As we head into peak residential real estate season, you may be thinking about whether it’s the right time to list your home for sale or to go house hunting. In addition to considering how local market circumstances such as job growth, mortgage rates, and tax incentives influence your timing, you also want to think about how selling or buying a home may impact your long-term financial plan. In this article, we explore important questions both sellers and buyers should ask themselves when considering a move.
1. How much will it cost to sell your house?
A good rule of thumb is to be prepared to pay costs of up to 10% of your home price to sell your house. This includes expenses associated with getting your house in shape to show, such as cleaning and painting, realtor commissions, closing costs including transfer tax and legal fees, and repair costs or concessions.
Depending on how long you owned the house and whether it was your primary residence, you may also owe taxes on the profit from your home sale. If you’ve owned your home for at least two years and lived in it for at least two of the last five years, you can exclude up to $250,000 of the profit as an individual or $500,000 as a married couple, if you file a joint tax return. If you’ve owned your home for at least one year, any profit will be taxed as a long-term capital gain.
2. Where would you go next?
If you’re planning to buy another home, consider the cost of maintaining that new house on an annual basis, from mortgage related expenses and property taxes to maintenance and repairs.
If your plan is to rent, you may need to figure out how to manage the potentially large inflow of cash from the sale of your home. This inflow should be incorporated into your long-term financial plan and aligned with your goals, which for many of you is retirement. If you allocate some of this cash to investments, it may be worthwhile to seek guidance from a Financial Advisor on the most efficient way to deploy it in such a volatile stock market.
3. How will you pick a buyer?
The attractiveness of an offer may depend on your risk tolerance and your timeline. Cash offers may be attractive because they don’t depend on bank underwriting or appraisals and can often be completed more quickly. Though cash offers may mean a lower selling price, they may be more likely to close without issues.
Many areas of the country are experiencing a seller’s market, where there are more prospective buyers than there are homes for sales. When housing inventory is low, buyers have fewer choices and may have to pay higher prices or be more willing to make concessions. Understanding how these factors impact your financial plan can help you make bidding and buying decisions with greater confidence.
1. How do you decide how much to bid?
Often, the response to this question is, “How much can you afford?” If you anticipate getting a mortgage, the Federal Housing Administration generally uses a 43% debt-to-income (DTI) ratio as a guideline for approving mortgages. Keep in mind that getting approved for a mortgage does not guarantee you will be able to afford the payments, so it is critical to be sure you understand, and are comfortable with, the level of financial risk you will be taking on.
Once you understand how much you can afford, you will have a clearer picture of your price range and how much you can bid.
2. How much will you need to set aside as a down payment?
If you are able to put down 20% of your home price, you may be able to avoid paying private mortgage insurance. There may, however, be situations where you opt against a 20% down payment. Your Financial Advisor may be able to advise you on what down payment makes the most sense for your situation.
3. What other costs do you need to budget for?
The costs associated with buying a house go beyond the down payment and the monthly mortgage payments. You will need to factor in expenses such as closing costs, which are all the fees associated with the mortgage, as well as title insurance, NY state mortgage tax and mansion tax for purchases over $1 million, property taxes, homeowner’s and mortgage insurance, homeowner’s association fees, and relocation expenses. You will also need to plan for routine and unexpected home maintenance and repairs.
As you can see, the financial implications of selling or buying a home go far beyond the purchase price and can have long-term impacts on your financial plan and overall wealth strategy.
When it comes down to it, the best time to sell or buy is the time that works best for you. Selling or buying a home is not just a financial decision, but a personal one. It’s important to make sure the timing makes sense for you from the standpoint of lifestyle and emotional preparedness. Whether you’re thinking about selling or buying a home, working with a Financial Advisor who understands your circumstances, priorities, and long-term goals can help you formulate a plan that is designed to protect your vision of the future.
About the Author
Richard Bloom, CFP® is a Financial Advisor with The MayerGelwarg Group at Morgan Stanley. He works with our clients to gain a full understanding of their financial goals and coordinates wealth planning analyses on their behalf to clarify the long-term financial implications of the decisions they make today. Rich is a Certified Financial Planner™, earning that designation through New York University, and is an active member of the Estate Planning Council of New York City and the Financial Planning Association of New York. He can be reached by email at Richard.Bloom@morganstanley.com or by telephone at (212) 893-7597.
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.
Richard Bloom is a Financial Advisor in 1290 Avenue of the Americas, New York, NY 10104 at Morgan Stanley Smith Barney LLC (“Morgan Stanley”).
This article has been prepared for informational purposes only. The information and data in the article have been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.
Richard Bloom may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration, http://brokercheck.finra.org/Search/Search.aspx.
© 2022 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 4399252 2/2023