6 Smart Ways to Build Home Equity

Home equity is the percentage of your home’s value that you own, and it’s key to building wealth through homeownership. Let’s take a closer look at how to build home equity without blowing your budget – and how to access it when you need it.

How much equity do you have?

Equity is easy to calculate when you first buy a home because it’s basically your down payment. For example, if you put $11,250 down on a $225,000 home, your down payment is 5 percent and so is your equity.

From 2016 to the first quarter of 2018, most first-time home buyers in the U.S. started with about 7-percent equity, according to Inside Mortgage Finance. This is encouraging because it shows you don’t need to spend years saving for 20 percent down or more before you buy. Repeat home buyers started with more equity, at about 17 percent.

How to build your equity

Here are six ways your home can create wealth for you. Some require time, money – or both. A lender can help you decide what works best for you.

1. Let your home appreciate

Building equity through appreciation can take little time or a lot, depending on the market. With home prices going up like they have in recent years, appreciation has been a boon for many home owners.

Zillow research indicates that the median home value grew from $185,000 in April 2016 to $216,000 in April 2018. If you bought a home for $185,000 in April 2016 with a down payment of $12,950, your beginning 7-percent equity would have grown to 23 percent by April 2018.

We calculate this by subtracting your current loan balance ($165,600) from your home’s current value ($216,000). Then we divide the difference by your home’s current value. One-eighth of this additional 16 percent equity is from paying down your mortgage, and the rest is market appreciation.

If you waited two years and bought the same home in April 2018 with a 20-percent down payment of $43,200, you started off with 20-percent equity. You also used 3.3 times more cash to make the purchase. And here’s the kicker: Your total monthly housing cost would be the same – about $1,050 in both cases.

This example illustrates two things:

First, the power of home appreciation. It’s a lot like buying stock and benefitting as its value goes up. But there’s also a difference: While you’ll pay capital gains on rising stock value, you’re exempt from paying taxes on primary-home capital gains up to $250,000, or $500,000 for married couples.

Second, waiting to “save enough” isn’t the primary factor in determining if you can afford to buy a home. When it comes to qualifying for a loan, lenders do indeed look at your down payment. They’ll also want to know how much you’ll have in cash reserves after closing. But there are lots of options for low down payments that require minimal reserves.

Your monthly budget is the primary factor lenders consider when deciding whether you can afford a home. Lenders will allow you to spend between 43 percent and 49 percent of your income on monthly bills, which is actually on the high side and could strain your budget.

Since 2016, most first-time buyers have spent about 38 percent of their income on housing and other debt, which is a pretty safe cap for budgeting.

2. Make a larger down payment

You can do this but, as we’ve seen, waiting to save extra cash can go against your broader financial interests if you lose the chance to build equity through appreciation. Therefore, you must strike a balance among down payment, monthly budget and savings for other priorities. A good lender can provide rate and market insight to help you do this.

3. Use financial windfalls

Take advantage of work bonuses, family gifts and inheritances to pay down your mortgage. If you do pay down in lump sums, see if your lender will recalculate (or “recast”) your payment based on the new, lower balance.

4. Double up on payments

Make mortgage payments every two weeks instead of once a month. Over the course of a year, this will add up to 13 monthly payments instead of 12. You’ll build equity faster and shave five to six years off a 30-year mortgage. Just make sure your lender isn’t charging extra for processing bimonthly payments.

5. Cut your loan term in half

Take out a 15-year mortgage instead of a 30-year mortgage, and you’ll build equity twice as fast. Two caveats here: You’ll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying.

6. Make home improvements

New appliances or cosmetic features like paint are unlikely to increase value. Only big improvements like new kitchens, or additional bathrooms or other rooms will add meaningful value. Make sure the cost of such improvements will create the added value you’re looking for.

How to use your equity

You must borrow or sell your home to use your equity. The three most well-known ways to get to your equity through borrowing are a home equity line of credit (HELOC), home equity loan or cash-out refinance. Compare the pros and cons of each.

