Frequently Asked Questions
Question about renting & selling
Yes, a home can depreciate in value, but it’s important to understand what is and isn’t depreciating.
The key distinction is that while the physical structure of the house depreciates over time due to wear and tear, age, and obsolescence, the land it sits on typically appreciates in value. Since a home’s overall value is a combination of the building and the land, the land’s appreciation can often offset or even surpass the building’s depreciation, leading to an overall increase in the property’s market value.
Here are the key factors that cause a home to depreciate:
Physical Depreciation: This is the most straightforward type and refers to the natural aging and deterioration of the physical structure. This includes things like the roof, foundation, plumbing, electrical systems, and overall condition of the house. Deferred or neglected maintenance is a primary cause of physical depreciation.
Functional Obsolescence: This occurs when a property’s design, layout, or features become outdated or inefficient. For example, a house with a cramped floor plan, a single bathroom, or outdated fixtures may have a lower value than a more modern home with a desirable open concept.
External (or Economic) Obsolescence: This is a loss of value due to factors outside the property itself, which are often beyond the homeowner’s control. These can include:
A decline in the local economy or job market.
A significant increase in noise or pollution (e.g., a new highway or airport).
Negative changes in the neighborhood, such as nearby landfills, power plants, or poorly maintained properties.
An oversupply of similar properties in the local market.
It’s worth noting that for tax purposes, real estate investors can often claim a depreciation deduction on the building portion of a rental property to reduce their taxable income, which is a key benefit of real estate investing. The IRS has specific rules and schedules for this.
Determining whether an older home is a better value than a new home isn’t a simple yes or no question. Each type of property offers a unique set of pros and cons, and the “better value” ultimately depends on a buyer’s priorities, budget, and long-term goals.
The Value of an Older Home 🏡
Older homes often have a charm and character that new builds lack. They were typically constructed with a focus on craftsmanship and are located in established neighborhoods with mature trees, larger lots, and a sense of community.
Pros
Location: Older homes are usually closer to urban centers, public transport, and existing amenities.
Character and Craftsmanship: Unique architectural details like built-in shelving, crown molding, and hardwood floors give older homes a distinctive personality.
Larger Lots: Land was more plentiful and less expensive in the past, so older homes often come with more spacious yards.
Potential for Appreciation: A well-maintained older home in a desirable neighborhood can be an excellent long-term investment, especially if it has unique architectural features.
Cons
Higher Maintenance Costs: Outdated plumbing, electrical systems, and roofs can lead to frequent and expensive repairs.
Less Energy Efficient: Older homes may lack modern insulation, energy-efficient windows, and appliances, leading to higher utility bills.
Outdated Floor Plans: The layouts of older homes may not suit modern living. Many have smaller, more compartmentalized rooms rather than the open-concept designs popular today.
Hidden Problems: You may not discover issues like water damage, foundation problems, or pest infestations until after you move in. A thorough home inspection is crucial.
The Value of a New Home 🏠
New construction homes are built with modern living in mind. They offer a blank slate with up-to-date features and the peace of mind that comes with a warranty.
Pros
Low Maintenance: Everything is brand new, so you’ll have fewer repair and upkeep costs for the first several years.
Energy Efficiency: New homes are built to meet modern energy codes, with better insulation, airtight windows, and high-efficiency HVAC systems, resulting in lower utility bills.
Modern Design and Amenities: They feature open floor plans, smart home technology, and new appliances, all designed for today’s lifestyle.
Builder’s Warranty: Most new homes come with a warranty that covers structural defects and other issues for a set period, offering a safety net.
Cons
Higher Upfront Cost: New homes often have a higher price per square foot than older homes.
Limited Customization: While some builders offer personalization options, they can be costly and limited to a predetermined set of choices.
Smaller Lots: New subdivisions are often built on smaller plots of land to maximize density, which means less yard space.
Lack of Character: New homes can sometimes feel “cookie-cutter” and lack the unique architectural charm and mature landscaping found in established neighborhoods.
Ultimately, an older home can be a fantastic value for someone who loves character, is willing to handle potential repairs, and values an established location. A new home, on the other hand, is a better value for someone who prioritizes low maintenance, energy efficiency, and a turnkey, modern living experience.
A broker is a professional intermediary who arranges and facilitates transactions between a buyer and a seller. Think of them as a “middleman” who brings two parties together to complete a deal. Brokers are particularly valuable in markets that are complex or require specialized knowledge, such as real estate, finance, and insurance.
Unlike an agent who may represent only one party, a broker’s main role is to facilitate the entire transaction, ensuring that it is executed smoothly and legally. For their services, they typically earn a commission or a fee, which is often a percentage of the total transaction value.
What a Broker Does
The primary function of a broker is to use their expertise, network, and resources to help clients achieve their goals. This can include:
Connecting Buyers and Sellers: They have extensive networks and can efficiently match a buyer looking for a specific product with a seller who has it.
Providing Expertise: Brokers possess deep knowledge of their specific market, including pricing, trends, regulations, and legal requirements.
Negotiating on Behalf of Clients: They act as a go-between, negotiating the terms and price of a deal to secure the best possible outcome for their client.
Handling Paperwork: They manage the complex documentation and legal processes required to finalize a transaction, from contracts to closing documents.
