Personal Capital First Time Home Buyers Guide

First-Time
Home Buyer’s
Guide
PHOTO BY CHRISTIAN STAHL ON UNSPLASH
WWW.PERSONALCAPITAL.COM
Content
04 What to Consider When Buying a Home
08 Home Buying Finances
17 Home Buying & Your Portfolio
21 Home Buying & Taxes
24 Home Ownership & Titling
30 Home Purchasing Strategies

INTRODUCTION
Buying a home used

to be an integral part to
the “American Dream.”
Even though it may not always be the most cen-

tral focus of realizing that dream any more, many
Americans list buying a home as one of their top
long-term financial goals. Recent studies found
that 75% of Americans say that buying a home
is a priority, and in 2017, 34% of American home
buyers were first-time home buyers.
The Personal Capital First-Time Home Buyer’s

Guide is designed to help you navigate the ins
and outs of buying a first home. There are many
things to consider before making such an import-
ant investment that will certainly impact your life
– financial and otherwise – for years to come.
Anyone who has owned a home can likely attest

that with ownership comes a lot of benefits, but
it’s not without its potential drawbacks. Before
making the leap, make sure you’ve given careful
consideration as to how your home fits into your
financial plans and investing strategy.
Note: this guide serves as an educational guide for those

interested in buying a primary home to live in for the first time,
and does not cover investment properties or vacation homes.
PERSONAL CAPITAL HOME BUYING GUIDE p3

CHAPTER NAME
What to Consider
When Buying
a Home
There’s no doubt about it: buying a
home is a big purchase.
It’s not the type of purchase you can

easily return if it doesn’t end up working
out for you; it’s a major investment. And
its impact on your finances – now and in
the future – is great.

CHAPTER NAME
General Assess your finances and your reasons for pur-

chasing a home.
Home Determine what you can afford; establish a bud-

get and stick to it.
Buying Decide what kind of home you want that will fit
Process your needs for the timeframe you want the home
Engage a local expert in the market you’re look-

ing in (using tech apps like Redfin and Realtor.
com can also be helpful).
Find a lender/mortgage broker – interview at

least four from private providers to large banks.
Shop around – view at least eight to 10 proper-

ties before committing.
Do your due diligence – get all of the information

associated with the property, such as tax records
and any sort of relevant legal documents and
records.
Once you decide which homes you’d like to make

an offer on, request disclosures and determine if
they are acceptable or negotiate terms that are
acceptable to you and the seller.
Make an offer – negotiate if necessary.
Hire a qualified inspector to ensure everything

about the house – from the foundation to plumb-
ing and electrical – is up to code. Also check that
the property lines are accurate; these potential
“surprises” down the road can be costly, and, in
some instances, a professional assessment can
serve as a negotiation tactic.
Go into escrow.
Sign the title.
Move in!

WHAT TO CONSIDER WHEN BUYING A HOME
Is Homeownership
Right for You?
Since a home is likely the largest purchase PERSONAL CAPITAL | Strategy
most of us will ever make, doing extensive

Renting Vs. Buying
research is a wise use of time. The “right”
choice is different for everyone. One big ques- A big question is whether you should rent or
tion (especially for those who live in pricey real buy. Homeownership is entirely different from
renting. Do you enjoy picking up a phone to
estate markets) is: should I rent or buy?
have someone else fix that clogged drain?
Do you feel comfortable with a lawnmower
When you’re young and don’t have much and enjoy the reward of cutting your own
saved, renting may be the obvious choice. It’s grass? Homeownership can include a step up
in responsibilities. Many people feel pride in
less obvious later in life. If you are older with a
completing the necessary tasks of owning a
substantial amount of cash to invest, you may home, whereas others look at the “to do” list
want to consider whether it’s wiser to put it and cower in fear.
into a fixed asset (i.e., a house), or continue A good rule of thumb is to buy a home if you’re
to have it work for you making money in the going to live there for six-plus years and you
would rather live in the place that you’d buy than
financial markets while you pay rent.
the one you’d rent. And don’t forget that when
you’re deciding on your mortgage, think about
it in the context of your entire wealth picture.
SALE RENT

WHAT TO CONSIDER WHEN BUYING A HOME
The Current Housing Market PERSONAL CAPITAL | Strategy
There’s an old adage: location, location, location. This plays such a Housing & Risk
crucial role in your housing search, and it goes beyond where you
Tolerance
want to live and the area’s amenities. Your job plays a pivotal role in
choosing location, but so do considerations such as property values, When the financial crisis
safety and crime rates, political views, education access, community, hit, the average American
taxes, commuting costs (including the psychological toll and time saw their net worth greatly
impacted because property
spent away from family and friends), and more.
a c co u n t e d f o r a l a r g e
majority of it. While each
person’s risk tolerance
It’s often tempting to think about real estate from a speculative
is different, property –
position, but home ownership can be riddled with costs like Realtor especially for first-time
commissions (on both sides of the transaction), mortgage interest, buyers or in expensive states
insurance, private mortgage insurance (PMI), maintenance, property – can end up comprising
more than 50% of your net
taxes, and more, which can cut deep into the profit of your purchase
worth, which is probably
(or pocket) even in the fastest appreciating geographies.
okay in many cases. It’s good
to remember, however,
property is one of the least
Understand the Current Market liquid investment classes. A
registered financial advisor
While most of us have lived through the peak and subsequent burst can help you determine how
this type of investment fits
of the 2008 real estate bubble, many of us still seem conditioned to
into your overall financial
believe that real estate is a guaranteed “win” after nearly another strategy.
decade of rapid growth. But it’s easy to make emotional – and irrational
– decisions when it comes to real estate.
If you’re considering a home purchase, you should keep in mind that many factors can drive
the local market up or down: major employers come and go, weather events can leave
lasting environmental changes, and zoning laws are always subject to change.
Working with a professional knowledgeable in the area you’re exploring can give you a
good idea of market activity and pricing trends. Real estate agents will help you find homes,
clarify local transaction fees, taxes, and commissions, and advise you on local zoning and
rental rules. Loan advisors will help you analyze your options and determine which loan
options you are eligible for given your employment profile, and which is most efficient from
a budget and tax standpoint.

