How to Save on Closing Costs

You’ve saved up the money for a down payment and are finally ready to make your dream of owning a home a reality. Congratulations! Buying a house is one of the most exciting – and one of the most stressful – events in your life. If you’ve done your due diligence, you’ve shopped around for a mortgage and secured a great interest rate. But did you know it’s also possible to save money on your closing costs? Here’s how.

SHOP AROUND

Lenders are required to provide you with a three-page Loan Estimate that includes your closing costs, which are fees that generally add up to as much as five percent of the purchase price. You can use these estimates to shop around and potentially save yourself thousands of dollars. You can also negotiate to have one lender match the lower closing costs of another.

In addition, a third party provider can perform some of the services required for closing. Take time to research options other than those provided by the lender for services such as pest inspection or title insurance. You’ll often find a lower price elsewhere.

EVALUATE AND NEGOTIATE

Once you’ve received the Loan Estimate, go over it in detail. Ask the lender what each fee covers. This is a good way to discover if the estimate has been padded with unnecessary or redundant fees. At this point, you can negotiate to have some of these fees reduced or removed.

Three days prior to closing, you will receive a Closing Disclosure. Double check to verify that the fees listed on your Loan Estimate match those on the Closing Disclosure or have increased no more than the standard limit of ten percent if you’ve used the lender’s service providers. If they have, the lender is required to reimburse you the difference.

ASK IF SELLER WILL SHARE COSTS

Another way to save on your costs at closing is to ask if the seller would be willing to pick up a portion of the fees. While this is unlikely in a tight market and isn’t advisable in a bidding war, if a seller is particularly motivated they may agree. You will need to check with your lender, as some have caps on how much a seller can contribute towards the closing costs. You can either request to have the seller pay for certain services, such as the home inspection, or for a specific dollar amount. Ask your real estate agent what would be the best course of action in your specific situation.

ENLIST THE HELP OF A PRO

Navigating the home buying process can be daunting. That’s why it’s helpful to have a trusted professional at your side. An agent with experience in your local market can help you through the closing process. They’ll take the time to explain the costs so that you understand, and help find ways to save you money in the long run. In the end, you’ll finally have that house you’ve always dreamed of, and at a price that fits well within your budget.

USE YOUR TAX REFUND ON YOUR HOME

Have you filed your taxes yet?

We know — tax season isn’t anybody’s favorite time of the year (except, of course, for tax accountants). But if you’re expecting a refund, now is a great time to reinvest that money in your home. Whether you’ll be getting a check for a few hundred dollars or a few thousand, there are great ways you can put that money to good use.

Save it for a down payment

Are you hoping to buy a home in the near future? As you probably already know, you’ll be expected to put down a down payment — anywhere from 3.5 to 20 percent or more of the purchase price. If you’re expecting a refund in the thousands of dollars, adding it to your down payment savings account is a fantastic way to get yourself closer to home ownership. And if you manage to save more than 20 percent, you’ll eliminate the need to buy mortgage insurance, saving you even more money down the line.

Pay down your mortgage

Even if you have a great rate on your mortgage loan, making an extra payment will still help you save money in the long run. By paying off more of your mortgage early, you will pay less interest over time. You’ll build equity more quickly and will own your home outright sooner. You may also be able to eliminate the cost of mortgage insurance once some of your loan has been paid off.

Purchase additional insurance

An inevitable part of owning a home is also purchasing homeowner’s insurance. This protects you from liabilities should someone get injured on your property and sue you. Unfortunately, most homeowner insurance policies are not comprehensive. By purchasing umbrella insurance, you get additional protection once your primary insurance coverage limits are reached, and as an added bonus, it also applies to your vehicles. For around $300 a year, you get about $1 million in coverage. It’s a very small price to pay for peace of mind.

Audit your home’s energy usage

Leaky windows, drafty doors and energy-hogging appliances all needlessly eat up your money. If you’d like to find ways to cut your energy costs, consider using your tax refund for a home energy audit. While there are free programs available from many local power companies who will send out a professional to look at your home and offer advice about where to make changes, the biggest bang will be to hire a private firm to do a comprehensive audit of your home. While you’ll be paying more up front, the audit is much more detailed and could potentially save you up to 30 percent on your energy bills should you decide to implement their suggestions.

Make needed home repairs

If your refund is less than $1000, perhaps one of the best ways to use it is to make some needed home repairs that you’ve been putting off. You can repaint, add some new landscaping, buy aprogrammable thermostat or finally organize your garage. The money spent will go a long way to contributing to your overall enjoyment of your home.

