Buying a second home

For many, owning a second home is a reality brought on by good financial planning. It can be treated as an investment, a vacation home, a rental property – or all three.

With property values and loan rates low, now might be your best opportunity to buy a second home, for whatever reason you have in mind. However, owning a second home brings with it issues that you should consider before purchase.

Be realistic about your finances

First and foremost, don’t rush into the decision to buy. Even though rates are low, property values are down and people are unloading second homes, you want to avoid purchasing a second home that you can’t afford. Renting it out when you’re not using it sounds like a win-win: although you may be able to cover some costs, it’s unlikely that your property will “pay for itself.”

How you’ll use the property (now and in the future)

Are you looking for a weekend getaway? Or for something that will serve as your retirement home? Finding a property that serves both functions may be more difficult than you’d imagine. Sure, a ski condo is great, but living there and skiing there are two entirely different things. Accessibility to medical care, cost of living, taxes and maintenance are all things to consider if you’re looking for a retirement home.

Tax implications depend upon the use of the property

There are tax implications to consider, based upon how much you use your home and how much you lease it. Know the regulations regarding what you can deduct and what you can’t. Talk to your REALTOR® and be informed. Make sure you can make the payments without the rental income. If you’re not handy, or live far away, you’ll need to hire maintenance and cleaning services.

Financing differs from primary residence

A second home usually falls into a different category than your primary residence, which means that your lender will require a larger down payment, perhaps as much as 30 to 50 percent. You’re also likely to have to pay a higher interest rate and need a higher credit score and substantial income to qualify. Talk to your lender about financing options before you get your heart set on a second home.

Owning a second home may be a dream for you, whether you’re looking for a vacation home, want to retire to the lake or mountains, or want to generate income as a landlord. Think carefully and talk to your REALTOR®, financial planner and lending institution before you make the move.

10 negotiating tips for home buyers and sellers

When it comes to buying a house, everything is negotiable from the commission to who pays how much on the fees to the price. Negotiating a transaction effectively can save you time, money and headaches.

Tip #1: Knowledge is good

Yes, it is vital to know things like how long the house has been on the market and what other houses in the area have sold for, but it's also important to know why the owner is selling. If they are relocating for a job, that could mean they'll take a lower offer with quicker closing.

Tip #2: Know your price

Whether you're buying or selling, knowing what you'll take or what you'll give is one of the most important things in the negotiation. Otherwise you're more likely to concede more than you should.

Tip #3: Remember… it's not personal; it's business

Even in "The Godfather" it was business when they went after Vito Corleone. No matter what, keep calm and remember that it's just a business transaction. Check your ego at the door.

Tip #4: Let them start

Many negotiators make it a point to never make the first offer. It allows you to define the mid-point. In many cases, their first offer may be better than what you would have asked for in the first place.

Tip #5: Set an expiration date

By putting a deadline on your offer, you eliminate the seller's ability to gather other offers. It shows you're serious about buying and gets negotiations started quickly. Ask for a response within 24-48 hours.

Tip #6: Use the silent treatment

Negotiating is all about talking, right? People are uncomfortable when no one is talking, but this is exactly why you should use silence to your advantage. They will often interpret silence as disagreement and will break the silence by revising their offer or offering a concession.

Tip #7: Give the reason

No matter what the sticking point, when you decline the other party's request or ask for some sort of concession, it's always more effective to give a reason why. It negates their ability to counter.

Tip #8: Ask for financial concessions

If you're close and seller won't budge any more on price, you can ask them to pay for all the fees, including city transfer taxes, inspections and appraisals, which can help you alleviate being cash-strapped at closing.

Tip #9: Be nice

This kind of goes along with “it's not personal,” but realize that if you're nice, people are more likely to give you what you want. Being respectful and pleasant, even when asking for everything you want, increases the chances of getting it.

Tip #10: Be willing to walk away

It's difficult when you've found a home you love in a great neighborhood, but you have to be willing to end negotiations if you don't get what you need from the deal.

The trend toward paperless closings

If you’ve ever bought a home, you know that the amount of paperwork generated can be overwhelming. After signing pages until your hand cramps, you take home a file folder full of documents. 

That’s just what you take home. Now consider the amount of paperwork produced when the selling and buying agent, the lender, the title company and the county (who keeps most of the records) all get copies. 

Now imagine the amount of paper we could save when you consider that according to the National Association of REALTORS®, 4.65 million homes were sold in 2012. It’s staggering. 

The road to a paperless real estate industry

The steps toward paperless real estate transactions include the Uniform Real Property Electronic Act, the Uniform Electronic Transactions Act, and the federal Electronic Signatures in Global and National Commerce Act. In 2000, use of electronic signatures was legalized in the United States. Although technology was lacking at that point to make doing everything digitally, it was an important legal hurdle because it enabled many industries the option of paperless transactions. 

