Getting ready to buy a home can be both an exciting and a stressful time. Finding the right property for the right price, contract negotiations, mortgage considerations and tax ramifications all require a thoughtful approach, which can be especially daunting if you are new to home-buying.

A home purchase can be one of your largest investments, so it’s important to arm yourself with the right information when navigating this process. Here are some things you may want to think about beforehand.

Cash is often king

In “hot” real estate markets, cash buyers often come out ahead. Even if you ultimately intend to put a mortgage on your new home, presenting a cash offer can be an important factor in determining whether the home becomes yours.

If you choose to offer cash and want to close quickly – and without disrupting your long-term investment plans or generating unnecessary capital gains – consider taking a loan against your portfolio.

A line of credit against your portfolio can be put in place in a matter of days – and you pay nothing to set it up. In fact, there are no fees; you only pay interest on amounts you draw against the line while those amounts are outstanding. You can repay the loan over time, or you can repay it fully if you decide to take a mortgage loan on your home.

Match your loan to your expected time in the home

Many people instinctively prefer a fixed-term loan, whether 15 or 30 years. But if you expect to be in a home for a shorter period of time, or if your income varies – and especially if you can afford to repay the loan at any time – consider an adjustable-rate mortgage. The annual percentage rates on adjustable-rate mortgages tend to be lower than on fixed-rate mortgages, and the payments on interest-only adjustable-rate mortgages are generally lower as well since they don’t include any principal payments. And during the period that you are only paying interest, many interest-only loans reset your monthly payment lower if you prepay principal (rather than reducing the number of payments you’ll eventually make, as is common with amortizing fixed-rate loans).¹

Look at all the terms, not just the rate

While the mortgage rate is the number on which we all tend to fixate, consider other elements of a mortgage loan when making your choice. Does your lender charge fees for closing, locking a rate or extending a rate lock? A low headline rate can increase with the imposition of “stealth” fees. Will your lender hold the loan on its own balance sheet, or will it sell the loan to a servicer? If you want to modify the loan later, or if you run into an issue making payments, your original lender is likely to be easier to deal with than a servicer with whom you have no relationship.²

If you have an adjustable-rate loan, how high and how quickly can the rate increase? Some adjustable-rate loans allow for a five-percentage-point increase in the first adjustment – so your 3.25% adjustable-rate mortgage can increase to up to 8.25% at its first reset point if interest rates have increased significantly. Is that a risk you want to take? Other loans cap the first adjustment at a two-percentage-point increase (so that 3.25% rate could only rise to 5.25%). Even if you may be paying an eighth- or a quarter-point more today to cap the first adjustment or to fix the rate for the term of the loan, it might be worth it in the future.

Be thoughtful about taxes when borrowing

As a married couple filing jointly, you can deduct the interest on up to $750,000 of debt used to acquire a home ($375,000 for those married filing separately) – typically this is mortgage debt, but it can include other types of debt as well. For indebtedness incurred on or before December 15, 2017 (and certain refinancing of the indebtedness), this limit is $1 million, or $500,000 if you are married and filing separately.³

If you want a new loan against your home of more than $750,000, consider using the proceeds of the loan to invest in securities rather than to “acquire” the home or to spend for other purposes. Under a different provision of the Internal Revenue Code, interest on money you borrow to purchase taxable investments may be deductible to the extent you have net investment income.

So if you borrow money against your home and use the loan proceeds to purchase taxable investments, interest on the entire amount of the loan may be deductible as an investment interest expense deduction and not as a home acquisition indebtedness deduction. Note that in order to qualify for this deduction, you can’t invest in tax-free bonds, and qualified dividend income is generally not considered investment income for this purpose. Given the complexities involved, it may be helpful to consult a tax professional that can help you plan an optimal strategy to finance your home.

What does refinancing a home mean?

Refinancing your home essentially means replacing your existing mortgage with a new one, typically with different terms. Refinancing can sometimes help homeowners reduce their monthly payments, lower their interest rates or gain access to cash.

Why do people choose to refinance their homes?

There are a number of reasons why you might decide to refinance your home. Here is an overview of some of the potential benefits of refinancing:

• Reducing interest rates: If the current interest rate is lower than it was when you set up your mortgage, you might be able to refinance to get a lower interest rate. This will save you money on your monthly payments.
• Changing the length of a loan: Shortening your loan term can save you interest over the years. For example, if you signed a 20-year loan but now you have the money to afford a higher monthly mortgage payment, you might want to consider shortening your loan term to 15 years or 10 years. In contrast, you can also lower your monthly payments by lengthening your loan term.
• Switching the type of loan: There are several different types of mortgages. If your financial situation or the market has changed, it might make sense for your mortgage to reflect that. For example, if you signed an adjustable-rate mortgage, you might think about switching to a fixed-rate mortgage to provide more predictable monthly payments and protection against rate increases.
• Tapping home equity: Another reason to refinance a home could be to gain access to money through what is called a cash-out refinance. This can be a helpful option for people whose home value has increased since the time when they set up their previous mortgage. A cash-out refinance replaces your original mortgage with a new loan that reflects your home’s increased value. Homeowners sometimes use funds from cash-out mortgages to pay for home improvement projects, to pay off debt or for other large expenses.
• Reflecting changes in a household: People sometimes refinance their mortgages if their household situation has changed. For example, you may want to add a new partner or housemate to a mortgage or remove someone from a mortgage after a divorce.

Potential downsides of refinancing a home

Refinancing a home is not without potential downsides. There can be significant costs that come with refinancing, including application fees, appraisal fees and attorney fees. Sometimes these costs are negotiable, but they can still add up. You should be sure that the money you will save from refinancing won’t get eaten up by costs associated with the refinancing process.

Additionally, you should ensure that your refinance aligns with your long-term financial goals. Avoid refinancing solely for lower monthly payments if it extends your loan term unnecessarily. Conversely, if opting for higher payments to pay off your mortgage faster, confirm you can handle the increased financial burden as missing payments could negatively impact your credit score.⁴

Selling a home

Don’t forget that if you are selling a primary residence – and you have lived in it for at least two of the past five years at the time of the sale – you can exclude up to $250,000 of gain from your income for the year of the sale (or up to $500,000 for married couples filing jointly). So if you bought your home for $800,000 and are selling it for $1.1 million, you would only owe tax on the $50,000 of gain above this $250,000 exclusion. Note that if you don’t own your home in your name, you may forfeit this exclusion, so it is important to speak with a tax professional when deciding how to own your home.⁵

Make sure you coordinate with all of your professional advisors to ensure you have all the information you need to navigate your home-buying journey.

IMPORTANT INFORMATION

This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.