Rates are rising right now, so these borrowing options might cost more in the future. Talk to your lender to determine the best approach for you.

Top image from Shutterstock.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

from Zillow Porchlight https://www.zillow.com/blog/how-to-build-home-equity-226885/

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Everything You Need to Know About Employer Relocation Packages

If your company has asked you to move to a new city or state for work, you’re not alone. Each year, nearly seven million people in the United States relocate because of their jobs.

Before you start packing boxes, it’s important to know what your employer will and won’t offer in terms of relocation assistance, and how that could affect both your move and your pocketbook.

Make no assumptions

Approximately 70 percent of U.S. companies offer relocation incentives for employees or new hires. If a relocation package isn’t discussed with your offer, you’ll need to start the conversation yourself. Ask for what you want, including all the services and compensation you’ll need for your move.

In 2012, companies spent an average of $19,303 to move a new hire renter and upward of $90,000 to move a current employee homeowner, according to the Worldwide ERC, the association for professionals who oversee employee transfers. Do your research to figure out what your move will cost, and make sure your relocation package is adequate. If it’s not, see if you can negotiate changes.

Ask about extras

No two companies offer the same relocation packages. Some will cover just the basics, while others will transfer vehicles, provide cultural training, help pay closing costs or mortgage points buy down, or even provide employment assistance for an accompanying spouse or partner.

If you’re a homeowner being asked to relocate, you’ll know you’ve hit the jackpot if your relocation package includes a Guaranteed Buy Out (GBO). With a GBO, the relocation company hires two independent appraisers prior to listing your home. If you’re unable to sell the property on your own within a certain time period, the company will buy your home for the average of the two appraisals.

Doing it yourself

If your company’s relocation package is of the barebones variety, you may want to explore your DIY alternatives.

Moving all your household items using your own vehicle is the least expensive do-it-yourself option, but it comes with risks. Without professional packing and moving services, you increase the chance of your belongings being damaged. This option can be physically and emotionally draining, plus it can take a toll on relationships with friends and family you’ve asked to help. This type of move works best if your new home is not far from your old one.

Another DIY option is renting a moving truck. A large-capacity truck is easier to load and unload than a car, and allows you to accomplish the task with fewer trips back and forth. In addition to the cost of renting the truck, you’ll need to buy gas to get the vehicle from one place to another, and you may be required to purchase additional insurance.

Self-service moving uses portable storage containers, and is a blend of DIY moving and professional moving. These services drop off large storage containers at your current residence. You pack and load the containers yourself, on your own timeline. When the containers are full, the moving company transports them to your new home or, if you’re not ready to move in just yet, they can take the containers to their warehouse, where they will store your belongings.

Tax implications

If your job requires you to relocate, your moving costs and the expense of traveling to your new location could be deductible if they meet certain IRS standards regarding distance and time worked after the move.

Payments made directly by your employer to your moving company do not need to be reported on your W-2 form. However, if your employer gives you a lump sum payment to cover moving expenses, that money is fully taxable as earnings. Depending on the program specifics, either you or your company must bear the associated tax cost of including these amounts in your wages.

Interpreting these tax laws can be complicated. Be sure to hold onto all your moving receipts and consult with your tax or legal advisor to ensure you stay on the right side of the IRS.

Ask questions, do your research and seek out professional advice to make sure your move is a good one.

Top photo from Shutterstock.

Related:

Originally published September 1, 2015.

from Zillow Porchlight https://www.zillow.com/blog/about-employer-relocation-packages-182791/

Which Celeb’s House Is Your Vacation Dream Home?

Being in the public eye can be taxing, so celebs tend to make their homes the ultimate in comfort and luxury. When they’re ready to retreat into peace and quiet, these homes are where they unwind away from the cares of the world.

Which celeb’s R&R style most aligns with the vacation home you’d want to buy?

