By Sue McAllister
San Jose Mercury News
November 18, 2007
The potential pitfalls of home buying don't disappear when the purchase offer has been accepted and the loan has been lined up.
As you may have guessed, most of them have to do with managing money. A few pointers:
Don't buy any high-priced items on credit before closing the home purchase, or you might not qualify for your mortgage anymore. Lenders will look at that new debt -- a car loan, for example, or lots of furniture charged to a credit card -- and judge that you are less able to take on mortgage debt. And don't spend a large chunk of cash, either, if you might need it for closing costs.
Expect to get a "supplemental" property tax bill from the county tax collector soon after you've purchased your home. This bill is for the difference between the amount of tax the former owner paid and the amount you will be paying, prorated for when you bought the house.
Don't ignore this bill. Many people assume the tax was paid during escrow, but that is not so. The supplemental tax bill is a one-time charge that you must pay.
Some people also wrongly assume that the supplemental bill is the annual property tax bill, said J.R. Wheelwright of Neighborhood Housing Services Silicon Valley.
Which brings us to this reminder ...
Remember to budget for property taxes. One of the joys of home ownership is getting to deduct what you pay in property taxes each year from your taxable income. But one of the miseries is having to pay the tax bill in the first place.
Property taxes amount to about 1.25 percent of the sales price of your home. On a $700,000 home, that's $8,750 annually in property taxes, made in two payments.
Consider setting up an "impound account" to help save enough for taxes and insurance. Training yourself to save enough money to pay these bills when they come due is hard, but setting up an impound account when you get the mortgage can really help.
With an impound account, each month you'll pay one bill that includes the mortgage payment, plus one-twelfth of the annual property taxes and home insurance payments. The money for taxes and insurance is held in reserve until the bills are due, and the lender automatically sends the payments for you. Some lenders, however, charge a monthly fee to manage an impound account.
If you're disciplined enough, a better alternative is to set up an account with a bank or credit union for paying taxes, insurance and/or homeowners association dues. Arrange for the monthly costs to be transferred into this account automatically each month from a checking or savings account, and then you won't have to scramble to find the money. This way, you earn interest, rather than your lender.
This next tip sounds obvious:
Pay your mortgage on time. True, there is often a grace period of two weeks before you are charged extra, but don't be tempted to pay late. You'll be accruing extra interest on your principal if you delay, and in the long run that will cost you money.
Late payments can also hurt your credit history, possibly resulting in a higher interest rate if you try to refinance, for example.
If you are temporarily unable to pay your mortgage, notify your lender. If because of a job loss or other serious circumstances you can't make a payment, the lender may allow you to skip it and make it up later. The lender may also allow you to pay only the interest, or offer some other temporary remedy.
If your payments are not up to date, "the thing to do is get friendly with your banker," Wheelwright said. "Be honest with them and let them know the situation you're in and how you plan on resolving it."
If you have private mortgage insurance, be familiar with how to get rid of it, and do so as soon as you can.
When you buy a home using a loan equal to 80 percent or more of the home's value, you are often required to pay for private mortgage insurance, or PMI. PMI insures your lender in case you default. In other words, this is money you don't want to shell out any longer than you must.
Typically, you must pay for PMI for two years, or until you have about 20 percent equity in the home, whichever comes last.
Borrowers' PMI is canceled automatically once they pay their loan down to 78 percent of the home's value at the time of purchase, Beth Haiken of the PMI Group said.
Or, if you think appreciation has increased your equity past the 20 percent mark , you should have your house appraised by an appraiser who's been approved by your lender. If the appraisal agrees with your assessment, your lender will cancel the PMI, and you'll be spending less on your monthly mortgage costs. An appraisal typically costs $300 to $400.
Some home buyers avoid getting PMI upfront by taking out two mortgages. For example, you make a 10 percent down payment, and get one loan for 80 percent of the home's value, and a second mortgage for the remaining 10 percent (this is known as a "piggyback" loan).
But "piggybacking" is not as attractive an option now as it was in recent years. Interest rates for second mortgages have risen steeply, for one thing. And there's a new federal tax break for PMI premiums this year. For those who get a mortgage in 2007 and whose household income is no more than $100,000, the cost of private mortgage insurance premiums is deductible in 2007.