In most real estate transactions, homebuyers and sellers hire real estate agents to represent them. In many cases, buyers and sellers never interact with each other; the agents work as intermediaries and do all the negotiation.

Every now and again, however, you may run into the acronym FSBO on your house hunt. This means “for sale by owner” — a seemingly minor detail that impacts the sale significantly. 

If you’re wondering what FSBO is, you’ve come to the right. This article offers a complete overview of FSBO, including: 

• What is FSBO in real estate?
• MLS listing vs. FSBO
• Why homeowners sometimes choose FSBO
• Considerations to make during an FSBO transaction
• How home buyers can potentially benefit from FSBO deals
• The challenges of FSBO
• Frequently asked questions about FSBO

What is FSBO in real estate?

FSBO refers to a method of selling real estate where the owner handles the entire selling process end-to-end without using a real estate broker. Instead, they’re responsible for all of the tasks associated with selling a house, including marketing the property, taking photos, making yard signs, listing it, negotiating with buyers, and closing the deal.

All kinds of properties — both single-family and multi-family homes, including standalone houses, condos, apartments, and townhouses — can be sold directly by the owner. However, the vast majority of real estate deals are not made this way. 

In fact, the latest data from the National Association of Retailers (NAR) has FSBOs accounting for just 10% of home sales, with the typical FSBO home selling for $225,000 versus $330,000 with an agent.

MLS listing vs. FSBO

When a homeowner decides to sell their property with the help of a broker or real estate agent, the real estate company typically lists the property in a multiple listing service (MLS) database. There are numerous MLS databases throughout different areas and regions, and each is a network of new listings designed to help real estate professionals. 

When a property goes into an MLS database, the listing typically includes details like square feet (sqft), location, features, and asking price. This allows other real estate agents to access and share information with their clients, resulting in greater market exposure. 

In an FSBO transaction, the property owner assumes the full responsibility of marketing and selling the property to potential buyers. Since they don’t use a real estate agent, FSBO properties typically do not appear in an MLS. 

Instead, property owners usually explore alternative means of advertising FSBO properties like social media, classified ads, open houses, and online platforms like Zillow, Redfin, or Trulia. That said, some MLS systems do offer limited services to FSBO sellers in exchange for a listing fee. 

Why homeowners sometimes choose FSBO 

Any time you explore a new home that’s for sale, you should always think about why the person is selling their house and what their selling strategy might be. This is especially important with an FSBO property, which deviates from the traditional selling process.

With that in mind, let’s examine some common reasons a homeowner may choose to market their property FSBO instead of using an agent.

Save money

One of the top reasons why homeowners choose FSBO is to save money. In most transactions, real estate brokers ask for 5% to 6% of the sale price, with half going to the listing agent and the other half going to the agent representing the buyer. By selling the property themselves, homeowners can avoid paying a real estate commission and pocket the savings instead.

If a person opts to sell their property FSBO to pinch pennies, it may indicate they are a tough negotiator and looking for the best possible deal. In such cases, you should go in ready for a potential price battle and round up as much comp data as you can. 

Maintain control over the sales process

Working with a selling agent requires giving up significant control over the selling process. Naturally, not all sellers are comfortable with this.

By selling a property FSBO, the homeowner can set the listing price, retain control over the property’s appearance, and negotiate directly with buyers — all without relying on an agent. 

Control the market 

Sometimes homeowners want to avoid exposing their property to the general market and target their advertising to a specific group of buyers. FSBO helps reach potential buyers without listing the property on an MLS and attracting the attention of every real estate agent under the sun.

Homes for sale by owner: Considerations to make

In a traditional real estate transaction, buyers often leave the heavy lifting to their real estate agents. But when buying a property for sale by the owner, the process requires more diligence. In addition to securing a mortgage, here are a few other factors you need to keep in mind when you’re considering buying a FSBO property.

Pricing

First things first: Research the market and ensure the price is fair and in line with similar properties in the area. Here, it helps to get an appraisal or consult with a real estate agent if possible. According to the NAR, 16% of FSBO sellers struggle with getting the price right. 

Property inspections

Always insist on a comprehensive home inspection before agreeing to any purchase. This holds true regardless of whether you are completing an FSBO or traditional sale. Asking for an assessment can help reveal potential issues that a seller may be trying to hide — like malfunctioning wells, septic systems that are past their useful lives, or structural damage.

Negotiations 

Sellers often try to avoid dealing with real estate agents altogether when putting their houses on the market as FSBO. As such, you may have to get in the trenches and negotiate directly with the seller about things like price, contingencies, and repairs. Before diving in, brush up on your real estate negotiation tactics.