CHAPTER NAME
Home Buying
Finances
Perhaps the most important
consideration when it comes to buying
your home is how homeownership fits
into your overall finances.
It’s not just about what you think you can afford
at the outset – you also need to understand
all the expenses associated with purchasing,
maintaining, and keeping the home. The latter
type of expenses aren’t generally one-and-done.
You’ll want to consider not only your monthly
mortgage, but other items, such as fees, taxes,
insurance, homeowner dues (i.e., HOA fees), and
other associated costs.

HOME FINANCES
Your Long-Term Goals

Buying a home is an important long-term financial PERSONAL CAPITAL | Strategy
goal. But while it is important, it’s good to keep

Questions to Ask Yourself
in mind that a home purchase competes for the
same resources as your other long-term financial It’s good to ask yourself – (and your
goals. Retirement, paying for your children’s partner if applicable) – some questions
to see whether you’re financially
education, saving for your estate, or a trip to ready to bear the responsibility of
Hawaii; all are valuable goals. But remember that homeownership. Some of these include:
the tradeoff always means less money for one

or more of those goals - something you’ll have What is your credit score
to evaluate carefully. and how might that
impact a lender’s rate?
What other funding sources

do you have, and will those
be used for the home
purchase?
What other liabilities do

you have and how can
those count against your
home purchase?
Do you expect to have the

same future income, and if
not, how will that impact
what you can afford?
Speaking with a financial advisor is

a good way to figure out how this
purchase can fit into your overall
financial strategy

HOME FINANCES
Principal, Interest,
Taxes, Insurance (PITI)
There can be quite a few considerations that go into
your monthly home costs. One of the most important PERSONAL CAPITAL | Strategy
considerations related to your home buying journey
is referred to as PITI, which stands for the sum of Calculating PITI & 28%
monthly principal, interest, taxes and insurance.
This is usually calculated on a monthly basis. Keep Just like running a business, managing
personal expenses and income ratios
in mind that PITI may account for just some of your
can help you meet your cash flow needs.
monthly expenses when owning a home. Depending
When it comes to calculating what
on where you live and how you are paying for your you can afford regarding your PITI, we
home, there may be additional costs built in. generally recommend that 28% of your
gross monthly income should be the
maximum monthly cash outflow for costs
Usually your lender will calculate your PITI and
associated with your PITI.
compare it to your monthly gross income to see if
you are a viable candidate for a mortgage loan. This So, why the magic number of 28%?
is often called the debt-to-income ratio. Other times, Usually, this number is calculated by
taking the principal and interest of your
lenders can use PITI to require reserves in the event
monthly mortgage payment and adding
that you temporarily lose your income. In this case, one-twelfth of your annual real estate
your lender may require, say, two months of PITI, taxes (i.e., one month of real estate taxes),
so you would need to place double the amount of as well as one-twelfth of your annual
homeowner’s insurance premium (i.e.,
your monthly PITI in a depository account (aka your
one month of your annual homeowner’s
escrow account).
insurance) and one-twelfth of any annual
association fees (i.e., one month of your
annual HOA fees). Then you can divide
this by your gross monthly income.

CHAPTER NAME
PITI Principal – This is the amount of your loan, so it is likely the cost of your home
minus your down payment. You generally pay off a portion of this with your
COMPONENTS
monthly mortgage payment, so the principal will drop as you pay your mortgage;
however, some interest-only mortgages do not include the principal.
So what exactly goes
into PITI? A very high- Interest – Just like the majority of other loans, the interest is the amount the
level overview of its lender charges you for borrowing money. Usually, the largest amount of your
components include: mortgage payment will go toward paying down interest, and then will shift to
paying off your principal. If you have an adjustable-rate mortgage, then this can
change the interest rate you pay eventually.
Taxes – Taxes also make up a part of many homeowners’ mortgages. Tax rates
vary significantly from area to area, so you should figure out just how much of
your PITI goes to taxes. See the section on taxes to learn more about what goes
into the taxes you pay and what you should be considering when it comes to
taxes.
Insurance – Your lender may require homeowner’s insurance as part of your PITI.
Even if it’s not required, it’s good to keep in mind that homeowner’s insurance
can cover numerous items associated with your home, from the property itself to
what’s inside. You’ll want to make sure you are properly insured when it comes to
your home, and that your policy is based on accurate and up-to-date information,
and you carefully read what types of perils are and are not covered under your
policy. Casualty insurance will cover a specifically named incident that happens in
your home (.e.g., injuries sustained on your property for which you are liable, or if
your home is vandalized or damaged). There are also regionally specific policies
that are offered by the government – and are usually required by your lender.
Private Mortgage Insurance (PMI) - Your lender may require homeowner’s

insurance as part of your PITI. In addition, if you put down less than 20% for
a down payment – even with good credit - then your lender may also require
insurance known as private mortgage insurance (PMI) to cover the risk lenders
take in issuing small down payment mortgages, since smaller down payments
are associated with higher chances of default. Though PMI payments can be
canceled once you gain 20% equity in your home, building up to 20% can mean
years of pricey PMI payments. Unlike mortgage payments, PMI does nothing to
help grow or build equity – once the money is gone, it’s gone. If you have to put
down less than 20% as a down payment, then try to make additional monthly
payments to get out of the PMI as quickly as possible.

