congratulations, your now a home owner. After buying your home, your now responsible for both an asset and liability.

Liability: If you have a mortgage, your home goes on your taxes as a liability, not an asset. This is because the bank, not you, owns the house (to them it’s an asset). It also becomes a liability if the property value goes under what you owe (called an underwater mortgage). The liability of home ownership also includes keeping up with insurance, keeping the property safe from law suits, paying taxes, regular upkeep etc.

Asset: A home, and the land, is an asset because it holds value. It provides a place to live and you’re not losing money in rent. You can hand it down to future generations. And you can use any equity in the home if it increases in value.

To Refinance or Not.

When buying a home, sometimes we get locked into a high interest rate. To refinance something means going back to your lending institute to change the conditions of the loan.  The good thing about refinancing is you may be able to lower your monthly payments, get more cash out of the loan, or change the length of the loan to best suit your long-term objectives.

The problem with a refinance is they usually cost thousands of dollars to process, and puts you farther into debt.  The term underwater means that the loan amount is greater than the value of the property, and that the owner may not be able to keep making the payments. Let’s look at  three reasons why people refinance.

1. Changing the length of time:  The longer you take to pay off the loan, the lower your monthly payments will be.  However, the more you pay in interest in the long run. Many do this to lower their payments, which helps them still live in the house.

2. Changing the amount you borrow.  This can only be done if the banks send out their appraiser. The appraiser determines if the current value is higher than what you owe on the property (called equity). If the difference is significant, than a bank may loan you up to 80% of the difference in value. For example if you owe $100,000 on a home, but it’s appraised at $200,000, the bank may loan you up $80,000 in cash, on top of your current loan. The bank will also add the processing fee (often up to 10% of the cash amount), which then changes the amount you owe each month (or even lengthen the terms of the loan).  This may be a good way to get extra cash, but also causes many problems by forcing people to lose their homes later on.  The reason is people will spend this new money foolishly, and then not be able to afford the higher mortgage payments a few years down the road.

3. Lower your monthly payments.   This does not mean the bank lowers the amount you owe. It just means they either make the length of time longer, or by lowering the interest rate on the loan.  By making the term longer (from 15 year to 30 year), or lowering the interest rate (say 5.5% to 4.3%) they can lower the monthly payments. This is because less goes to interest payments, and lowers the amount paid in primary each month.  Now obviously the best deal for the bank is a longer loan, but sometimes you can renegotiate both. Because it’s better for the bank to have you making payments than to go through a foreclosure.

Foreclosure and Short Sale

When it comes to real estate, the truth is banks technically own most of the properties on the market.  When you get a loan on a property, or other large purchase, the bank keeps the ownership papers. Which they sign over to you when you finish paying the loan.  If you stop making payments, the bank has the right to take ownership of the property.

The odd thing is, a foreclosure and short sale can be good or bad. Depending on your perspective. For the home owner its a tragedy. For the buyer its a blessing (because sometimes they get better deals).

So basically, a foreclosure is when a bank or lending institute takes back a property when someone is unable or unwilling to make the payments on their mortgage.  This process is called foreclosure, and typically will not start until someone is 3 months behind on payments.

Some institutes will work with you to refinance, or to change the conditions of your loan to help make payments.  When a property is foreclosed, the bank will typically sell it right away. They list the property as a “bank owned” property.The laws change state-to-state, and country-to-country.  Some states offer more protection to the home owner, some to the home owner (banks). As far as time, the foreclosure typically takes just a few months to complete. But it can drag out, in court, for years. Some states will even allow the banks to come after the previous owner for the balance of what is owned after it’s resold.

A short sale is when an owner can sell the property before it’s foreclosed on.  This allows the bank to sell the property, while the owner is released from the obligations of a legal foreclosure (which goes on our credit history).  However, these short sales are never really short.  Because different and more complex rules apply. For example – The previous owner or renter may still live in the property. The bank has to decide if they want to sell to the new buyer at a lower price. The new buyer has to process many legal documents and prove they can afford the property etc.

After Buying Your Home Conclusion:

There are many moving parts to home ownership. As a renter, the landlord typically covers most of the costs, maintenance, insurance, taxes etc. All we have to do is pay rent. As a home owner we take on all responsibilities. Obviously, paying cash for a property would be best, since it puts us in control. But since most of us need a loan, it’s just part of the process. My advice is to pay the mortgage off as quick as possible, maintain the property well, and try to keep your neighborhood up by being an active member in your community. Your house, family and pocket-book will be thankful.