By the end of 2005, counties across the country adopted electronic records management systems. Because the technology has improved and become less expensive in the last few years, that number has continued to grow. 

There have been obstacles toward a completely paperless transaction. Some real estate agencies, title companies and banks have been reluctant to adopt. But their number is beginning to wane. As the process has improved, they can see that it saves them time and money while improving the customer experience. 

The benefits of an electronic closing

For the home buyer, there are many advantages to a paperless closing. Of course, going green is a huge factor. Signing your name once and applying it electronically as you and your REALTOR® go through the process saves time – and a cramped hand. At the end of it all, you walk out with the records of your transaction on a CD rather than a file folder. 

For the REALTOR®, lender and title company, it saves on storage space. It’s more efficient to ship documents electronically than to copy every page and ship them. If one page is missing, it could hold up the entire process. From a record-keeping standpoint, it’s also more efficient to search digital records than paper records. As more companies adopt the technology and save money, they could pass the savings on to the buyers.

Although digital transactions are not available everywhere, make sure to ask your REALTOR® if a paperless closing is an option when you buy your next home. The trees will thank you!

Seven times when you should not refinance

Interest rates are at an all-time low, which can influence homeowners to refinance their mortgages. In some instances, this makes a lot of sense. However, there are some times when refinancing your mortgage may not be your best option.

Paying off credit card debt

Resist the urge to pay off high-interest debt, such as credit card debt, by rolling it into a new mortgage. On the surface it seems like a smart move, but by moving unsecured debt into a loan backed by your home, you put yourself in danger of losing your home if you can’t make the payment. Many consumers are tempted to run up credit card debt when they have a zero balance.

Moving to a longer term

If you have been paying on your loan for more than ten years it may not be worth it to you to refinance. Check the long-term cost of the loan. If you’ve been paying on a 30-year mortgage for 18 years and refinance to get a lower payment, the extra mortgage payments and interest you pay could negate any savings you would realize over the long term.

If you’re not saving at least one percent

This is a good rule of thumb and should be considered the jumping off point. If the monthly savings you’ll see can’t cover the cost of the new loan, it’s simply not worth it. There will be loan fees and other costs.

Taking advantage of a no-cost refinance

There’s no such thing as a "no-cost" mortgage loan. There are several ways to pay for closing costs and fees when refinancing. In every case, the homeowner pays the fees one way or another; either with cash or by including it in the principal. Another option is that the lender would pay the costs by charging a slightly higher interest rate, which means you pay it.

If your credit rating has gone down

Life happens. If your credit rating has gone down, it’s not the end of the world, but it might spell the end of considering a refi. You still may be able to qualify, but at a higher rate. If that’s the case, refinancing could cost you more in the long run.

If you’re planning to move soon

Generally, if you plan to move in less than five years, refinancing may not make sense. It takes time to build up equity; the cost savings over a couple of years may not pay for the expenses associated with refinancing. Consider how long you plan to stay in your home before you refinance.

If you don’t have enough equity

You may be approved by some lenders even if you have little equity in your home. You’ll end up paying the price if you don’t have at least 20% equity because you may have to pay for Private Mortgage Insurance (PMI), which can be expensive and adds to your mortgage payments each month.

A final word about refinancing

There are a lot of options to consider. Do the math. If it will cost you more in the long term, don’t do it. Talk to your lender and REALTOR® before making any decisions.

Understanding your credit score

Your credit score plays an important role when you’re buying a home. Understanding what your score is and how it affects your ability to get a mortgage is essential.

A credit score is used by mortgage lenders to estimate what kind of risk you are. The higher the score, the less likely you are to default. The lender can offer you a lower interest rate. By the same token, the lower the score, the higher the interest rate you will pay.

The FICO score and how it’s calculated

The terms credit score and FICO score are used interchangeably. FICO stands for Fair Isaac Corporation, the company that created the software used to calculate your credit score. 

The FICO score is calculated by looking at a number of factors:

35% - Payment History
30% - Amount Owed
15% - Length of Credit History
10% - Types of Credit Used
10% - New Credit

Knowing is half the battle

Knowing your credit score prior to applying for a loan will help you avoid an unwelcome surprise. If your credit score is lower than you’d like, don’t panic. It’s not the end of the world. You can do a few things prior to applying for a mortgage to clean up your score and save yourself some money. 

There are a number of free credit reporting services that you can use to check your score. You’re looking for false reports, for issues that can be cleared up quickly by working with creditors or disputing them. Your lender and REALTOR® can help identify areas that can be cleaned up prior to making your final application. Improving your score can save you money in the long run. 

As a rule, you’ll need a minimum score of 620 to qualify for a mortgage. Interest rates go down as the score goes up. A score of 760 is needed to get the best rate possible.

Understanding what is in a credit report can help you as you proceed through the home buying process. In the long run, a higher credit score can save you tens of thousands of dollars over the course of your mortgage.