Escrow and closing

In an FSBO transaction, the roles of escrow and closing are similar to a traditional sale. However, there are some key differences to be aware of. 

In an FSBO sale, the seller and buyer must decide how to handle the escrow process. The two parties can use a third-party escrow company or attorney to facilitate this unless they want to handle it themselves.

What’s more, during closing the seller is responsible for coordinating all closing details — like scheduling the closing date, preparing all of the necessary documents, receiving signatures, and addressing last-minute concerns. It’s also necessary to meet in person and finalize the sale. 

Unpredictability

All real estate transactions have a degree of unpredictability to them. When you remove professional real estate agents from the process, things can get a little more chaotic. 

To switch to the first person for a second, when I was buying my first house, I was eying a property that was a FSBO listing. After some tense negotiations, we finally had a deal. The sellers were a married couple; the house was in the wife’s name, but the husband didn’t want to sell. 

Then things got weird. Even though the listing included a commission being paid to the buyer’s agent, the sellers started trying to weasel out of that clause. After more back and forth, the seller ultimately withdrew from the deal. It was an emotional rollercoaster and a waste of time.

When two real estate agents are involved in a deal, they work together to bring it to the finish line expediently. There’s less likelihood of funny business.

The benefits of FSBO for buyers

While people often think of FSBO transactions as being beneficial to the seller, there are some advantages for savvy buyers who can navigate the process and execute a transaction. 

Less competition

From a homebuyer’s perspective, an FSBO transaction means less competition because the property is usually not included in MLS listings. With less competition comes greater negotiation power, which means you could wind up with a better deal.

Personal connection

When dealing directly with a buyer, you can connect more personally. This can establish trust and understanding and help reach a price that both parties can agree to. 

To illustrate, suppose you need a family home in a safe neighborhood with a decent school system. You discover a seller who wants to see their home go to a family that will appreciate the property and put it to good use. In this case, forming a connection with the buyer could help facilitate an easier sale. 

Direct negotiation

In an FSBO transaction, you or your real estate agent can negotiate directly with the seller. This can potentially lead to more flexible and personalized negotiations without someone standing in the way and potentially complicating the process.

The challenges of FSBO

Despite offering a more direct and intimate buying experience, FSBO has several challenges and drawbacks for buyers. Here are a few reasons why buyers tend to struggle when they buy directly from an owner.

Negotiating without third-party representation

The negotiation process goes more smoothly when two licensed real estate professionals with experience closing deals are the ones doing it. In FSBO deals, the buyer may be disadvantaged if the seller has more knowledge or experience negotiating. 

Some buyers may also be uneasy about working with sellers without a neutral third party. This can create trust issues, making it harder to reach a deal. Sellers also may not provide as accurate or trustworthy disclosures. Unfortunately, verifying disclosures on your own may be challenging.

Having less market information

Real estate agents have deeper access to market data and local economic conditions than you do. That being the case, it’s typically much more challenging for buyers to determine a property’s actual value. 

Buyers who choose to move forward with FSBO transactions should consider going in with as much data as possible. Even better, consult with local authorities for information about the property and surrounding area. 

Handling emotional attachment 

Selling a home can be an emotional experience, making it hard to negotiate from a business standpoint. It’s common for sellers to throw curveballs into the equation by changing prices or terms, being flakey, and otherwise attempting to back out of deals.

FAQs for FSBO homes

Thinking about pursuing a FSBO property. Here are some answers to commonly asked questions.

Are foreclosures different from FSBO transactions?

A foreclosure is a different type of transaction. It occurs a homeowner defaults on their mortgage payments and the lender takes legal action to repossess the property and recover their outstanding debt. While a homeowner may choose an FSBO sale to save money, it does not necessarily mean they are financially distressed or in danger of foreclosure. 

How does an FSBO impact the buyer’s agent?

As a buyer, you can still work with an agent when purchasing an FSBO property. However, it’s up to the property owner to decide whether to negotiate with a real estate agent and pay them a commission. 

If you decide to use a buyer’s agent during an FSBO transaction, ensuring that the seller will agree to an agent commission ahead of time is critical. Sellers often try to get out of paying buying agents, leading to disputes and legal issues. 

Do mortgage lenders accept FSBO transactions?

Lenders do accept FSBO transactions. As such, you’ll still have to go through the normal mortgage application process.

Without a real estate agent, the lender will most likely require an independent appraisal to ensure the property’s value and sale price are accurate before issuing a loan. You can also expect the lender to complete a title search, review the contract and other documentation, and verify proof of funds for the down payment and closing costs. The lender may also need to work with the seller to get documentation and complete the mortgage process. 