While it may be tempting to splurge on a big treat, spending your tax refund wisely on your home can improve your financial health for the long haul.

Time to Review Your Home Owner’s Policy

What do you know about your Homeowner’s Insurance Policy? Have you evaluated it recently? If not, it is a good idea to review it every six months to ensure that your coverage is as expected. Obviously, the best time to review your policy is prior to a crisis situation. So take some time out of your busy schedule and spend a few minutes today going over the details in your insurance policy.

You should contact your insurance agent if you have questions or need to make a few adjustments. He or she should be able to answer your questions. If you don’t feel comfortable with your agent or question whether or not he or she are providing you with the best policy for your situation, please contact us for a reference. You may find that a change could save you money both short-term and long-term.

Some helpful questions:

Ask – Can I qualify for a premium reduction by installing smoke detectors, alarms, new locks or doors, or improved roofing material? Do I qualify for a preferred customer or senior/student discount? What is really covered by my insurance? Ask about the phrase “acts of God” and the interpretation of the insurance company.

Discover – What is insured, the actual home or only the land under it? Is land value part of my policy amount and if so, why? Did I opt for replacement value or actual cash value in your home coverage and does that still apply?

Discuss – Are my valuables and heirlooms in need special coverage? Would a higher deductible result in a significant reduction in my premium? Should I get earthquake or flood damage insurance?

Asking these questions now and periodically in the future will give you peace of mind and give you the knowledge you will need should you ever encounter a crisis with your home. It is a good idea to place a copy of your homeowner’s policy in a place away from your home, as well, in case just such an accident does occur.

TAKE ADVANTAGE OF JANUARY APPLIANCE DEALS

Now that you’ve done all the hard work of qualifying for the loan, securing the mortgage and putting the deal in motion…you can start to shop for the new items you’ll need for your new home.

First up are kitchen appliances:

January is THE month to get great deals on appliances. Stoves and cooktops, wall ovens, dishwashers, trash compactors, refrigerators, washers and dryers, and disposals all typically are on sale at the beginning of the new year.

In the same way that car dealers sell of the old models of cars, new appliance models come out in the fall. But, appliance dealers make great deals on appliances in January to make room for the new models and to sell off floor models. In fact, because January typically is a slow month for retailers, you may even be able to haggle for items like free delivery and installation even on the newest model.

Price matching:

Always ask your favorite retailer about price matching, too. So if you prefer Best Buy, for example, to Sears or Lowe’s because it’s closer to your home or you get reward points, ask them to price-match the lowest prices you can find.

In fact, if you’re willing to go with last year’s model you’ll get the steepest discounts in January.

End of month or holidays:

If you can’t swing your purchase right now, consider buying your appliances at the end of the month. If your salesperson works on commission, the end of the month may be the time you can put your negotiation skills to work with a sales associate trying to reach a quota.

In addition to January and end of the month specials, most appliance retailers offer some sort of special corresponding to any of the major shopping holidays. These include: New Year’s Day, President’s Day (February), St. Patrick’s Day (March), Easter (March-April), Memorial Day (May), Independence Day (July), Labor Day (September), Columbus Day (October), or Black Friday (November). On these days you’ll get percentage off deals and specials on specific models or product lines.

The super deal:

In between these holiday sales events you’ll find the steepest discounts on open-box, scratch-and-dent or refurbished items. While you may fear these items, if you buy from a well-established retailer, you’ll get the same warranties as are available on a new, in-the-box item, but at a substantial discount.

Warranties:

In addition to the manufacturer warranties, you can purchase retailer extended warranty programs — also called service plans — for most appliances. While quality appliances should not break down within a couple years, sometimes they do. Given that refrigerators, washers and dryers and even ceiling fans now have electronics built in, you might want to consider one. Having an extended warranty can give you peace of mind as long as the price of the warranty doesn’t negate the great deal that you got. If buying the warranties puts the price out of reach, it’s not a good deal. Consumer Reports suggests putting that money aside instead and using it to pay for repairs down the line.

You might convince your seller to leave their appliances behind or to offer an allowance that would pay for new ones as part of the closing.

DREAMING OF THAT NEW KITCHEN OR BATH? WHAT RENOVATIONS REALLY PAY OFF?

Owners of older homes dream of updating or modernizing kitchens and baths. In fact, before they place their homes on the market, some folks go to all the effort to update the kitchen they’ve been meaning to redo for years … only to have someone else enjoy it.

