The Key to a Happy Home is Living Without Buyer's Remorse

By Erik Braunitzer and courtesy of Douglas Elliman Real Estate Company, Agents for Luxury New York City Apartments.

Buyer's remorse, feeling regret after making a purchase, is a common experience. This post-purchase anxiety most frequently follows the decision to buy an expensive item such as a car or a house, but can occur after any purchase. With the recent economic downturn, people are experiencing buyer's remorse in greater numbers.

Psychologists categorize buyer’s remorse as a form of cognitive dissonance. The term “cognitive dissonance” refers to the tension resulting from inconsistency between attitudes, or between a behavior and an attitude. In the case of buyer’s remorse, this tension occurs after initial positive feelings about a purchase. At the time of purchase a person may have completely positive feelings about their choice. After the purchase, however, the consumer may become more aware that those positive feelings about their choice are at least partially in conflict with other facts or beliefs. Imagine buying a cell phone after researching a variety of models. After initially feeling pleased with your choice, later you may find yourself dwelling on the fact that another phone has better features. Alternatively, you may make an expensive purchase only to later doubt that your finances can handle the payments. A house may have seemed wonderful when you signed the purchase papers, but upon moving in you find yourself focusing on its imperfections.

When economic conditions are poor, families with less money to spend are more careful about purchases and more likely to struggle with buyer’s remorse. This anxiety can take a toll not only on the individual making the purchase, but on other members of the family as well. Studies have shown that financial stress can negatively affect marriages, creating strain between partners that in turn increases stress levels. Stress can have health effects such as increased risk of depression, fatigue and heart disease. Children of families under stress tend to become ill more often and experience anxiety themselves.

Below are some tips for coping with buyer’s remorse:

     -Use positive self-talk. Remind yourself that you researched the pros and cons of the purchase, and made the best choice you could.

     -Stop comparing the price or features of your purchase to comparable items and move on. The more you question your decision, the worse you will feel.

     -Wash your hands. A recent study showed that washing hands after making a choice relieved people of the urge to justify that choice, though how long the effect lasts is unknown. Such washing may be symbolic of freeing oneself from the past, helping people to mentally “start fresh.”

     -Engage in activities known to relieve stress. Maintain a regular exercise routine, talk to a friend, and set aside time each day to relax and have fun.

Home Security System

The process of buying a first home is daunting. Besides having to carefully review the finances of your purchase, there are hundreds of details about the neighborhood you will be moving into and the actual home itself that overwhelm many consumers, and rightly so. Your home will be a major part of your family’s life for many years. To protect your family, one of the details that you should consider is the installation of a home security systems (such as those provided by ADT Alarms Davenport Iowa).


Although burglary prevention is one the primary value propositions of a home security system, some of the recent changes in product offerings have been the availability of automated fire response, carbon monoxide detection, and for you techies – laser trip wires for connecting to web-available security cameras.

Home security-systems have come down substantially in price. Services typically range from $10/month with a $100 one-time installation feel. Although to many-first time home buyers a home-security systems may sound like a luxury investment, this investment can pay off if you are ever in a bind and have to rent your home out quickly (in cases where you may have to suddenly move as an example). In such a case, a security-system may be the differentiating factor that helps you outmarket your competition and rent your home more quickly.

How an Adjustable Rate Mortgage Works

Many first time home buyers have the option to buy a home with an Adjustable Rate Mortgage (ARM for short), but many of these consumers may not understand how an ARM really works and whether it is the right choice for them. This article focuses on explaining how an ARM works and what some of the common terms associated with an ARM mean.

Almost all home buyers have heard of the term '5 Year ARM', but what does this really mean? The most important thing to know about an ARM is that the interest rate on such a mortgage is adjustable and can change throughout the lifetime of a mortgage. However, there is a certain period of time that an ARM's interest rate does not change referred to as the Adjustment Period. When you hear the term '5 Year ARM', you are being told the Adjustment Period of this loan. Do not confuse the Adjustment Period of an ARM with its Term (the life of the loan) which is usually 30 years. Simply put, a 5 Year ARM is an adjustable rate mortgage whose interest rate remains fixed for the first five years of the loan but will become adjustable for the remaining 25 years of the loan.