What consumer protection services are available to buyers during an FSBO sale?

All purchasers are entitled to various consumer protections to ensure a fair and secure homebuying process. This includes the right to review property disclosures, inspection contingencies, financing contingencies, and the right to conduct a title search. 

In addition, buyers can hire a real estate attorney to review the purchase contract and use a neutral third-party escrow service to hold funds. FSBO sellers must also comply with state and federal consumer protection laws, and fair housing laws which prohibit discrimination based on race, color, sex, religion, disability, national origin, or familial status.

What is a flat fee MLS listing?

A flat fee MLS listing is a real estate service that allows homeowners to list their properties in an MLS database for a one-time, flat fee instead of paying the traditional commission fees to realtors.

The bottom line: Should you buy an FSBO house for sale?

The vast majority of real estate transactions take place between licensed real estate agents. But during your search, you may find a dream house listing in a top market like New York, Chicago, or California with an FSBO acronym attached to it. Should that happen, only you can decide whether you want to move forward with this type of process. 

While FSBO transactions are more challenging, they can be a walk in the park if both sides come to the table organized and ready to make a deal. It all depends on the property, the seller’s mindset and strategy, and the buyer’s willingness to negotiate and ask the right questions. 

We get it: Buying a property is tricky, and there are countless pitfalls along the way. While research can help, sometimes sites like Realtor.com don’t tell the full story about a property. 

Before you start searching for your first property, we recommend checking out our free guide for first-time homebuyers.

When you’re buying a home, it’s easy to get caught up in focusing on things like a property’s appearance, price, and location. But homebuyers also need to carefully consider other factors, like the water you’ll have access to.

Unless you’re a robot or an advanced artificial intelligence algorithm, you need water to survive.  After all, water permeates almost every part of our lives. We use it for drinking, cooking, cleaning, growing plants and vegetables, and countless other tasks — which is why it’s critical to have access to clean, affordable, and reliable tap water that comes out of a faucet at your new place. 

When you’re buying a new home, you have the choice between whether you’ll be drinking and cleaning with well water or city water. Read on to learn what well water is, how it works, its pros and cons, and important safety considerations. 

What is well water?

Well water originates from a deep hole or shaft beneath the surface of the ground. It can come from different underground sources like aquifers, where water sits in permeable rock formations or porous materials such as sand or gravel. 

Not everyone in the United States has access to well water. Roughly 43 million people — 15% of the U.S. population — use private domestic wells as their source of drinking water. In most cases, you’ll find well water in rural or suburban areas that lack municipal infrastructure. 

While it’s possible to install a well in an urban environment, you’ll likely need to obtain permits, licensing, and inspections to install one.

What is city water?

City water comes from a municipal water system. Such systems contain water that originates from local sources like lakes, rivers, underground wells, and reservoirs. The sources that contribute to each city’s water system vary by location. 

Unlike well water, city water goes through several rounds of treatment and sanitation to ensure it’s safe for consumption and other uses. 

Some examples include: 

• Sedimentation, where water sits in large basins, heavier particles sink to the bottom, and clean water rises to the top.
• Filtration, which involves passing water through sand, gravel, and carbon filters to remove impurities. 
• Disinfection, the process of using chlorine and chloramine to kill harmful microorganisms like viruses, bacteria, and parasites. 
• pH adjustment, which involves adjusting the pH level of the water to optimize taste and reduce corrosion in the distribution system.  

When using public water systems, homeowners have little to no direct say as to how the city stores, treats, and transports water. So, if you’re considering purchasing a home that uses city water, you’ll want to research local water and infrastructure quality to ensure it’s safe. You may also need to invest in private filtration systems to purify the water before use. 

For guidance, the U.S. Environmental Protection Agency (EPA) offers abundant water data and reports that you can use to find information about water quality in your community.

How does a well work?

Unlike a municipal water system, a well generates water on-site — meaning it’s a private, decentralized mechanism and the property of the homeowner.

A well contains several mechanisms, including: 

• Casing to ensure structural integrity and prevent the well from collapsing; well casing may include steel or PVC.
• Screens, which allow water to enter the well while keeping out debris and larger particles.
• Pumps that collect water and bring it to the surface; the two most common types of pumps are submersible pumps and jet pumps, which rest above ground.
• Holding tanks — or cisterns — which store water before transporting it to the house for drinking, irrigation, or other household needs. 

The depth of the well depends on the location of the underground aquifer or water table, or the point where the ground becomes saturated with water. 

Three types of wells to know about

There are several types of wells in the U.S. which can vary depending on the region and geology. As you continue the homebuying process, it’s important to have some familiarity with the most common kinds of wells. 

