Whether you’re a novice or you’re experienced in the home buying market, here are some things to think about as you move forward in the process.
The Benefits of Cash
In “hot” real estate markets, cash buyers often come out ahead. Even if you ultimately intend to pay for your new home with a mortgage, presenting a cash offer can be an important factor in determining whether or not the home becomes yours.
If you choose to offer cash and want to close quickly—and without disrupting your long-term investment plans or generating unnecessary capital gains—consider taking a loan against your securities portfolio. A line of credit against your portfolio can be put in place in a matter of days and you pay nothing to set it up. You only pay interest on amounts you draw against the line while those amounts are outstanding. You can repay the loan over time, or you can repay it if you decide to take a mortgage loan on your home.
Match Your Loan to Your Expected Time in the Home
Many people instinctively prefer a fixed-term loan of 15 or 30 years. If you expect to be in a home for a shorter period of time, if your income comes irregularly, or if you can afford to repay the loan at any time, you could consider an adjustable-rate mortgage. The annual percentage rates on adjustable-rate mortgages tend to be lower than on fixed-rate mortgages, and the payments on interest-only, adjustable-rate mortgages are generally low since they don’t include any principal payments. During the period that you are only paying interest, many interest-only loans reset your monthly payment lower if you prepay principal (rather than reducing the number of payments you’ll eventually make).
Look at All the Terms, Not Just the Rate
While the rate is the easiest number to judge, consider other elements of a mortgage loan when making your choice. Does your lender charge fees for closing, locking a rate, extending a rate lock, etc.? A low headline rate can increase with the imposition of “stealth” fees. Will your lender hold the loan on its own balance sheet, or will it sell the loan to a servicer? If you want to modify the loan later, or if you run into an issue making payments, your original lender is likely to be easier to deal with than a servicer who you do not have a previous relationship with.
If you have an adjustable rate loan, how high—and how quickly—can the rate increase? Often, adjustable-rate loans allow for a five percentage point increase in the first adjustment. This means your 3.25% adjustable-rate mortgage can increase to up to 8.25% at its first reset point if interest rates have increased significantly. In the current environment, is that a risk you want to take? Other loans provide for only a two percentage point increase in the first adjustment. In this case, the 3.25% rate could only rise to 5.25%. Even if you may be paying an eighth- or a quarter-point more today, it might be worth it in the future to guard against these relatively high increases.
Selling a Home
If you are selling a primary residence—and you have lived in it for at least two of the past five years at the time of the sale—you can exclude up to $500,000 of gain from your income (for married couples; or $250,000 for single taxpayers).
You can deduct the interest on up to $750,000 of mortgage debt. For indebtedness incurred on or before December 15, 2017 (and certain refinancing of the indebtedness), this limit is $1 million.
If you’ve borrowed against your securities to fund your down payment, and even if you haven’t, and you want a loan against your home of more than $750,000, consider using the proceeds of the loan to invest in securities. Under a different provision of the Internal Revenue Code, interest on money you borrow to invest is deductible to the extent you have investment income.
If you borrow money against your home and use the loan proceeds to purchase investments, interest on the entire amount of the loan can be deductible. Note that in order to qualify for this deduction, you can’t invest in tax-free bonds and you can’t offset the interest expense with qualified dividend income.
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