All Adjustable Rate Mortgages have an initial interest rate, also referred to as a 'teaser rate', that stays constant during the adjustment period. However, after the adjustment period, this initial interest rate can suddenly change to a higher value thereby increasing your monthly mortgage payment. There are limitations, though, to the amount that your interest can change. These limitations are known as Index, Margin, Periodic Rate Cap and Lifetime Rate Cap.

All Adjustable Rate Mortgages are tied to an Index. An Index is basically a financial instrument that has a rate that varies. Common examples of Indexes that many ARMs are tied to are the LIBOR (London Inter Bank Offered Rate) or the US T Bill (United States Treasure Bill). One of the other important parts of an ARM is its Margin. In the context of an ARM, Margin is the amount of profit that your bank will tack onto the Index. If your ARM is tied to an Index such as the LIBOR, after your Adjustment Period when your mortgage's interest rate becomes variable, your bank will set your new interest rate based on the price of this Index plus a Margin. It is OK if you are confused, I will show you how this all works in an example at the end of this article.

Because of the lack of control that home buyers have on the behavior of an Index, a common concern is that a sudden change in their interest rate can occur if the Index that their ARM follows suddenly increases. To help protect consumers against such wild shifts, every ARM has a Periodic and Lifetime Rate Cap. A Periodic Rate Cap sets an annual limit by which your ARM's interest rate can change by. A Lifetime Rate Cap sets the maximum interest rate that you will ever be charged on your ARM. Banks do not typically advertise their Periodic and Lifetime Rate Caps so you should ask them what these rates are when you are shopping around for your mortgage.

Now, let's work through an example that brings all of these concepts together. For a clear visual demonstration of this example, open this Adjustable Rate Mortgage Calculator in a new window and follow along. In this example, let's assume that you are shopping for a $100,000 mortgage and your bank offers you a 30 year Term Adjustable Rate Mortgage that follows the LIBOR with a 5 year Adjustment Period, a 5.5% Initial Interest Rate, a Margin of 1%, a Periodic Rate Cap of 2%, and a Lifetime Rate Cap of 10%.

In this example, for the first 5 years of your mortgage, your interest rate will be set to 5.5% and your monthly loan payment will be $567. After your 5 year Adjustment Period is over, let's assume that the LIBOR has jumped to 12%. When you account for the 1% Margin, your interest rate could theoretically jump to 13%! However, because you have a 2% Periodic Rate Cap, your interest rate between year 5 and year 6 will increase by 2% to become 7.5% (monthly loan payment of $683). Similarly, between year 6 and year 7 your interest rate will increase by another 2% to become 9.5% (monthly loan payment of $804). Between year 7 and year 8, however, your interest rate will not jump by 2% to become 11.5%, but will only increase by 0.5% to hit your Lifetime Rate Cap of 10% (monthly loan payment of $835). Assuming that the LIBOR does not fall below 9%, your interest rate will remain at 10% for the remaining 22 years of your loan.

With this understanding of how an adjustable rate mortgage works, you are prepared to work with your lender confident that you understand how an ARM is going to impact your loan payment and if this impact fits within your budget.

 

Buying a Home – Is a Fixed Rate or Adjustable Rate Mortgage Right for You?

As a consumer planning for a home purchase, one of the major decisions that you will have to make is deciding what type of mortgage will best meet your needs. In today's mortgage market, the types of mortgages available to you can be divided into two categories, adjustable and fixed interest rate mortgages.

Before discussing the benefits and pitfalls of adjustable and fixed rate mortgages, let's recap what the primary difference is between these two types of mortgages. A fixed rate mortgage is a mortgage where the interest rate and the monthly mortgage payments are fixed to a specific amount for the entire life of the loan. An adjustable rate mortgage, however, is a mortgage where the interest rate can fluctuate throughout the life of the loan. Because the interest rate in an adjustable rate mortgage can change, the monthly mortgage payment can also change.

Many consumers opt for fixed rate mortgages when buying a home because of the peace of mind that these types of mortgages provide. With a fixed rate mortgage, you can rely on the fact that your monthly mortgage payment will be the same every month for the life of your loan. This peace of mind, however, comes at a cost. Fixed interest rate mortgages typically have higher interest rates than adjustable rate mortgages. This higher interest rate means that, you will typically be paying more each month than you would be with an adjustable rate mortgage. Because fixed interest rate mortgages typically result in a higher monthly mortgage payment, they can often make it difficult for some consumers to meet the financial requirements necessary to qualify for a home loan.