1. Drilled wells

Drilled wells — which are built using a drilling rig — are the most common type of well for U.S. homes. They reach deep into the earth to access groundwater. Depending on the location, drilled wells can run from a few tens of feet to hundreds or even thousands of feet. 

2. Dug wells

Dug wells are shallow wells that are excavated either by hand or machine. They typically contain a wall of stones, bricks, concrete, or tiles. Most dug wells are less than 30 feet deep. 

3. Driven wells

Driven wells use pipes and casing to reach water tables. These are common in areas with sandy or loose soil and in areas with shallow water supplies. 

Some less common wells you may want to research a bit include mechanically bored wells, hand-dug wells, and jetted wells, which use high-pressure water or air to force the casing into the ground. 

What are the pros and cons of having private well water?

The pros

• Well water comes directly from underground sources like aquifers or water tables. Because of this, wells are often free from additives like chlorine and fluoride.
• Since well water doesn’t usually rely on chemicals, it may have a fresher and more natural taste than city water — especially if you use an additional filtration system.
• Well water systems often use little to no energy. As a result, they have a lower environmental impact than large-scale water treatment and distribution systems.

• With proper management and maintenance, wells can be sustainable water sources. However, monitoring your well and practicing responsible water use is essential for ensuring sustainability. This is especially important in areas with water scarcity and high demand.
• Using a well means your home won’t rely on a municipal water system. As a result, you can continue receiving water during local emergencies and outages — as long as your property and well infrastructure remain intact, that is. 
• As a well owner, you have control over your own water supply. This means you can test your water for quality whenever you want. You can also make adjustments to improve its quality and monitor its usage — like installing a reverse osmosis system or a UV water purifier. 

The cons

• Wells are vulnerable to droughts. For example, many wells in Texas are currently running dry following the state’s recent heat wave. 
• Contaminants can enter wells from nearby septic systems or agricultural runoff. Drinking contaminated well water can lead to serious illness. Common contaminants include coliform bacteria, microorganisms, radium, heavy metals, organic chemicals, fertilizers, radionuclides, and fluoride. Well systems can also be contaminated by human activities.

• As a homeowner, you must manage and maintain your well water. But not all homeowners want the responsibility of keeping their water supply up and running, and that’s perfectly okay. If you prefer a more hands-off approach, city water may be a better option.
• Owning a well can potentially limit your ability to build other structures on your property. When buying a home, find out where the well resides to avoid construction disturbances and delays down the road. Of course, you can always relocate the well to accommodate construction plans. But that’s about as easy and affordable as it sounds.
• Wells are vulnerable to contaminants from disasters like floods and hurricanes. For guidance, check out the U.S. Centers for Disease Control and Prevention (CDC) safety precautions for disinfecting wells after a disaster.
• If your water has high levels of magnesium and calcium ions, this can lead to water hardness and issues like limescale buildup in appliances and pipes. Well owners with hard water may need to use water softeners; otherwise their pipes and appliances can degrade, potentially leading to catastrophic problems. 

Is well water safe?

New homeowners often assume that wells are perfectly safe to drink from. But without the proper treatment, they can contain high levels of harmful substances — like E. coli, pesticides, heavy metals, harmful bacteria, and animal waste. Consuming contaminated water can lead to gastrointestinal illness and other health risks. In fact, a recent United States Geological Survey (USGS) study reveals that roughly 23% of wells contain one or more contaminants at a level that can cause potential health effects.  

Considering this, well water can still be perfectly safe to consume and use around the house — as long as you follow the right safety protocols. Well water safety depends on the following factors.

The surrounding environment 

It’s important to consider the well’s location. Wells that are near septic systems, hazardous waste centers, and industrial sites can potentially be unsafe due to pollutants. Homeowners in such situations should take active measures to fortify their wells and potentially add additional filtration and purification methods.

The well’s construction 

Proper well construction is necessary for maintaining superior drinking water quality. The well must contain a seal to prevent surface water from getting inside and contaminating it. 

Proper maintenance 

Wells can degrade over time or break due to movement from the earth or nearby construction. As such, it’s critical to inspect your well periodically and keep up with maintenance. Wells that sit for long periods of time without inspection or upkeep can become unsafe.

Treatment options for well water contaminants

While it’s impossible to completely prevent wells from contamination, there are several things you can do to remove or reduce the presence of harmful substances. 