HOME FINANCES
Potential Purchase Costs

In addition to PITI, which is a recurring cost (usually
monthly), there will be more one-off types of costs that
you’ll need to keep in mind when you are purchasing your PERSONAL CAPITAL | Strategy
home. While some of these can be negotiated into the

selling price, it’s good to know that these are also costs Tapping Other Sources
that can easily add up. Some of these include Realtor,
closing, and title costs. You may look into other sources of
equity to help with affording your home.
You could qualify for certain loans, like
a VA loan, which can help greatly. While
some people may have the option to
take a loan from their 401k plan, anyone
under the age of 591/2 who qualifies as
a first-time home buyer can take up to
$10,000 penalty-free for a first-time
home purchase.
$400
$400 $3,500
$3,500 However, you will still have to pay tax
on the distributions. We generally
APPLICATION FEE CLOSING FEE
recommend looking across all your
APPLICATION FEE CLOSING FEE
assets to try to find the best option
from a risk management perspective.
$300-$400 $500 - $7,500
Borrowing from retirement can cause
$300-$400 $500 - $7,500
many challenges and you want to ensure
HOME INSPECTION PROPERTY
you have full access to yourTAX
retirement
HOME INSPECTION PROPERTY
funds. Speak with TAX to
a financial advisor
review which assets might be the best
for you to use toward a home purchase.
$3,500
$3,500
CLOSING FEE
CLOSING FEE
0-$400 $500 - $7,500

00-$400
SPECTION
$500 - $7,500
PROPERTY TAX SALE
INSPECTION PROPERTY TAX SALE
RENT
RENT

HOME FINANCES
Potential Ongoing Costs

PITI may not be the only expense you need to factor in. First-time home buyers,
especially, may encounter other costs that they haven’t had to pay before. Sometimes
renters will see their expenses increase once they become homeowners. Some of these
ongoing expenses include:
Homeowners Association (HOA) Dues – Whether you’re in a condo,

apartment, or in a housing development, HOA fees can range from inexpensive
to quite expensive, depending on what they cover. You will want to read the
bylaws carefully to ensure you understand what is covered and what isn’t,
and what fees may be incurred if you violate any of the rules.
Parking – Sometimes parking can be covered in HOA fees, and sometimes

this is a separate expense. This can be a surprise for some folks who are used
to having this cost baked into their monthly rent.
Maintenance – When things break or fail to work, you no longer can call your
landlord to fix it. Your refrigerator loses power? A window is broken? Your
heater won’t turn off in the middle of the summer? Unfortunately, those types
of costs will likely now fall on your shoulders as a home owner.
Utilities & Additional Costs – As a renter, you may be accustomed to paying

for Internet, electricity, and gas. But with home ownership, you’re likely going
to be responsible for other costs, such as water, garbage/recycling pick up,
and more. If you were lucky enough to have a gardener covered in your rent,
landscaping now likely becomes an expense transferred to you
Legal Costs – Insurance covers legal possibilities, and that’s because it covers
legal possibilities that you may not have been responsible for as a renter. But
with great power as a homeowner comes great responsibility, so you’ll want to
ensure you’re covered for whatever legal expenses that might come your way.

HOME FINANCES
Home Mortgage Loans

Primary residence mortgage loans are used for buying a home to live in. There are different
types of mortgage loans (also known simply as mortgages) you can take out, but the most
common ones are fixed and variable (and there are even more variations within these types
of mortgages). Each type of mortgage carries some benefits and some drawbacks that may
apply to your unique financial situation. This is a simple, high-level overview of these types of
mortgages. You’ll want to speak to a professional to understand the benefits and drawbacks
of each mortgage type and which one may fit your needs the best.
Fixed vs. Fixed-Rate Mortgages generally refer to mortgages that carry an interest
Adjustable-Rate rate that does not change throughout the life of the loan. Even though
Mortgages the allocation between amount of principal versus interest may change,
the total amount of the payment remains the same. While these types of
mortgages can be beneficial for home buyers if interest rates rise, they
can also be challenging to qualify for if interest rates are already high.
Fixed-rate mortgages can be offered with a variety of terms, but the more
common ones tend to be 30, 20 or 15 years. The shorter the mortgage
term, the higher the payment – but remember, shorter-term loans usually
come with a lower interest rate since more of your principal is paid off
with each payment, and the lender is taking on less risk. This equates to
a lower overall cost to the borrower.
Adjustable-Rate Mortgages (ARMs) generally refer to mortgages that

have variable interest rates. Usually, your initial interest rate is set below
market rate (compared to a similar fixed-rate mortgage) for a pre-set
time period, which can range from months to years. After that initial
period, your interest rate will move up and down, based on an agreed-
upon index that is set by the lender (such as the Libor or COFI).
ARMs tend have lower initial interest rates than fixed-rate mortgages,
particularly for the first three to seven years. In a market where interest
rates are falling, this also gives you the opportunity to take advantage
of those lower rates – and subsequently lower payments. You may also
qualify for a larger loan with an ARM. On the other hand, your monthly
payments can change frequently over the life of your loan, and when
interest rates rise and you’re unprepared to cover those costs, then you
could be in trouble. Remember 2008?

HOME FINANCES
Loan Programs If you don’t have upfront liquidity to make a significant down payment, there
with Smaller are other options that may be beneficial to you. Some of these include:
Down Payments
97% LTV Programs
Fannie Mae and Freddie Mac programs allow qualified first-time buyers of
a primary residence and those looking to refinance their primary residence
to do so with as little as 3% down (there are loan maximums depending on
where you live). If you qualify, you will be issued a fixed-rate mortgage, also
known as a 97% loan-to-value (LTV) ratio. There are some considerations:
you must live there for at least one year, and if the housing market declines,
borrowers with low down payment mortgages are at higher risk of owing
more on their mortgage than their property is worth. Minimal upfront equity
also means higher risk of default.
FHA Loans
If you have a credit score of 580 or higher, you may want to consider
a Federal Housing Administration (FHA) loan. This is an FHA-insured
mortgage, which many first-time home buyers leverage because they don’t
require down payments of more than 3.5%. Even if your credit score isn’t
above 580, you may qualify for an FHA loan if you can make a 10% down
payment (though it bears remembering that your interest rate will be higher
the lower your credit score is). Note that you will also be responsible for
PMI premiums.
The Changing While no one can predict interest rate changes, changing interest rates
Interest Rate can have a real impact on your mortgage. For example, with ARMs, rate
Environment increases may have a significant impact on monthly housing payments.
If you are interested in a hybrid mortgage, you may want to consider
refinancing your loan if it looks like rates are likely to rise significantly. Talk
to your financial advisor to learn more.