Beach cottage photos, including the top featured image, from Zillow listing by Jim Bartsch. Mid-century pool pad photos from Zillow listing. Modern marvel photos from Zillow listing. Southern estate photos from Zillow listing. Resort-style mansion photos by Charles Lauersdorf. Contemporary beach house photos by Simon Berlyn.

from Zillow Porchlight https://www.zillow.com/blog/celeb-vacation-dream-home-201268/

How Renting Out Your Vacation Home Can Land You in Hot Water

Ready to buy that ski cabin or lake house? Renting it out while you’re not using it is a great way to make it happen – but not so fast. Lender rules may not allow it, so here’s what you need to know.

Loan types and their rules

The first step to financing your vacation home is understanding what mortgages are available and their rules about renting:

  • Primary residence loans. These loans are the most favorable, and you’ll get the lowest possible mortgage rates. These loans require you to move into the home within 60 days of closing and live in it for at least one year. After that, you’re free to rent out the home.
  • Second-home loans. These loans have the same rates as primary residences, so your rate will be the lowest it can be, but down payments must be larger – most lenders require 20 percent down. You qualify for the loan using your full primary residence housing cost plus your full second home cost. You can use the home for family and friends, but lenders won’t let you rent the home.
  • Non-owner occupied loans. Also called rental property loans, these loans offer rates .25 percent to .375 percent higher than primary residence or second home rates, and down payment requirements typically start at 30 percent. Your lender will let you know if you can use the rental income to qualify. These loans allow you to rent the home and use it when it’s not rented.

Beware second-home loans

The best thing about a second-home mortgage is that the rates are the same as a primary residence mortgage. The worst thing is that you can’t rent the home.

This is an often overlooked provision of second-home loans, but it’s the most important, because if you ever rent your vacation getaway, you’ll violate the loan’s terms.

When you get a loan, there’s a document called the note, which spells out the loan’s amount, rate, payments, and fixed versus adjustable periods. Depending on what state you live in, you’ll also have either a mortgage or a deed of trust in addition to your note, which spells out additional loan requirements. (See which states use mortgages versus deeds of trust.)

At first glance, a second-home mortgage or deed of trust seems like it has the same requirements as a primary residence. Provision 6 says you must move in within 60 days and live there for at least one year – then you’re free to rent it out. Here’s a sample:

secondhomeoccupancyHowever, there’s an addendum – called a rider – in mortgages and deeds of trust that replaces this friendly requirement with a new, much more strict requirement saying that you can’t rent out the home. Here’s a sample:

secondhomeoccupancyaddendum

This language, though hidden deep in the loan documents you’ll sign before closing, makes two critical points:

  1. You can’t rent the home.
  2. If you applied for a second-home loan and rent it out, your entire loan balance could be called due and payable by your lender.

Choosing a loan

So, if you plan to afford a vacation home by renting it out, you can’t finance it with a second-home loan. But you’ll need to review non-owner occupied loan options with your lender to meet the objective of using and renting a home that’s not your primary residence.

As noted above, this means you’ll need to put down a larger down payment, and your rate will be slightly higher. But it’s a small price to pay for the flexibility of earning income off of a home that you also use for your own enjoyment.

Top featured photo from Shutterstock.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published October 4, 2016.

from Zillow Porchlight https://www.zillow.com/blog/renting-out-your-vacation-home-204821/

The 5-Step Plan for Buying a Vacation Home

Dream of owning a vacation home but find the idea of buying one too intimidating? It’s actually easier than you may think.

Here’s a guide to help you analyze your options.

1. Match housing choices to your lifestyle

Many people assume they must own a primary residence before owning a vacation home, but that’s not necessarily true. What’s really important is matching your housing choices to your lifestyle.

You may live in a city and want lots of space that you can’t afford there. You could rent a modest condo in the city and buy a large vacation home outside the metro area.

Or you may live in a large country house and want to enjoy city life as much as you can. In that case, you could own your country home and also buy a vacation condo in the city.