• Reverse osmosis is an effective water purification method for removing contaminants like minerals, nitrates, nitrites, pesticides, bacteria, and viruses. It involves passing water through a semipermeable membrane to remove impurities and cleanse the water. Typically, reverse osmosis systems are located either in the house or near the point of use.
• Aeration is a purification method that involves releasing air into the water. You can use aeration to eliminate radon, which is a naturally occurring radioactive gas. 
• Water filtration systems can remove things like sediment, chlorine, and other common contaminants. They come in various forms like sediment, carbon, and multimedia water filters. Filtration systems sit either in the house or at the point of use. 
• Well water testing can help identify different contaminants and inform you about your water quality. Generally speaking, it’s wise to hire a professional to test your water in a certified laboratory. It’s a good idea to get test results regularly — and especially in the event you detect a change in water color, taste, or odor. 
• Ion exchange systems use resin beads to eliminate ions like manganese, iron, and hardness minerals. An ion exchange system replaces these with harmless ions, like sodium. 

• Oxidation and filtration is yet another method to remove things like iron and hydrogen sulfide. This process involves converting substances into solid particles and then filtering them out.
• Chemical disinfection (e.g., with chlorine) can kill microorganisms and bacteria in well water. However, some chemicals can be less effective against things like protozoa and parasites. To ensure safety, always use proper dosing and monitor your water quality. 
• Distillation involves heating water in order to create steam and then condensing it back into liquid. This is a great way to remove contaminants like heavy metals and chemicals. 

Maintenance costs for wells

One of the nice parts about having a drinking water well is that you don’t have to pay monthly usage fees. On average, residential customers in the U.S. pay around $54 per month for water. But in some areas like California, water can exceed $80 per month. 

That said, well owners still need to factor in maintenance costs which can eat into savings over time. Here are some costs to keep in mind.

Inspections

To ensure your well is functioning properly, you need to schedule routine inspections. During an inspection, a technician will inspect your well and ensure components like casing, pumps, and seals are in proper condition. The cost of a well inspection depends on your location, the well size, and the extent of the inspection.

Water testing

In addition to inspecting a well system, you’ll also need to test the water regularly. This is necessary for detecting and eliminating harmful contaminants — and otherwise making sure your water is safe to drink and won’t corrode your pipes.  

Repairs

Wells may experience wear and tear as time passes, requiring extensive repairs. For example, you may need to repair or replace pump mechanisms or well casing. If the pump runs on electricity, you might need to replace components like pressure switches or control boxes.

Well cleaning

Wells can collect sediment and bacteria over time which can adversely impact water quality. Homeowners should periodically clean their well to keep it running in optimal condition.

Sealing 

Wells that have contamination issues may require resealing or sanitation. Costs for this kind of work can vary depending on the scope of the job. 

Relocation 

In some cases, local health departments or other agencies may require homeowners to relocate their wells due to public safety issues, zoning and land use regulations, contamination concerns, or infrastructure development, among other things. This isn’t common, but if it happens, it can require extensive consultations, assessments, and negotiations to address. Unfortunately, in some instances, the homeowner may have to foot part or even all of the bill. 

Replacement

The lifespan of a well depends on its type, local geology, and how well it’s taken care of. For example, a drilled well with proper installation and maintenance can potentially last for around 100 years. On the other hand, a driven well may only last 10 to 30 years. 

With this in mind, check the age of a well before buying a house to see if it will require replacement under your care. Replacing a well may be expensive, but it can also enhance your property’s value. 

Should you choose well water or city water?

There’s no right or wrong answer. It largely depends on where you want to live and whether you care about having to manage a well after purchasing a property. While maintaining a well might seem complex, it’s actually pretty simple with the right guidance, budgeting, and maintenance strategy.

At this point, you have a decision to make: Take on the responsibility of owning a well or opt for city water and a more hands-off approach to water management. 

Struggling to decide which option is right for you? Home Approach is standing by to advise. To receive a consultation from one of our experts, sign up today. 

Before you become a homeowner, it’s essential to think about how much responsibility you want to have when it comes to managing your property. 

Are you the type of person who likes to mow their lawn on a Saturday afternoon, cold beverage in hand? Or would you rather write a check and have someone else worry about it?

If you prefer a more hands-off approach to homeownership, you may want to look to buy a property that’s part of a homeowner’s association (HOA). 

In this post, we’ll examine how HOAs work, what they cover, why they’re important, and how much you can expect to pay should you become part of an HOA community.

What is a homeowner’s association?

An HOA is an organization or entity that manages a community or residential development like a condominium or neighborhood. They typically are managed by an HOA board of directors, which includes elected members who live in the community. Most communities have HOA elections each year.

HOAs are responsible for overseeing various responsibilities, including infrastructure, aesthetics, maintenance, and shared common areas within a community. They act on behalf of the property owners and work to keep the community fair, orderly, and under budget. 