The challenge can be when the update is for the purpose of increasing your home’s marketability or resale value. In that case, does the renovation really pay off? Here are some things to consider before you tackle that upgrade or renovations just to sell your property.

When it adds value:

Anything that increases your usable square footage adds value to your home. So, if you finish a basement or an attic space, add a wing or just extend a single room, that extra space and increase your home’s market value. Adding a bathroom or bedroom is a substantial improvement that changes a home’s category. A three-bedroom home with three full baths has more market value than a similar home with only two baths, or two bedrooms.

The biggest bang for you buck, however, can come from making some simple changes.

Consider this: a new front door, on average, adds up to 96.6 percent of the amount you will spend on it to the value of your home. Of course, you’ll need to pay attention to which door will enhance your home and which might look like an afterthought, but the right new door adds instant curb appeal. In fact, even painting the front door can bring a significant improvement (without the extra expense of replacing it).

Other improvements, such as replacing windows or worn and discolored siding can yield a greater return than an expensive kitchen remodel.

Minor kitchen upgrades, on the other hand, can add back over 82 percent to the value of what you spend on them. A “minor” kitchen upgrade can be as simple as new cabinet doors and hardware, or new appliances, an updated counter surface and sink, or new fixtures.

When it’s not worth it:

A $100,000 kitchen remodel on a $250,000 home will yield anywhere near that additional value to your home, especially if all of the other homes in the neighborhood are in the same price range. So, if you upgrade it while you’re living in it because your love to cook and want the perfect kitchen … the value is your enjoyment of the upgrade. Don’t expect it to increase your home’s resale value by that much though when the time comes to sell.

Another upgrade that you should only undertake for your enjoyment is the addition of a pool. In general, a pool does not increase the value in many locations. So, while a pool may be highly sought after in Southern California or Texas, it could even be a detriment in Missouri or Tennessee.

When it doesn’t pay off:

If you increase the value of your home while you continue to live in it, realize that you may be increasing your tax basis as well. A new assessment of your home may increase your taxes and cause it to be more expensive to live there. Simple improvements such as adding a garden shed can trigger a reassessment in some localities, while moving a wall or putting in an additional bath or bedroom most certainly will.

Before you take on an improvement, addition or upgrade for the purpose of increasing your home’s marketability, talk to us.

HOW DO FED RATE HIKES AFFECT MORTGAGES?

Eeeeek! Rates are going up … or are they?

Last week, for the first time after years of historically low rates, the Federal Reserve decided to raise short-term interest rates. For homebuyers, any rate hike often is seen a negative, but here are some reasons why this rate increase is good.

First of all, understand that the interest rate hike was NOT on mortgages. The Federal Reserve does not directly control interest rates on mortgages. What the Fed does control is the overall money supply. By raising interest rates at the Fed level on the “Federal Discount Rate,” they have begun a trickle-down effect that will begin to tighten the money supply. This makes it more expensive for commercial banks to borrow money and so decreases the amount of money available for short-term borrowing.

1. It’s a good sign

For the Federal Reserve to take such a bold step after years of low rates means that the Federal Reserve Board believes that the economy has improved enough that it can withstand an increase. Because the Federal Reserve has a mandate to achieve maximum employment rates AND keep prices relatively stable (curb inflation), raising rates means that employment levels have improved. An improved economy is a good sign that homebuyers will be able to afford to buy a home.

2. It does not directly influence mortgage rates

The discount rate does NOT directly influence mortgages. Mortgage-backed securities (bonds made up of pools of mortgages) track with the percentage yield on 10-Year U.S. Treasury bonds. Regular mortgages follow the mortgage-backed securities. While some mortgage rates increased slightly after the announcement, the bond markets have not settled on rate hikes, so the could end up either higher or lower once it becomes apparent how the economy reacts to the Federal Discount Rate increase.

3. It should be a slow increase

Because of the dual mandates of the Federal Reserve (low unemployment and stable pricing), the increases should be gradual rather than quickly increasing hikes because the Fed needs to make certain the economy is keeping pace with the increases. While it seems counter-intuitive, the Fed would like to see inflation rise slightly and this move is one way they can affect inflation in a gradual manner.

4. It might be good for your bottom line

Yes, your mortgage rates might increase a bit, but so will the interest on your savings accounts and securities. You’ll begin to see higher offerings on CDs and other interest-based income streams.

5. It’s still historically low

The current generation of homebuyers has not experienced high rates. Most millennials or Generation Xers do not remember when mortgage interest rates were in double digits and may fear the worst, but the changes in mortgage interest rates, at least for the near term, won’t increase their payments by more than their designer coffee or energy drink habits.

