Your guide to buying a home
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).
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.
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
You can deduct the interest on up to $750,000 of debt used to acquire a home—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.
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 invest can be deductible to the extent you have investment income.
So if you borrow money against your home and use the loan proceeds to purchase investments, interest on the entire amount of the loan can 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 you can’t offset the interest expense with qualified dividend income.
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). 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 advisor when deciding how to own your home.
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.
This material is for information 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”). The views and strategies described in the material may not be suitable for all investors and are subject to investment risks. Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
Legal Entity and Regulatory Information. J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
Bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
This document may provide information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). The agreements entered into with JPMS, and corresponding disclosures provided with respect to the different products and services provided by JPMS (including our Form ADV disclosure brochure, if and when applicable), contain important information about the capacity in which we will be acting. You should read them all carefully. We encourage clients to speak to their JPMS representative regarding the nature of the products and services and to ask any questions they may have about the difference between brokerage and investment advisory services, including the obligation to disclose conflicts of interests and to act in the best interests of our clients.
J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document. JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.
© 2021 JPMorgan Chase & Co. All rights reserved.