In addition, associations enforce HOA rules, or covenants, conditions, and restrictions (CC&Rs). These governing documents keep the community in proper condition and help residents avoid conflicts because everyone knows what’s expected. 

Today, roughly 22% of homes participate in an HOA — a figure that has remained consistent over the last decade.

What are HOA fees?

Homeowners association fees are regular payments homeowners who live in HOA communities have to pay. In most cases, homeowners distribute monthly dues to cover the costs of managing and maintaining the common areas and shared amenities within the community.

In some cases, HOA fees may also cover utilities like water, electricity, and cable or internet. However, HOAs can vary across different communities. Before purchasing a property, be sure to find out what your HOA fees cover so that you don’t wind up overpaying for services. 

Are HOA fees mandatory?

HOA fees are generally mandatory for homeowners who live in a community or development with an HOA association. By purchasing a property within a condominium or community association, you automatically become an HOA member and must pay monthly HOA dues.

While you cannot buy your way out of an HOA, there are some scenarios where homeowners can gain a bit more control over their properties. For example, some communities offer non-mandatory HOAs with optional memberships and fees. However, non-members may not be able to access common amenities like community pools or fitness facilities. 

In some cases, the homeowners in an established community may also vote to dissolve their HOA. However, this is rare and typically requires both a majority vote and legal counseling.

If you do not wish to participate in a community with an HOA, the easiest thing to do is purchase a property that’s not part of one. 

HOA fees vs. special assessments

Homeowners in HOA communities contribute financially to the area’s upkeep through both HOA fees and special assessments. However, these are different types of expenses.

Special assessments are one-time or occasional payments that homeowners must make in addition to paying HOA fees. They typically occur when the HOA faces unexpected or significant expenses that exceed what is available in the association’s reserve fund or budget. 

For example, a special assessment may cover major repairs, capital improvement projects, and emergency maintenance like roof replacements.  

What do HOA fees cover?

The specific services that an HOA covers can vary depending on the community’s rules and regulations. But in general, you can expect your HOA fees to cover the following. 

Insurance 

HOA fees typically include insurance coverage for shared structures and common areas. They also include liability coverage for the association.

Security and surveillance

In some communities, HOAs help ensure safety. They may provide security cameras, arrange private security patrols, or restrict access to the community (e.g., with a gate). 

Exterior maintenance 

HOAs often cover exterior maintenance like roofing, siding, painting, parking lots, and structural repairs. They also typically pay for a property management company to oversee maintenance operations.

Administrative expenses 

A portion of the HOA fee goes toward the association’s administrative costs. This may include things like hiring staff members, purchasing office equipment, and paying vendors. 

Amenities 

Communities often have shared amenities like tennis courts, swimming pools, clubhouses, and fitness centers. HOA fees help keep them up and running.

Common area maintenance 

Fees also cover costs associated with maintaining common areas like community gardens, parks, walking trails, green spaces, and playgrounds.

Utilities and services

In some communities, HOAs manage utilities like cable, internet, and electricity. This can make life easier for homeowners by consolidating their bills into one easy monthly payment. 

Reserve funds

HOAs use reserve funds to cover the cost of major repairs, renovations, and expenses. 

HOA vs. no HOA: Cost comparison

Many homebuyers balk at the idea of paying into an HOA at first. But that changes when they do some quick budgeting and think about all of the expenses they might otherwise have to pay entirely on their own. As it turns out, an HOA can actually save you money if it’s affordable. 

With that in mind, here’s a breakdown of some common services that an HOA covers that you’d have to pay for out of your own pocket as a homeowner. 

Swimming pools 

Condominiums and HOAs often have private swimming pools. If you buy a home that doesn’t have an HOA and you want a pool, you will need to cover all the costs associated with maintaining a pool — like water, cleaning, chemicals, and routine maintenance. You may also have to pay more for your homeowner’s insurance policy, too.

Landscaping

It takes a lot to keep a yard looking good. If you want to maintain your property yourself, you’ll need to purchase tools and equipment like lawnmowers, shovels, rakes, and trimmers. Otherwise, you’ll have to hire a landscaper. If your property has trees or other natural resources, you will need to care for those as well. If you live where it snows a lot, you’ll also have to pay to clear your driveway.

HOA fees typically cover landscaping costs as well as snow removal during the winter months — saving you time and money. 

Upkeep and repairs

Without an HOA, you’ll be responsible for keeping up both the interior and exterior of your property. This includes things like painting, ensuring your roof and chimney are in good shape, pest control, and maintaining your walkways and driveway.

Do HOA fees build equity?

Equity is the difference between the market value of your property and what you owe to the bank. Unfortunately, HOA fees do not directly build equity for a homeowner like mortgage payments do. That’s because HOA fees go to the HOA association — not the lender that owns your mortgage.