Choosing a fixed rate mortgage can be even more costly than most people think. The very benefit of knowing that your interest rate is locked for the entire life of your loan can sometimes be a disadvantage. Because interest rates always fluctuate, a good interest rate in today's standards could be much higher than the market interest rate in five years. In this case, with a fixed rate mortgage you will be overpaying interest. To avoid overpaying interest, you should choose a fixed rate mortgage when interest rates are at historical lows. You can use a mortgage calculator to experiment with your monthly mortgage payments with a fixed rate mortgage.

An adjustable rate mortgage, often referred to as an ARM, is a popular form of mortgage for consumers that plan to live in a home for only a few years before selling the home. Unlike fixed rate mortgages that have a constant interest rate over the loan's entire life, an ARM's interest rate fluctuates over time. Depending on the length of time you think you will stay in your home, you can choose between ARMs that have a fixed rate for as short as 1 year to as long as 10 years. ARMs typically have a substantially lower interest rate associated with them resulting in a lower monthly mortgage payment. This lower monthly mortgage payment makes it easier for many consumers to meet the financial requirements necessary to qualify for a home loan.

Choosing an Adjustable Rate Mortgage can be seen as a gamble because it can both benefit you as well as be dangerous to you. The benefit of an ARM to you is that the short term interest rate on an ARM is typically lower than the interest rate of a fixed rate mortgage. For example, If you plan on staying in a home for only 5 years, a '5 Year ARM' is a good idea because its interest rate will be much lower than a 30 year fixed rate loan and will cost you less. The danger of an ARM, however, is that if your plans change and you have to stay in your home for more than 5 years, the ARM's interest rate can suddenly change after the 5 year adjustment period, possibly making your monthly mortgage payment much higher and burdensome. You can use an adjustable rate mortgage calculator to experiment with worst case payments of an adjustable rate mortgage.

Choosing between an adjustable and a fixed rate mortgage depends on your needs. To help make this decision, you must decide for yourself if you will be purchasing a home that you will live in for a short period of time (less than 10 years) or a longer period of time. If you are purchasing a home for a short period of time, an adjustable rate mortgage is the right option. Your decision must also be based on how comfortable you feel with risk. If having a predictable monthly mortgage payment is more important to you than a lower monthly mortgage payment, a fixed rate mortgage is the right option for you.

Home Ownership and Your Community

Owning a home is one of the largest investments that most Americans make throughout their lives. Owning your home means providing a secure and comfortable space for your family to flourish as well as investment in a financial tool that can help you build equity, move up through social classes, and prepare for retirement. Buying a home, however, is more than just a long term investment in your family's security; it is also an investment in your community.

When you own your home, you become more than just a resident in a neighborhood, but a contributor to the well being of your community. By owning a home, your property taxes go directly towards funding the schools, libraries, and other services provided by the county to your community. The care that you put toward maintaining your home's exterior helps the community prevent blight. Your vigilance while participating in a local Neighborhood Watch program can keep your community free of crime. All of these contributions to your community not only help maintain a safe and desirable living atmosphere, but over time helps increase the overall property value of homes in your community.

An increase in property values helps you and other members of your community thrive financially. When property values increase, residents in the community begin to build more equity in their homes. This growth of equity provides community members with money to invest in businesses in the community, which in turn continues to increase property values. Most important, as you continue to build equity in your home, you begin to build a nest egg that you can use to send your children to college or retire with. As with any investment, owning your home requires diligent financial planning, and the help and advice of a professional who cares for both your interests and the interest of your community.

As a first step to buying your home, you should reach out to the local non-profit housing organizations in your area. These organizations are usually vested in the community where they operate and have a high focus on helping you with financial planning and education. Often, these organizations can help you get a home mortgage, provide down payment assistance programs, and offer real estate services at a fraction of the cost of working directly with a bank or mortgage broker. One of the organizations local to Silicon Valley that provides such services is Neighborhood Housing Services of Silicon Valley, NHSSV.