HOME FINANCES
Mortgage Lenders & Brokers

Unless you are one of the rare lucky folks who don’t need a loan for your home, some
key players will be involved in your home purchase. Two of these include those who
will help you access a mortgage loan: the mortgage lender and the mortgage broker.
So, what is the difference between the two?
A mortgage lender A mortgage broker

typically is a licensed typically does not actually
professional or financial lend you the money, but
institution that makes will help you find a lender
loans directly to you or that will.
through a third party.
Lenders are regulated by state and Oftentimes, a mortgage broker works

federal agencies, which may go a long with many lenders to try to find you
way toward trusting the process. In the best rate and terms. One potential
addition, working directly with a lender drawback is that once your broker finds
may help you save on some costs as you a lender, your broker is typically out
well as iron out any difficulties that may of the picture and you are responsible for
arise during the process. On the other staying in touch with your lender, which
hand, lenders typically offer only their can sometimes prove to be difficult.
own programs, so you will likely want to There can also be some hidden costs
shop around with different lenders for associated with working with a broker,
comparison. so be sure you know the loan process
and ask questions along the way.

CHAPTER NAME
Home Buying
& Your Portfolio
A primary home can be a wonderful
investment, especially if you enjoy
living in it.
Over the last 30 years or so, real estate has
appreciated at a rate very close to that of
inflation - a rate that is less than the historical
appreciation of stocks*. Even so, the leverage
of a mortgage and the tax benefits of the
interest deduction can still make owning a
home a good idea, as long as you can afford it
and plan to live in it for at least six years. The
leverage of a mortgage and the tax benefits
of the interest deduction make owning a home
a good idea, as long as you can afford it and
plan to live in your home for at least six years.
*Based on the annualized return of the Case-Shiller Home Price Index (National)
versus the US Consumer Price Index (from 1988 to 2018).

HOME BUYING & YOUR PORTFOLIO
Your Mortgage & Investing

Few areas of such importance are as largely ignored as the subject of when to pay off
mortgage debt and how to think about it in relation to other investments. One question is: does
it make more sense to pay off your home as soon as possible or make investments designed
to fund your future lifestyle?
Generally speaking, there is a short answer to this question—invest first. Why? The answer is
relatively simple: opportunity costs. Opportunity cost refers to a potential loss of value from
other opportunities when you choose an alternative. In this case, most people these days have
a mortgage with a relatively low interest rate, 3% or 4%, and that rate is locked in for 15 or 30
years. In contrast, a standard rate of return of a diversified portfolio from 12/31/2011 to 3/31/2018
is 7.6%1 (based on representative benchmarking) —greater than the borrowed mortgage rate.
It seems clear to choose the option that offers the higher rate of
PERSONAL CAPITAL | Strategy
return. Unfortunately, like most things financially related, this simple
answer comes with a few complications. For instance, the stock
market does not deliver “average” annual returns in a neat and tidy
Risk Tolerance
package. When you choose to enter the financial markets and how & Your Mortgage
long you plan to stay are significant factors. Your risk tolerance is
Some investors are simply too risk
another factor. The market can be unpredictable, and this volatility
averse to tolerate market volatil-
is one of the variables when weighing the benefits of paying off a ity. You may elect to pay off your
mortgage or investing in the stock market. mortgage, foregoing any possi-
ble excess annual stock market
returns, because of the peace of
There are also tax-related variables that impact your decision.
mind it brings. The same applies if
For instance, if you no longer itemize due to the new increased you simply cannot tolerate debt.
standard deduction, your mortgage interest deduction has lost Owning your home outright may
its traditional tax-return value, which may make paying off your mean more if you are debt-averse
mortgage early an attractive decision. When it comes to interest than any potential benefits from
higher stock market returns. Or,
rates, the structure of your mortgage is an important factor. If you
you may have stronger risk tol-
have a mortgage with an interest rate above 5.5%, you may want to erance and will weather market
investigate refinancing to take advantage of today’s lower interest cycles by maintaining a diverse
rates. In other instances, hybrid mortgages — such as adjustable- and balanced portfolio.
rate mortgages or loans with balloon payments — could tip the

scale toward paying off a mortgage. Assess your risk tolerance by
taking Personal Capital’s free
interactive quiz by clicking here.
1. Representative Benchmark: 41.7% US Equities (VTI), 20.8% International Equities (VEU),

23.4% US Bonds (AGG), 4.1% International Bonds (IGOV), 10.0% Alternatives (equal split VNQ/
IAU/DBC) from 12/31/2011 to 3/31/2018

