Just like visiting your doctor’s office for your annual physical to keep yourself healthy, it is imperative to conduct an annual real estate checkup to be diligent about your financial wellbeing. December is an excellent time to complete the review and make any adjustments for the year ahead.
If you are not yet a homeowner or don’t own any investment property, the real estate checkup can be done pretty quickly. Ask yourself, “Do I own any real estate?” Since the answer is no, it’s time to start laying the groundwork. In general, the sooner you can own real estate in your life, the more likely it will be a useful source of retirement income. Now is a good time to get started. You can meet with a Realtor® and develop a plan to make the first home purchase as soon as it is feasible for you.
If you already own a home or investment property, here are a few things you should evaluate during your annual real estate checkup:
Get a market analysis from your Realtor
One of the wonderful things about real estate in our area is that it has increased in value over time. Sure, it has seen ups and downs, but when I started working in real estate in 1978, Baseline Subdivision homes in the city of Boulder were selling for under $30,000. Now, it 2020, these homes start at around $650,000. As a homeowner, it is a good idea to ask for an updated value of your home each year and apply that information to your financial statement. You can use that information for planning and studying your financial future, relative to real estate and anything else you might invest in.
Check your insurance coverage
Double check your insurance coverage and see if it is in line with replacement coverage. Remembering our 2013 flood and recent wildfires, it is also a helpful to check for flood insurance, fire insurance and sump pump failure insurance.
Check your loan balance on your home and/or your rental properties
If you have an amortized loan on your home, that means the loan balance goes down each month. On a 30-year loan, principal reduction is fairly slow in the first half. If you keep the property and the loan for a long time, at about year 14, the principal reduction happens pretty rapidly. It makes it fun to see how much your equity has increased each year.
Mortgage insurance removal
Mortgage insurance, for purposes of this discussion, will pay off your lender if you default. There is another kind of mortgage insurance that like life insurance, if you die the loan gets paid off so your loved ones don’t have the burden of a mortgage payment.
Knowing your loan balance can help you determine if you can get rid of mortgage insurance. Many homes were bought with low down payments. As a result, many homeowners have private mortgage insurance as part of their payment. The combination of rising values and principal reduction could make you eligible for removing the private mortgage insurance and lowering your payment. Check with your current lender to see if the mortgage insurance can be removed or if you need to refinance to get rid of it. You may not be able to do it now, but you can make a plan for how soon you could get it removed.
Check your interest rate
Over time, we tend to forget what the interest rate is on our home mortgages. Interest rates currently remain at historical lows, so now might be a good time to refinance into a lower payment. Remember, if you have a five-year-old, 30-year amortized loan, for example, if you refinance, you start over on a new 30-year schedule. Refinancing at a lower interest rate and starting over on a new 30-year amortization, could substantially lower your payment. If you are able to eliminate mortgage insurance as well, you might really like your new payment
Decide on your loan term, if you refinance
If starting over on a 30-year loan doesn’t excite you, it is possible to refinance into a 15-year loan. If your goal is rapid principal reduction this is one way to do it. The payment will be higher, however, and this could potentially make it tougher to meet the qualifying requirements. Some lenders will allow you to recast your loan at a new interest rate and over a term you would like. In other words, if you are 10 years into a 30-year loan, a lender might be able to make a new loan at today’s rates, but on a 20-year amortization. You might have the benefit of a lower payment if the interest rate is lower than your current rate, and not add 10 years to the loan.
Meet with your real estate lending professional and Realtor
Knowing the current value and loan balances on your property gives you a wealth of information with which to discuss with your mortgage lender and Realtor. By knowing this information, you will learn how much equity you have. If you have equity, you have options to continue to grow your real estate portfolio.
If your family size has increased, you might need a larger home. It could be possible to purchase a larger home and build your real estate portfolio at the same time. You can check into refinancing your old home, rent it, pull cash out for your down payment, and then buy your next personal residence.
If you are happy where you are, it might be possible to refinance and pull cash out to buy a rental property. By meeting with your mortgage lender, you can determine if you can qualify, or formulate a plan to be able to qualify in the future.
Get a home inspection
A home and a rental property can be an individual or family’s biggest investment in their life. Like anything else that is important to you, it is advisable take good care of it. It is vital to get a home inspection every once in a while. Spring is a great time to do that, to ensure that snow won’t be covering up any potential issues. For example, when was the last time you crawled up in your attic? There might be a family of raccoons living there! The point is that a home inspector can alert you to simple repairs and maintenance items that might prevent significant problems down the road. This helps you maintain your property and allows you to anticipate big-ticket updates, like a roof or furnace replacement, and budget accordingly.
Consider a home warranty
It has been common for an independent home warranty policy to be part of a real estate transaction. These policies cover many working parts of the house, such as the furnace, air conditioners, water heaters, etc. Some of these companies provide coverage for a home you are already living in and own. For instance, if a failure of a water heater or furnace at the same time might create financial hardship, it is a good idea to look into the premiums, coverage and deductible on such a policy.
Get started on your real estate checkup today by contacting your Realtor, mortgage lender, and home inspector.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.