As always, if you have questions about the housing market, contact us. We stand ready to help you make sound decisions on the home of your dreams.

SLASH YOUR ENERGY BILL

We don’t think about our heating bill much in the summer, but this is the time to make some upgrades to your home that will see you through the winter, such as adding insulation, changing out windows for double or triple panes with low U-factors and repairing any leaks and drafts.

If energy-efficiency is at the very top of your list, however, consider a home with passive construction.

Passive building

The concept of passive building comprises specific construction principles designed to give measurable energy efficiency. There are five main principles that, using building science, offer the highest options for energy efficiency in both single-family and multi-family homes.

Scientists and builders developed the original design principles in the 1970s with funding from the U.S. Department of Energy and the Canadian government. In the 1980s, German scientists added to that information to develop passive principles for homes in the northern European climates.

The principles are:

1. Insulation: the construction utilizes continuous insulation throughout the building’s envelope (its weather barrier, air barrier and thermal barrier).
2. The envelope is airtight, so it prevents outside air from entering and inside “conditioned” air from seeping out.
3. It utilizes high-performance windows (typically triple-paned) and doors.
4. It utilizes some form of heat- and moisture-recovery ventilation and a minimal-space air conditioning system.
5. It exploits the sun’s energy for heating purposes, but minimizes it’s impact for cooling purposes.

The super-tight insulation and design strategy balances heat emissions (from appliances and the home’s occupants) to keep the indoor temperature comfortable throughout all seasons. Continuous mechanical filtration keeps the air quality fresh and comfort. The combination of insulation and consistent low-level filtration prevents mold and mildew from establishing inside the home, making this construction-type perfect for allergy-prone family members.

Passive house certification is stringent and means the home has high R-value insulation with up to 90 percent less energy required for heat, and overall 60 to 70 percent less energy overall compared to a regular code-built home.

Flat-paneled rooftop solar systems heat the water typically to between 100 and 140 degrees, even on cloudy days. A small electrical system works as a backup if there are an unusual number of cloudy days. Some passive homes include wood heat for the very coldest days in winter.

Other features of passive building include metal roofing which, in snowy climates allows the snow to slide off, and covered porches and patios to allow for outdoor living spaces and to protect the home’s entrances from snow buildup in inclement weather.

WHAT TO ASK FOR THIS HOLIDAYS — A DOWNPAYMENT!

You’ve been saving for a downpayment and you’re almost there.

Almost!

You just need a little more money in that account and you can make an offer on your starter home. Now, your parents and grandparents want to give you a gift of money toward your new house.

Gifts for downpayments can come from a variety of sources. Mortgage lenders will let you use a cash gift toward a plethora of loan options as well. These include FHA loans, VA loans (which only need a down payment if they exceed the threshold), USDA loans, conventional loans and even jumbo loans. In fact, affording a twenty percent downpayment puts you in position for a conventional loan backed by the Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac), potentially saving you money over the life of your loan.

Before you ask for that gift, however, you need to understand how it should be wrapped! If not done properly, you might just end up with a lump of coal in your pocket.

Here’s the skinny of how it works.

When you accept a downpayment gift, you cannot just deposit it into your bank account and co-mingle it with the funds you have there. You need to follow the required process for documenting the gift so that your loan isn’t denied.

1. Write a “gift letter” that notes the following:

• The amount of the gift
• Who gave you the gift and your relationship to the giver
• A note specifying that the gift is REALLY a gift and not just a loan you’ll have to pay back in the future
• The property address you intend to buy
• The signatures of the givers and the recipients
• Don’t add anything extra to your gift letter either. Make it simple and strait forward.
• Write a separate letter for each gift

2. Keep a paper trail:

The gift should be in the form of a check in the exact dollar amount you noted in your letter. (Do not just have the money transferred to your account.)

• Make a photocopy of the check
• With the check in hand, take it to your bank (the same bank your other downpayment money is in) and deposit that check alone (nothing else in the transaction) into the account.
• Make certain you get a receipt

If you receive more than one gift, deposit each one separately and get a separate receipt for it.

When applying for your loan, give copies of the gift letters along with copies of the checks and deposit receipts to the underwriter. Your underwriter will use the letters in the effort to get your loan approved and funded.

One side note: there may be tax implications for both the givers and receivers of financial gifts. Be sure to check with your tax advisor if you have questions or to find out how a gift might affect your situation.