Bonds vs. Your Mortgage
When it comes to thinking about your mortgage in relation to your portfolio, it’s
always helpful to think about what a mortgage is. A mortgage is debt with your
home as collateral. Once you buy a property, a mortgage does not leverage the
return of the house. The house remains leveraged at 1:1 on your balance sheet
regardless of the level of your mortgage. A debt is the opposite of an asset, and
borrowing money and paying an interest rate is the opposite of lending money
and receiving an interest rate.
So, does it make sense to own bonds and have mortgage debt? If the
interest rate on the bonds is meaningfully lower, the answer is probably
no, but this depends a lot on the specific bonds you own. It also gets more
complicated because of taxes, especially considering the change in the
allowable deduction on mortgage interest rates. Also, you may be paying
taxes on the bond investment. If the bond fund is owned in a taxable account,
the yield may decrease.
A primary reason to not sell bonds to pay down your mortgage is simple:
liquidity. Having liquid assets (like stocks and bonds) available can be important
to take advantage of other investment opportunities or for life’s surprises.
You may be able to re-leverage your mortgage with a home equity loan in
the future, but this can be costly. Of course, many types of bonds pay higher
yields than current mortgage rates.
Most investors own bonds and have a mortgage – and this is acceptable. But it
doesn’t make sense to have a high allocation to bonds that pay significantly less
than your mortgage rate. This includes low-paying CDs and savings accounts
that are not part of your emergency cash cushion. Don’t forget transaction costs
and management fees when considering bond yields.
There is no magic number, but if you do reach a point in the future where your
bonds are paying more than your mortgage, then this could be a good situation.
You should likely never pay down your mortgage more than necessary if this
occurs. Keep in mind that your home is likely a very important asset and your
mortgage is a major liability. When you buy a home with a mortgage, you are
increasing your allocation to real estate and decreasing your allocation to bonds.

Stocks vs. Your Mortgage
If you back out real estate, many people have higher stock
allocations than they realize. On the other hand, many people PERSONAL CAPITAL | Strategy
own stocks and also have mortgage debt. Usually they

randomly fall into a particular asset allocation based on when Stocks & Your
they buy their house without thinking too much about it. Mortgage
There is so much that impacts your stock allocation and its Everyone’s situation and risk
tolerance is different, but as long
relationship to your mortgage. Taxes, mortgage interest rates,
as you believe equities will perform
inflation, and – of course – the market and equity returns all play reasonably better than your after-
a crucial part in this relationship. Time horizon is also critical. tax mortgage rate on average over
What happens in 10 years will differ from what happens in time, it is usually better to maintain
a relatively high mortgage balance
20- and 30-year periods. Much can change not only within the
and invest the money in stocks.
financial world at large, but within your own life and priorities. But because there is some real risk
of losing a lot with this strategy, it
When it comes to your mortgage and your stock allocation, often does not make sense to be
one theory is that it’s better to keep a high mortgage and completely leveraged. The actual
ratio should be dependent on current
invest the money in stocks (rather than paying down your
mortgage rates, equity expectations
mortgage). Sometimes it is a lot better. The importance of this and other risk tolerance factors such
can hardly be overstated. And, this does not even account for as other assets, income and personal
the fact that a large portion of those mortgage payments will preference. It is important to have a
strategic plan regarding this topic,
be reducing the amount of debt principal.
because it will have a huge impact on
your eventual net worth. Don’t just
Still, it is not without risk. No matter what time period you look leave it to chance based on when you
at, there is a small, but real risk of losing more than 50% of buy or upgrade your home.
the value of your stock portfolio. This is a big game to play,

so being conservative makes sense for most people. There
is no guarantee stocks will go up. Therefore, some balance
between the two strategies is optimal. But especially if you are
still working, it can be a big mistake not to have a large portion
of total net worth in stocks.

CHAPTER NAME
Home Buying
& Taxes
Owning property has advantages
and disadvantages – and certainly
many of the issues are tax related.
Taxes play a significant role in your

home buying decision, whether it’s
taxes involved on the purchase itself
or taxes you pay down the road.
To make it more complicated, tax
reform has impacted several areas
when it comes to taxes and housing.

HOME BUYING & TAXES
Housing Deductions
There are some important residential real estate taxation changes that tax reform has
impacted, which in turn impacts your home buying process. They include mortgage interest
deductions and property tax deductions.
Mortgage Interest Deductions
Before the 2017 tax reform, qualifying mortgage interest could be deducted as an itemized
deduction on residential loans up to $1 million (plus another $100,000 of a home equity
loan). This loan cap applied to a maximum of two houses – a primary home and a vacation
home. Under prior law, the loan must be secured by the taxpayer’s main or second home,
and the interest paid on the home equity loan or home equity lines of credit could be used
to pay personal living expenses, such as credit card debts.
You can still potentially deduct interest on a home equity loan or a home equity line of
credit as long as they are used to buy, build or substantially improve the taxpayer’s home
that secures the loan. However, the interest expense on a home equity loan or a home
equity line of credit used for anything other than these purposes is no longer tax deductible.
Itemizing Deductions for Qualifying Home Mortgages
In the past, if you itemized your deductions, you would likely deduct the interest you paid
on a qualifying home mortgage, which reduces your taxable income. With the new tax
law, many homeowners may no longer benefit from itemizing their deductions and instead
can utilize the newly increased standard deduction amounts. If it still makes sense to
itemize, however, just be aware the limit for deductible mortgage debt has decreased to
$750,000. This applies to new loans taken out after December 15, 2017. (If you have a loan
from before that date, you are grandfathered in under the former limit of $1 million.) If you
have questions about whether the new tax law applies to you, check with a professional.
It’s interesting to note that many homeowners may not necessarily be impacted by this
change. However, a cap of $750,000 in high-cost states, like California or New York, may
be easily reached, even by those looking for relatively modest accommodations.

HOME BUYING & TAXES
Capital Gains Exclusion
One quick thing to note when you are buying your home and thinking about resale value: Tax
reform preserved the home sale capital gains exclusion of up to $250,000 for individuals
and $500,000 for married couples filing jointly. This means you can still potentially shield
profits on qualified home sales up to these amounts from federal income tax.
State & Local Property Taxes
Before tax reform, homeowners were able to deduct state and local (property) taxes from
their federal tax bill. Now, if you are itemizing deductions on your tax return, then you may
deduct property taxes you pay on your primary home as well as any other real estate you
may own for personal purposes, but the deductions are limited to $10,000 (the combined
total of state and local sales, income and property taxes is limited to the total $10,000). This
change tends to impact certain markets. While homeowners in most parts of the country
pay less than $10,000 annually in property taxes, taxpayers in states with high property
taxes and high home prices could surely feel a wallet pinch.