Either way, the financing and tax implications are almost the same.

2. Decide how you’ll use it

From a financing and tax standpoint, you need to consider how you intend to own and use your property. You have three options:

  • Primary residence. You can buy for as little as 3 percent down (if your loan doesn’t exceed $417,000), and you get significant homeowner tax benefits.
  • Second home. You can use your second home anytime you want, but lenders won’t let you rent the home. Buy for as little as 20 percent down, and qualify for the loan using your full primary residence cost plus your full second home cost. Mortgage rates and tax benefits are the same as primary residences.
  • Investment property. You can rent the home and use it when it’s not rented. Rates are .25 percent to .375 percent higher than second home rates, and your down payment usually starts at 30 percent. You qualify for the loan using your full primary residence cost plus your full investment home cost, but you can use rental income to help qualify. Tax treatment is less beneficial, but the extra income can help with affordability.

3. Understand the total cost of owning it

You can determine what you can afford in seconds. Then you’ll find a lender to formally analyze the cash available for down payment, closing costs and reserves. You’ll also calculate the total monthly cost on your existing home (whether you rent or own), plus the total monthly cost on the vacation home.

You also need to plan for personal budget items that lenders don’t use in their qualifying calculations:

  • Gas, electric, cable TV and internet
  • Furniture and housewares
  • Travel costs to your vacation home
  • Total cost of property maintenance items, like cleaning, landscaping and pool/spa upkeep

4. Review monthly and transactional cost line items

Suppose you live in San Francisco and want to purchase a home in the wine country of Sonoma County, CA, for $600,000. Here’s how much it would cost as a primary residence, second home and investment property.

Estimated monthly costs
Primary or second home Investment property
Mortgage payment $2,223 (30-year fixed mortgage at 3.75%) $2,035 (30-year fixed mortgage at 4.125%)
Insurance $100 $100
Property tax $600 $600
TOTAL ESTIMATED MONTHLY COSTS $2,923 $2,735
Estimated cash to close
Primary or second home Investment property
Down payment $120,000 (20%) $180,000 (30%)
Lender fees $2,500 $2,500
Title/escrow/inspection fees $3,500 $3,500
TOTAL ESTIMATED CASH TO CLOSE $126,000 $186,000

5. Make an offer using a local real estate agent and lender

Many vacation properties are in specialized local markets, so it’s best to find local real estate agents and lenders.

Your real estate agent will clarify local transaction fees, taxes and commissions, as well as advise on local zoning and property rental rules. For example, the town of Sonoma doesn’t allow short-term rentals for vacation homes, but other towns in Sonoma County do.

In destination areas, real estate agent commissions can be higher and can also be seller- or buyer-paid, depending on the area. Only a local expert can advise properly. And, of course, they will structure your offer for you and negotiate on all facets of the deal that are a priority to you.

Likewise, local lenders will be comfortable with appraisals and lending in rural areas. Appraisals are more difficult in less populated areas because comparable sales can be old and hard to find.

If you follow these steps, your closing will be a snap, and you’ll be relaxing in your vacation home before you know it.

Top featured photo from Offset.

Related:

Originally published June 8, 2015.

from Zillow Porchlight https://www.zillow.com/blog/5-steps-buying-vacation-home-177608/

The Counteroffer: Negotiating a Real Estate Deal

Buying a home is rarely as simple as making an offer and paying that offer out. Negotiations can go back and forth for weeks before the seller and buyer are both satisfied.

The vehicle for this negotiation is the counteroffer – a vital and complex rejection and counter to an offer made by either party. Counteroffers are typically handled between real estate agents and are time sensitive.

Selling or buying a home is more of a process than a transaction, so it’s important to understand counteroffers before you make your first offer.

Why was I countered?

As a home buyer, if you make an offer below list price, the seller may choose to reject, accept or simply let the offer expire. If there are multiple offers, the listing agent will lay out the options for their client and then notify all buyers’ agents of the choices.