NHSSV is unique because of its focus on financial planning. NHSSV's counselors make sure that you thoroughly understand the finances associated with owning a home. These finances include monthly PITI (Principal, Interest, Taxes, and Insurance) payments, your monthly budget of lifestyle expenses, and the expenses associated with maintaining your home. Realtors or lenders who do not provide this level of financial education can put you in peril of buying a home that you may not be able to fully afford resulting in a foreclosure. Unfortunately, nothing hurts a community more than a high rate of foreclosures because of the reduction of property values and the general sense of despair that foreclosures bring.

As you prepare to purchase your home, make sure to keep in mind that it is more than just your own security and well being that you are investing in, but the security and well being of an entire community. As a stakeholder in your community, you should work with local housing organizations that can help you make a responsible home purchase decision that will benefit your financial well being as well as the financial well being of your community.

Buying A Home – The Financial Benefits and Expenses of Home Ownership

Buying a home can make a significant impact on your monthly finances. Understanding the different expenses associated with home ownership before you buy a home can make the difference between a long term investment that can help you retire and a liability that can result in foreclosure.

Many people think that being able to afford a home means to simply afford a loan payment. Home ownership, however, is much more than just a monthly loan payment. When deciding to buy a home, there are several different monthly expenses, besides just a loan payment, to account for as well as a few benefits that can help make home ownership more affordable.

The most important expense to be familiar with when buying a home is the mortgage payment. A mortgage payment typically consists of four components – Principal payment, Interest payment, Property Tax payment, and Insurance payment. These four components of a mortgage define what is referred to as PITI (Principal, Interest, Tax, and Insurance).

The principal and interest payment of your mortgage are the portions of your mortgage payment that are paid to your bank on a monthly basis to repay your loan. Principal is the portion of your monthly mortgage payment that goes towards paying down your home loan. This portion of your mortgage payment is what builds equity in your home while Interest is the portion of your monthly mortgage payment that is the fee that you pay to your bank for borrowing money. The amount of interest that you pay depends on your loan's outstanding balance and interest rate.

Property tax and insurance payments are generally paid to the county and insurance companies separately. Although property tax and insurance payments are not due on a monthly basis, some banks set up an escrow account that collects 1/12th of your annual property tax and insurance premium on a monthly basis. When an escrow account is set up, your bank pays the county tax collector and your insurance company on your behalf with the funds in the escrow account when they become due. If your loan does not have an escrow account, you should make it a habit to put aside 1/12th of your annual property taxes and insurance premium each month so that the burden will not be excessive when the payments become due. When planning for a home purchase, you should contact the Count Tax Collector where you are searching for a home to find out the property tax rate of your neighborhood. Because property taxes can costs thousands of dollars a year, it is an expense that you can not ignore when planning for your purchase. Planning for an insurance payment is easier. The standard rule of thumb used by mortgage professionals to account for property insurance payments when pre-qualifying you for a home loan is to multiply the purchase price of the home you are considering by 0.3% (0.003). This provides a conservative estimate for your annual home insurance payment.

Private Mortgage Insurance, often referred to as PMI, is required by many banks when you buy a home with less than 20% down payment. Private Mortgage Insurance is an insurance policy that your bank buys from a third party to protect itself in the case that you cannot make your monthly payment and default on your loan. Even though this insurance policy protects the bank, you as the borrower are responsible to pay the monthly premium for the policy. The premium for this insurance policy varies depending on your down payment amount. Typically, the premium for this policy decreases as your down payment approaches 20% of your home purchase price.

A mortgage calculator provides you with a great tool for estimating your PITI payments. You can find a series of these mortgage calculators on the Resources page of many reputable real estate, lending, and non-profit housing agencies such as Neighborhood Housing Services of Silicon Valley. There is more to home ownership finances, however, then PITI. In the rest of this article, we will look at the 'big picture' by building a cash flow analysis. This cash flow analysis will combine PITI with your monthly budget and a few homeownership benefits to help you understand if you can truly afford owning a home.

One of the most important pieces of preparation for a home purchase is to understand your monthly budget prior to purchasing a home. This monthly budget should consider typical monthly expenses such as groceries and gas but should also consider annual expenses. For instance, if you pay $1,200 per year for automobile insurance, you should divide this amount by 12 and include the resulting $100 as part of your monthly expenses. A monthly budget calculator can help you formulate a detailed budget that includes your income as well.