CHAPTER NAME
Homeownership
& Titling
There are several ways you can
purchase your home.
The most common ways include

owning the home yourself, with other
people (joint ownership or tenants-
in-common, also known as a TIC), or
a living trust if you already have one
set up. The way you title your home
– or if there’s a gift involved in any of
the process – can have consequences
not only on your ownership but what
happens to your home in the future.

HOME OWNERSHIP & TITLING
Types Of Ownership
Typically, there are several types of homeownership when it comes to your primary
residence. These may include:
Sole Ownership – You are the one individual who owns the entire property
and when you pass away, you can leave your property to your heirs through
transfer documents or through your estate plan, which might contain a last will
or a living trust. These estate planning documents instruct an executor or trustee
to distribute your assets according to your wishes. If you do not have an estate
plan, a court will follow so-called state “intestacy statutes” to assign assets to
beneficiaries closest to you on your family tree. Having a current estate plan can
help your heirs avoid intestacy and could also assist in distributing your portion
of ownership in the additional property ownership methods below.
Joint Tenancy With Rights of Survivorship (JTWROS) – You and one or more
persons own equal, undivided parts of the property. If you pass away, then your
ownership interest passes along to the surviving joint owner(s). If one joint tenant
breaks the joint tenancy by selling his or her interest to another person, the
ownership would usually be changed to TIC for all parties.
Keep in mind, a married couple – or any joint tenants – may have different
percentages of equity in a property amongst the joint owners. You should consult
with an attorney if preserving your percentage of equity/ownership is important.
Otherwise joint tenancy could provide that an unequal amount of equity passes
to the remaining joint tenant(s) after your death or a divorce.
Tenancy in Common (TIC) – You own a property with one or more people;
however, you and your co-owners can own the property in different percentages.
While you are able to pass along your interest to your co-owner(s) when you pass,
your interest doesn’t automatically pass along to the other(s), like it would through
JTWROS. If your estate is not set up properly, this could mean that your interest
will go through probate, and could cause further complications with the property.

Community Property – You own a property that you purchased with your spouse in a
state that has community property laws (i.e., Alaska, Arizona, California, Idaho, Louisiana,
New Mexico, Nevada, Texas, Washington, and Wisconsin). Each of you would own half
of the property, which you can leave through a last will or living trust to the surviving
spouse or someone else.
Living Trust – You own the title to your home through a revocable living trust. Until you
experience disability or death, you own the home just as other ownership methods
mentioned above. In the event that you and/or your spouse become disabled or pass
away, a successor trustee, which you designate in the trust, can continue to own the
property for you or your family’s benefit, or sell the home so equity would be distributed
to the appropriate heir(s).\
Other Types of Ownership – While you can, most people don’t own don’t own their
primary home as an LLC or other business partnership, though secondary or rental props
are quite often titled this way.
In about half of the United States, a married couple can acquire property through
tenancy by the entirety. This type of ownership can extend asset protection to assets
of the marriage If tenancy by the entirety is available, you may want to consider it for
its useful asset protection over joint tenancy with right of survivorship.
Homeownership & the Fine Print – The types of ways to own a home can be
complicated and all come with various benefits and drawbacks depending on your
wishes and financial status. Don’t forget that taxes play a huge part in how your property
is transferred depending on the type of ownership you have. It’s good to consult a
professional to understand all of the fine print that comes with owning property.

Gifting a Down Payment

Today, most lenders are looking for down payments of 10% to 20%. While they may
take a sub-20% down payment, there are caveats involved (such as higher interest rates
or other requirements, like mortgage insurance). Coming up with a down payment of
that size – especially on higher-priced homes – can be challenging. Here is some helpful
information when it comes to gifting or receiving a down payment.
Annual Gift Tax Exclusion – Your parent or any family member or friend can gift
part or all of your down payment or future mortgage payments. While you can
receive a gift of any amount of money at any time, the annual gift tax exclusion
is the amount that can be given away per person per year without reducing the
lifetime gift tax exemption. The annual gift tax exclusion is $15,000 in 2018, which
increased from $14,000 in 2017.
Lifetime Gift Tax Exemption – The total amount that can be gifted over your entire
lifetime can be free from tax as well, if the overall gifted amount does not exceed
the lifetime gift tax/estate tax exemption, indexed for inflation and increased yearly.
The exemption was $5.49 million in 2017, but tax reform increased the exemption
to $11.18 million (per individual) in 2018. Any gifts over the annual exclusion would
reduce the exemption you have left to provide to your heirs at your death.
For instance, each one of your parents can give you $15,000, which adds up to
$30,000, per year. And if you are married, your spouse can also receive $30,000
per year, which, at the end of the day, comes to $60,000 that you can put toward
a down payment – a not insignificant amount – that doesn’t require you to pay any
taxes on that gift, thanks to the annual gift tax exclusion. In addition to helping with
a down payment, your parents also reduce the size of their taxable estate.
Keep in mind, though, some states impose their own state estate taxes with lower
exemptions than the federal gift tax/estate tax exemption limits.