Common Types of Brokers
The term “broker” is used across many different industries. Here are some of the most common types:
Real Estate Broker: A licensed professional who helps clients buy, sell, and rent properties. They are often the heads of a brokerage firm that employs real estate agents.
Stockbroker: An individual or firm that buys and sells stocks, bonds, and other securities on behalf of clients. In the modern era, many of these transactions are done through online platforms.
Insurance Broker: Works with clients to find the best insurance policies from various providers, rather than being tied to one specific company.
Mortgage Broker: An intermediary who connects borrowers with lenders to find the best loan for their needs.
Freight Broker: A person or company that connects shippers who need goods transported with carriers who can transport them.
Yes, you can absolutely pay your own property taxes and insurance directly. While many homeowners choose to include these costs in their monthly mortgage payment via an escrow account, it is not always a requirement. The choice to handle these payments yourself versus using an escrow account comes with distinct advantages and disadvantages.
How Escrow Accounts Work
When you use an escrow account, your mortgage lender collects a portion of your annual property taxes and homeowners insurance premiums each month, along with your principal and interest payment. The lender holds this money in a separate account and then pays the bills on your behalf when they come due. This simplifies your financial life by consolidating all your major housing expenses into one monthly payment.
The Case for Paying Your Own Bills
Opting out of an escrow account is often referred to as “waiving escrow.” This is a viable option for financially disciplined individuals who prefer to have more control over their money.
Advantages:
Financial Control: You keep your money for a longer period. Instead of your lender holding the funds in a non-interest-earning account, you can place the money in a high-yield savings account or a short-term investment to earn a small amount of interest before the bills are due.
Budgeting Flexibility: You have direct control over when and how you pay. If you want to pay a lump sum to your insurance company to get a discount or shop around for a better rate, you can do so without involving your lender.
Simplified Mortgage Statement: Your monthly mortgage payment for principal and interest will remain consistent, making it easier to budget for the long term. Your payment won’t fluctuate annually due to changes in property taxes or insurance premiums.
The Risks and Requirements
While paying your own bills offers flexibility, it’s not without its challenges. It requires a high degree of financial responsibility.
Disadvantages:
Lump Sum Payments: You will be responsible for making large, often semi-annual or annual, payments for your taxes and insurance. This requires careful budgeting throughout the year to ensure you have the funds available.
Risk of Late Payments: Missing a tax payment can lead to penalties, fines, or even a lien being placed on your property by the local government. A lapse in insurance coverage can violate your mortgage agreement and expose you and your lender to significant financial risk.
Not Always an Option: Many lenders, especially for loans with a low down payment (less than 20%), require an escrow account as a condition of the loan to protect their investment. Loan types like FHA and USDA loans also typically mandate escrow.
In conclusion, paying your own taxes and insurance is possible and can be a good choice for those who are highly organized and can manage their finances proactively. However, for most homeowners, the convenience and built-in discipline of an escrow account provide a valuable service, ensuring these critical bills are paid on time without the risk of forgetting.
The duration of a loan process is not a fixed timeline; it is highly dependent on the type of loan you are applying for, your financial profile, and the efficiency of the lender. From a few minutes to a few months, the timeline can vary widely.
For Personal Loans: The Fast Track
Personal loans, which are typically unsecured, have the quickest turnaround times. Many lenders, especially online-only platforms, have automated their application and approval process to be nearly instantaneous.
Timeline: The entire process, from application to receiving funds, can take anywhere from a few hours to a few business days.
Why It’s Fast: The absence of collateral means less verification is needed. Lenders primarily rely on your credit score, income, and debt-to-income ratio, which can be quickly assessed by automated underwriting systems.
For Mortgage Loans: The Full-Scale Journey
The mortgage loan process, by contrast, is a much more extensive undertaking due to the sheer size of the loan and the use of the property as collateral. This requires thorough due diligence on both the borrower and the property itself.
Timeline: The average time from a completed application to the final closing of the loan is typically 30 to 60 days.
Why It Takes Longer: This period includes critical steps that cannot be rushed, such as:
Underwriting: A meticulous review of your financial history, including bank statements, tax returns, and employment verification.
Appraisal: A professional assessment of the property’s value to ensure it’s worth the loan amount.
Title Search: A legal check to ensure there are no existing claims or liens on the property.
Key Factors That Influence the Timeline
No matter the loan type, several elements can either accelerate or delay the process:
Your Financial Preparedness: Having a strong credit score, a low debt-to-income ratio, and a stable income history are your best tools for a speedy approval. Lenders see these as indicators of low risk, which can reduce the need for manual review.
Documentation: Being organized and having all necessary paperwork readily available is crucial. Missing or incomplete documents are the most common cause of delays. Have your pay stubs, bank statements, tax returns, and identification ready to submit as soon as they are requested.
Lender Efficiency: Different lenders have varying internal processes. Online lenders are often faster, while traditional banks and credit unions may have longer timelines.
Loan Complexity: A straightforward conventional loan will generally move faster than government-backed loans (like FHA or VA loans), which have stricter requirements and additional layers of review.
In summary, while a personal loan can offer a rapid solution, a mortgage requires patience and preparation. By being proactive and having your finances in order, you can significantly streamline the loan process, regardless of the timeline.