Home ownership is not all expenses but can also have a couple of financial benefits. Some of the best financial benefits from home ownership are the federal tax benefits that you can receive. Based on your home purchase price, your property tax rate, and your interest rate, you can receive thousands of dollars per year back from the Federal government that can offset the expenses of owning a home. Another great way to offset the expenses of owning your home is to consider renting out a portion of your home or purchasing a multi-residential property. A multi-residential property, such as a duplex, allows you to live in one unit while generating rental income from the other unit(s) to offset your monthly mortgage expenses.

The best way to determine if you can truly afford a home is to develop a cash flow analysis for each home that you are considering. To make a cash flow analysis, simply add up your monthly sources of income including the income you receive from work, any potential rental income, and tax benefits you will receive from purchasing a home. Next, subtract your monthly expenses including the PITI of the specific home you are interested in and the lifestyle expenses that you estimated in your budget. If your result is negative, then the home that you are considering can lead you into financial disaster. If, however, the result is positive and you will have money left over each month, you will have to decide if this is enough money to put away for a rainy day and to help you build your savings to prepare for the next big investment.

Federal Income Tax Benefits Can Make Home Ownership Affordable

Federal income tax benefits can help make owning a home more affordable. As a potential home owner, understanding how these tax benefits work and how they are delivered to you can help you make an informed home buying decision.

When my wife and I were shopping for our first home during, we faced a common fear that many first time home buyers struggle with. Although the monthly mortgage payments that we were potentially facing were within our means, we were afraid that there would not be any money left over at the end of the month for much else. One of the factors that we had not accounted for in our budgeting, however, was the Federal income tax benefits that we would receive as a home owner.

Federal income tax benefits are how the United States government helps make owning a home affordable. As a home owner, these benefits are provided to you in the form of income tax deductions that can lower your tax liability and increase your monthly take-home pay. When you own your home, in most cases the IRS allows you to deduct the interest payments that you make on your mortgage and the property taxes you pay on your property from your taxable income.

Before explaining income tax deductions in more detail, I want to first provide an overview of mortgage interest and property taxes. Most of the mortgages available today are amortized in such a way that each of your monthly mortgage payments include a portion that goes towards paying off your loan principal and a portion that goes towards paying interest to the bank. In the case of tax deductions, only the portion of your mortgage payment that gets applied to interest is what is considered. You can use a mortgage calculator to help understand how your monthy mortgage payment gets split between principal and interest. Property taxes, on the other hand, are annual taxes that you pay to your county. In many cases, your entire property tax payment can be counted as a tax deduction.

The mortgage interest and property tax deductions that the IRS allows can make a significant postitive impact on how much Federal tax you pay each year. As an example, assume that last year you earned $100,000 in income and were in the 21% Federal tax bracket. If you did not have any deductions, last year you would have paid $21,000 in federal taxes. Now, assume that you bought a home this year on which you pay $25,000 each year in mortgage interest and $5,000 in property taxes. As a home owner, the federal tax benefits that are available to you allow you to deduct these payments from your $100,000 income. This deduction reduces your federal taxable income to $70,000 and loweres your federal tax bracket to 17%. By reducing your Federal taxble income to $70,000 and your tax bracket to 17%, your federal tax payment this year $13,000, an $8,000 savings over the $20,000 you paid last year.

You do not have to wait until the end of the year, when you file your tax returns, to get the benefit of your home ownership tax deductions. By using a mortgage calculator to project how much you will pay per year in mortgage interest and property taxes, you can adjust your tax witholdings amount so that the amount your employer takes out in taxes reflects the refund you will receive at the end of the year. By doing so, you can spread your federal tax benefits across your monthly paychceks. By updating your W4, in our example above, the $8,000 federal tax benefit can mean that your monthly take home pay will increase by over $660 every month.

Although a large portion of Americans qualify for Federal tax benefits from home ownership, these benefits are not available to everybody. If you have income that qualifies your for the Alternative Minimum Tax (AMT) you may not be able to deduct your mortgage interest and property tax payments from your income. Before buying a home, you should talk with a Certified Public Accountant who is familiar with your taxes to make sure that you will be able to take advantage of Federal tax benefits.