Loan vs. Gift
If your down payment comes in the form of a gift, you’ll

want to ensure that it’s recorded as a gift, and not in any
way a loan, i.e., the gift giver doesn’t require any repayment.
Your mortgage lender doesn’t want anyone down the road
coming back claiming they need to be repaid, and you don’t
want the gift counted as more debt in the qualifying process.
In addition, it is helpful to clearly spell out any expectations if
the gift “belongs” to a certain person within the purchasing
party. For example, if a mother gifts a married couple a
down payment, but clearly states it counts toward her
daughter’s equity, then the mother and the couple should It is helpful to
document the terms of this gift to the daughter, and the
sale documents and titling of the home may need to be
clearly spell out
consistent with the expectations of this gift.
any expectations
Parents sometimes claim their gift is a loan, but they should
ensure that it’s treated as such; if there is no repayment
if the gift
within 10 years then this may imply the loan is a gift and
the loan could be canceled in the future. Did their children
“belongs” to a
make loan payments back? Is there paperwork reflecting
a repayment schedule? If family or friends become your
certain person
lender, consider working with an attorney to set up the loan within the
officially. For example, does this “intra-family loan” have
repayment terms that would be appropriate? Do you have purchasing party
a reasonable interest rate?
You can also ask a real estate attorney about utilizing a

promissory note, which can be customized to document a
contract between a buyer and the parent/person providing
equity for the purchase. A promissory note can be as
enforceable as a mortgage.

Grandfathering
When we talk about “grandfathering” with real estate, we’re not speaking in familial
terms. We’re instead talking about certain laws or conditions that you may be able to
inherit – or be “grandfathered” when certain conditions are met.
For example, if you live in California, you may be familiar with Proposition 13. This is
the proposition that allows parents to pass their homes to their children and in doing
so, grandfather them in to their property tax rate without reappraisal. You can imagine
some places that have been in families for generations have very low property tax!
However, you’ll want to ensure that the rules are followed correctly. If you were to leave
your home to your two children, say, and one ends up selling his half to his sibling, then
it’s a child-to-child transfer, and one half of the property would get revalued and will
likely be charged with higher property taxes.
Other states or municipalities might have other types of things that can be passed on,
so even if it’s not preserving property tax, you’ll want to check whether there are there
any kind of grandfathered-in stipulations (e.g., rent control or keeping an individual unit
out of an HOA). You likely want to ensure – wherever you are – that anything you pass
on to your heirs will be helpful.
These are the types of things that you normally want to address in estate planning
through your will or living trust so it is done correctly. Done incorrectly, you might end
up with the opposite of what you intended for your heirs. An attorney may be pricey
at the beginning, but it’s a one-time cost to ensure you’re doing it right and eventually
saving money beyond that over time.
Estate Plans & Real Estate
It’s important to have an estate plan in place that clearly helps guide your heirs when
you pass on your property. Having an estate plan is about deciding what to do with your
estate (e.g. your assets) and what impact that ends up having on those who receive
your property. Trusts can also be helpful in estate plans. Some older parents just pass
on their real estate without a current estate plan or any stipulations in place. No matter
who ends up getting property, setting up a current estate plan can ensure that your
beneficiaries receive the share of the estate you wish to gift to each beneficiary.

CHAPTER NAME
Home
Purchasing
Strategies
There are so many steps that go
into buying a house, it’s hard to
keep track of all of them.
Professionals within the real estate

industry can be key to helping you
navigate this process. Whether it’s
someone advising on the financial
end or someone who is advising
on the real estate side, a strong
team of pros can be instrumental
to your home buying success

HOME PURCHASING STRATEGIES
The Real Estate Industry

There are several names for those who help you with finding, negotiating and purchasing
your property. While they may be used interchangeably, there are specific conditions each
type must meet. For example, a real estate agent differs slightly from a Realtor, and both
are different from a real estate broker.
>> Real estate agent: Anyone who earns a real estate license can be called a real estate
agent, whether that license is as a sales professional, an associate broker or a broker. State
requirements vary, but in all states you must take a minimum number of classes and pass a test
to earn your license.
>> Realtor®: A real estate agent who is a member of the National Association of Realtors®, which
means that he or she must uphold the standards of the association and its code of ethics.
>> Real estate broker: A person who has taken education beyond the agent level as required by
state laws and has passed a broker’s license exam. Brokers can work alone or they can hire
agents to work for them.
Working With A Realtor

So how do you know if you’re working with the right real estate professional? Here are
some quick questions to ask yourself:
When was the last time your Realtor sold a home? If your Realtor hasn’t sold a home within
the past six months, alarm bells should be going off. He or she should have a consistent flow
of homes for sale, ideally in your price range or higher.
Does your Realtor really know his stuff? It’s important to see if your Realtor can come up with
a coherent thesis as to why he thinks XYZ about the direction of the housing market. Ask him
about pockets of strengths and weaknesses in local housing market, as well as the risks. Ask
about various real estate tax strategies or housing credits. Your Realtor should also present
to you a comprehensive game plan for marketing and selling your home.
Does your Realtor have integrity? Is your Realtor honest and transparent about seemingly
miniscule things? Good integrity goes a long way in minimizing the risk of negative surprises.
Can you feel the hustle? Real estate can be supremely competitive. Not moving fast enough
can cost you a dream home. Do you feel like your Realtor is a star member of your home buying
team, or is he or she just sitting on the sidelines waiting for everyone else to do the work?

Negotiation Practices
Buying a home will test your negotiation skills, which can be a daunting task. After all, you want to
ensure you’re getting the best deal, while the person who is selling you their home wants to ensure
they’re getting the best deal. So what are some ways you can negotiate? Here are some ideas:
>> Use the home inspection to your advantage. If something is in the assessment
that can be used as a negotiation tactic, use it to your advantage, whether it’s
to ask for a lower price or request any repairs be made prior to sale. Then when
you get to the appraisal stage, negotiate the price if the appraisal comes in below
the asking price.
>> Are you able to work quickly through the time it takes to close? In some of
the hotter real estate markets, this is a given – but in other areas, your ability to
close quickly may give you a leg up on negotiations. After all, who wants to go
through a lengthy escrow? Just keep in mind, you want time to ensure you’ve
done inspections and your homework correctly.
>> Contingencies are optional. They tend to be safer for you as a home buyer
because they give you more protection in case there’s an issue with the inspection
or the valuation, but they can also be waived if you’re fairly confident in the home
you’re vying for. While it’s not generally recommended, waiving contingencies
may give you a boost when it comes to negotiation time.
>> Do your homework in the area. What are homes valued at that are in a comparable
neighborhood, with similar square footage and amenities? Knowing this will keep
you within a realistic price range.
>> Consider the seller’s motivations and figure out how to meet him or her halfway.
For instance, is there a 1031 exchange involved, and can you help with the timing
of the sale? Or is the seller trying to get rid of a tenant-occupied home and you’re
willing to do the legwork to oust the tenant?
>> Add a personal touch through a “love letter” – in competitive markets, sometimes
putting together a personal note about why you love the property can influence
the seller to go with you, even if he or she has multiple offers on the table.