Sellers may also counter your proposed closing date. If they need to move out quickly, they may want to push it earlier. They may also ask to rent the property for a time after the settlement.

Price and closing date negotiations are common from both parties, but there are even more reasons sellers can potentially get countered.

The condition of the home is likely the biggest factor here. As home buyers conduct ongoing research into the home, any problems with the condition of the house can result in a counteroffer.

If you’ve chosen to take appliances with you when you move, buyers may also look to negotiate for those.

Appraisals are another reason for counteroffers. If an appraisal comes in below the agreed-upon sale price, it will affect the amount the mortgage company will lend to the buyer.

Negotiation power

When reviewing a counteroffer, it’s important to have an experienced real estate agent who can capitalize on your advantages in a negotiation. Both sellers and buyers can take steps to put themselves in an advantageous position through planning and smart counteroffers.

Knowledge is power in negotiations, so try to glean as much information about the seller or buyer as you can. Your agent will also seek information from the other agent on your behalf.

Sometimes sellers use the pending sale of their home to finance another, meaning they have a truncated timeline and could be more eager to make a deal. Similarly, buyers who have terminated a lease may be desperate for a place to live and more willing to negotiate.

If you’re selling a home with known issues, anticipate how these problems may put you at a disadvantage during negotiations. A leaky roof may not be discovered until after buyers order a home inspection. Depending on the cost, they may ask the seller to either fix the roof or deduct the cost of a new roof from the sale price.

These types of issues put sellers at a distinct disadvantage because they have to either pay for repairs, lower the selling price, or reject the counteroffer and hope the next buyer doesn’t notice or care about repairs.

This is why it’s worth the money (around $500) to pay for an inspection before listing a house. Preparation can save you headaches and money down the road.

Responding to a counteroffer

If you’ve received a counteroffer as a buyer or a seller, carefully review every aspect. Real estate agents, apart from yours, are under no obligation to ensure you read the full contract. So make sure you read everything carefully before you sign.

With each individual counteroffer, consider every aspect of the sale, including old and new information. If you made an offer above the list price, there is always the possibility for an appraisal to come in low.

If you are responding to a counteroffer before an appraisal or inspection, keep those at the forefront of your mind. Prepare yourself for future counteroffers once they are completed.

Whether you’re selling or buying a home, establish a baseline for when you will walk away from a sale. As a buyer, you don’t want to spend so much on a home that you move in with no cash for improvements and repairs. And as a seller, you should know how much you want to make off the sale.

With a measured and informed approach, counteroffers can be your friend. Communicate often with your agent to let them know what you want from the sale, and never be afraid to walk away if things go south.

Top featured photo from Shutterstock.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published October 25, 2016.

from Zillow Porchlight https://www.zillow.com/blog/negotiating-the-counteroffer-206191/

This Tiny Home Has Its Own Pizza Oven – House of the Week

Forget waiting 45 minutes for the delivery guy to show up. In this custom tiny home, pizzas are ready in just two minutes!

Empty nesters looking to avoid the burden of a big mortgage, Robert and Rebekah Sofia embarked on a 20-month journey designing and building a 221-square-foot home in Ocklawaha, FL. Most people would balk at the idea of putting a 800-degree wood-fired pizza oven in such a small space. But with layers of plaster, cement and a heavy metal door, it’s completely insulated.

The Floridians were passionate about bringing a European flavor to their design and using recycled building materials. From the exterior corrugated metal to the cedar planks and doors – everything had a prior life. Best of all: The materials only cost $15,000.

In addition to the pizza oven, there are amenities you might not expect in a tiny house: a big apron sink, outdoor soaking tub, formal dining room with a chandelier, a hangout music loft and his-and-hers closets.

Photos by John Jernigan.

Related:

The post This Tiny Home Has Its Own Pizza Oven – House of the Week appeared first on Zillow Porchlight.

from Zillow Porchlight https://www.zillow.com/blog/tiny-home-pizza-oven-226014/