That said, HOA payments can directly impact your property value. When an HOA is doing a great job at managing the community, HOA fees can potentially boost your equity, albeit indirectly. As a result, it’s critical to purchase a property with a responsible and financially secure HOA that is committed to doing its best to increase the value of community properties.

How HOA fees impact taxes

Unfortunately, HOA fees are generally not tax-deductible for homeowners. The Internal Revenue Service (IRS) views HOA fees as personal living expenses instead of tax-deductible expenses. 

Despite this, there are exceptions where you can write off a portion of your HOA fees on your taxes. Some examples include owning a rental property within an HOA community, claiming a home office deduction, or when the HOA assesses special fees or assessments for capital improvements.

Do HOA fees increase over time?

Just like pretty much everything else in life, HOAs generally increase over time. For example, you might purchase a property and pay $350 per month in HOA fees at first. But down the line, it’s possible that those costs could balloon to $500 or more due to any of the following factors. 

Inflation and cost of value 

The price of goods and services tends to increase over time due to inflation and the cost of living. HOAs often need to adjust their fees to cover the rising cost of labor, materials, utilities, and other expenses. 

Aging infrastructure 

Large planned communities require a variety of infrastructure like roads, fences, drainage systems, docks, grills, and benches. HOAs may sometimes raise their fees to fund capital improvement projects or fund repairs. 

Market conditions

HOAs are also subject to changing economic conditions in the real estate market. HOAs sometimes increase fees to make up for revenue shortfalls when property values plummet.

Reserve fund planning 

Part of the HOA’s job is to review and adjust reserve fund contributions. The HOA may occasionally raise their fees to ensure financial stability and prepare for emergencies.

Insurance and legal costs

Insurance premiums tend to rise over time, which can impact homeowners’ wallets. In addition, HOAs sometimes must budget for legal disputes.

When purchasing a property with an HOA, you should ask your real estate agent for a breakdown of average HOA payments for your target property. This will help you understand how the HOA’s fees have changed over time, giving you a sense of where they might be heading. 

Average HOA fees: How much can I expect to pay?

Monthly HOA fees can range from a few hundred to thousands of dollars. Right now, the average cost for HOA fees in the U.S. is around $300 per month. But depending on where you end up moving, it can be much higher. With that in mind, let’s take a look at some of the key factors that determine the total cost of an HOA fee. 

Location

The location of your property will directly impact what you pay as an HOA fee. For example, HOA fees tend to be higher in urban areas like New York City or Miami, as well as upscale neighborhoods, tourist spots, and vacation destinations. 

Amenities 

The more amenities you have, the more you can expect to pay in HOA costs. If your community has three or four swimming pools, a golf course, or a modern fitness center, your bill will be significantly higher.

Oftentimes, homeowners wind up paying for services that they occasionally use — like the swimming pool they jump in a couple of times during the summer. Before buying a home, take a look at what you’re paying for and determine whether it’s worth the cost.

Property type

The type of property that you own may also impact what you pay in HOA fees. For example, condominiums and townhouses are usually more expensive than single-family homes because they contain shared areas and amenities. On the other hand, a shared home HOA may only cover things like landscaping, security, snow removal, trash removal, and other basic services, resulting in a lower monthly price.

Community size

Large communities with 10 or 20 buildings tend to have higher HOA fees than smaller ones. That’s because they tend to have more shared spaces, more amenities, and more properties to look after. Larger communities are also more prone to lawsuits, which can result in higher payments.  

The HOA’s financial health

HOAs that lack adequate reserves and efficient planning tend to have less stable fees and higher expenses. Working with a well-managed and ethical HOA can help keep costs under control. 

Tips for managing HOA fees

Whenever you’re joining a new community, you’ll want to stay on top of monthly payments so you don’t draw the ire of your new neighbors or your HOA. Missing payments can also result in collections notices, late fees, and legal actions. Here are some tips that can help you avoid conflicts and enjoy a better quality of life.

Attend HOA meetings

By attending monthly HOA meetings, you can stay on top of community issues and voice your opinion about monthly fees and potential increases. If you can’t attend HOA meetings, ask about digital resources like community bulletins, newsletters, and user dashboards.

Keep a careful record of payments

HOA payments will add up over time, so it’s a good idea to track your overall spending. Keeping careful records can also help clear up discrepancies when they arise. If possible, consider using an online portal so that all payments are recorded in one place.

Budget for payments 

It’s important to be realistic about whether you can afford your monthly HOA payment in addition to all of the other fees you’ll have as a homeowner — like mortgage payments, property taxes, utilities, food, furniture, and insurance. Your HOA payment should fit comfortably within your budget and still leave you enough room for a decent quality of life. 