Home Expansion
Many experts consider location to be the most important factor for buying a property
with long-term appreciation value, but expanding a property also gives you another way
to make money in real estate. Property expansion entails creating additional living space
that gets input into the property’s value when it’s sold.
The first step to this is buying a home with expansion

potential. Its selling price should be at least 50% more than PERSONAL CAPITAL | Strategy
the construction costs, based on the research you’ve done. If

you decide to expand your home in a location with a high cost
To Expand or Not?
per square foot, and you can expand at a relatively low cost
There are some downsides to expansion
per square foot, then you could end up with added value onto to consider as well. When you expand
your home. However, it’s good to keep in mind that spending a home, you create more value, and
a significant amount of money on building materials and quality your home will be taxed on the value
that you’ve created. However, these
oftentimes has diminishing returns. There is a tradeoff when it
property taxes are based on the cost
comes to this, and you’ll want to calculate the cost of expansion
of construction and not on the market
in relationship to the value add. And don’t forget, property value of the property, which is subjective.
taxes are based on the value you’ve created. Additionally, expansions oftentimes
come from money that could be used
for other investments. Many projects run
The second step is to consider local rezoning laws. How eager
over budget, so be prudent to include an
is your county to develop or build more on your current plot? contingency budget of 10% or more. Your
Some counties are quick to act on their rezoning laws, whereas real estate agent and general contractor
others may drag their feet. If you are in a historical district, you will help you better estimate the costs in
your neighborhood. And before beginning
may be subject to very critical laws to keep the town looking
a home investment process, you should
uniform for years to come. These stringent laws may hinder all run realistic worst-case cash flow numbers
expansion projects. to see how long you can survive before
your money runs out. Having two years
in cash flow is a good guideline.
Remodeling & Renovation

Remodeling and renovation are not the same as property
expansion, and investing in these will most likely not get you
a return on your investment when/if you sell. But it doesn’t
mean these aren’t worth it; buying a cheaper home and then
remodeling over time is one strategy to save money. In addition,
renovations may give you the chance to rent out your home for
more money, if that’s an avenue you choose to pursue.

CHAPTER NAME
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First-Time

PHOTO BY CHRISTIAN STAHL ON UNSPLASH

04 What to Consider When Buying a Home

08 Home Buying Finances

17 Home Buying & Your Portfolio

21 Home Buying & Taxes

24 Home Ownership & Titling

30 Home Purchasing Strategies

Buying a home used

Even though it may not always be the most cen-

The Personal Capital First-Time Home Buyer’s

Anyone who has owned a home can likely attest

Note: this guide serves as an educational guide for those

PERSONAL CAPITAL HOME BUYING GUIDE p3

It’s not the type of purchase you can

PERSONAL CAPITAL HOME BUYING GUIDE p4

General Assess your finances and your reasons for pur-

Home Determine what you can afford; establish a bud-

Engage a local expert in the market you’re look-

Find a lender/mortgage broker – interview at

Shop around – view at least eight to 10 proper-

Do your due diligence – get all of the information

Once you decide which homes you’d like to make

Make an offer – negotiate if necessary.

Hire a qualified inspector to ensure everything

Sign the title.

PERSONAL CAPITAL HOME BUYING GUIDE p5

most of us will ever make, doing extensive

PERSONAL CAPITAL HOME BUYING GUIDE p6

The Current Housing Market PERSONAL CAPITAL | Strategy

PERSONAL CAPITAL HOME BUYING GUIDE p7

PERSONAL CAPITAL HOME BUYING GUIDE p8

Your Long-Term Goals

goal. But while it is important, it’s good to keep

the tradeoff always means less money for one

What other funding sources

What other liabilities do

Do you expect to have the

Speaking with a financial advisor is

PERSONAL CAPITAL HOME BUYING GUIDE p9

PERSONAL CAPITAL HOME BUYING GUIDE p10

Private Mortgage Insurance (PMI) - Your lender may require homeowner’s

PERSONAL CAPITAL HOME BUYING GUIDE p11

Potential Purchase Costs

home. While some of these can be negotiated into the

0-$400 $500 - $7,500

INSPECTION PROPERTY TAX SALE

PERSONAL CAPITAL HOME BUYING GUIDE p12

Potential Ongoing Costs

Homeowners Association (HOA) Dues – Whether you’re in a condo,

Parking – Sometimes parking can be covered in HOA fees, and sometimes

Utilities & Additional Costs – As a renter, you may be accustomed to paying

PERSONAL CAPITAL HOME BUYING GUIDE p13

Home Mortgage Loans

Adjustable-Rate Mortgages (ARMs) generally refer to mortgages that

PERSONAL CAPITAL HOME BUYING GUIDE p14

PERSONAL CAPITAL HOME BUYING GUIDE p15

Mortgage Lenders & Brokers

A mortgage lender A mortgage broker

Lenders are regulated by state and Oftentimes, a mortgage broker works

PERSONAL CAPITAL HOME BUYING GUIDE p16

PERSONAL CAPITAL HOME BUYING GUIDE p17

Your Mortgage & Investing

rate mortgages or loans with balloon payments — could tip the