS gives you up to a $500,000 Capital Gain Exclusion from tax on any gain from the sale of a home for Married individuals, For Single individuals, you get up to $250,000 of Capital Gain Exclusion.
- Mortgage Interest & Real Estate Tax deductions – If you are eligible to Itemize Deductions because your Itemized Deductions Exceed your Standard Deduction, you can deduct Mortgage Interest Real Estate Tax up to $10,000 (2024).
- Energy Credits – The IRS allows certain Energy Credits, that reduce your Income Tax, for the purchase of Energy Efficient Furnaces, Doors, Windows, Insulation or for installing Solar Panels.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