As a best practice, budget a bit higher to account for any changes to HOA fees or special assessments that may be coming down the road. Pro tip: Always set aside a portion of your savings to cover unexpected expenses. 

Demystify HOA fees with Home Approach

Buying a house can be an overwhelming experience with many different figures and details to consider. If you’re having a hard time understanding what it means to join an HOA, that’s perfectly normal.

That said, HOA payments are a critical piece of the financial puzzle when assessing home prices. For further guidance, we recommend scheduling a consultation with one of Home Approach’s expert advisors. Our professionals are well-versed in the intricacies of HOAs and can provide valuable insights to help you make informed decisions.

To gain a deeper understanding of HOA fees and access personalized guidance, sign up for  Home Approach today.

If you’re like most people, you probably don’t spend much time thinking about wastewater. 

But when you’re buying a new home, it’s a good idea to understand the essential role that wastewater management plays in maintaining a healthy, sustainable, and efficient living space. In fact, when it boils down to it, wastewater management is one of the most important considerations you need to make during the homebuying process. 

That’s because homes quietly churn out substantial amounts of wastewater every day. Believe it or not, the average household in the United States produces around 138 gallons of wastewater each day from places like the tap, shower, washing machine, toilet, and dishwasher. To put things in perspective, that’s roughly seven standard bathtubs full of water. 

But where does it all go? 

There are two primary methods of dealing with household wastewater: septic and sewer systems. Ultimately, your home’s wastewater management system will directly impact your daily life, maintenance routine, and long-term expenses. 

With all this in mind, let’s plunge deeper into the topic of septic versus sewer systems and explore how they work, their main differences, and their financial impact.

What is a septic system?

A septic system is a decentralized or localized method of treating and removing wastewater. With this type of system, all wastewater management takes place independently on the property without connecting to a central or municipal sewer. 

According to the United States Environmental Protection Agency (EPA), more than one in five households in the U.S. depend on individual septic or small community cluster system for wastewater treatment.

Septic systems are common in suburban and rural areas that lack access to public sewer systems. Some cities allow homeowners to install private septic systems, although this isn’t very common.

How does a septic system work?

Septic systems funnel household waste into a single underground tank for treatment and removal. 

Sewage enters the tank from the house through a pipe and flows into a general basin where it goes through a separation process. Solid waste — like toilet paper and organic matter — sinks to the bottom of the tank and forms a layer of sludge. Lighter materials like oils and fats float to the top of the tank and generate a layer of scum. 

The partially treated liquid that remains in the middle layer exits through a separate outlet pipe. This liquid contains special microbes and natural bacteria that break down and digest the organic matter, further treating the wastewater. 

After exiting the septic tank, the effluent flows into a drain field — or leach field — for absorption. At this point, the water moves through a network of surrounding pipes and gravel and eventually returns to the soil which acts as a filter by removing harmful pollutants and pathogens. Eventually, the water becomes compatible with the groundwater and the local environment.

The pros and cons of using a septic system

The pros 

• When you have a septic system, you don’t have to pay monthly sewer fees, which could lead to potential savings. 
• Septic systems tend to be more environmentally friendly than centralized sewer systems. This is mainly because they use natural biological processes to break down waste. They also require less energy.
• Septic systems operate independently from centralized sewage networks. This gives the homeowner more control over things like maintenance, repairs, and upgrades. 
• Septic systems provide effective wastewater management in rural or remote areas where centralized sewers are not available.

The cons 

• It can be cost-prohibitive to install or replace a septic system. By one estimate, the average cost of a septic tank installation is around $7,000 while a complete septic system can run anywhere from $10,000 to $25,000. That said, with proper maintenance, the lifespan of a septic system is generally around 20 to 40 years or longer.
• Septic tanks are prone to operational failure due to inadequate maintenance, excessive water usage, and improper installation. They can also clog from excessive solids.
• Septic tanks can potentially contaminate surface and groundwater without proper installation or maintenance. This can lead to significant health risks. In addition, septic systems can produce foul odors when they malfunction, and also when they’re cleaned.

• A poorly functioning system can negatively impact your property value. Buyers may be unwilling to purchase a property with an outdated or unreliable septic system that’s prone to backing up.
• You’ll need to find reliable and cost-effective plumbers and septic system companies to help with ongoing maintenance and inspections. Not all companies are reliable or trustworthy, and picking the wrong vendor can lead to costly mistakes. 

What is a sewer system?

A sewer system is a network of pipes and infrastructure for collecting, moving, and treating wastewater. Public sewer systems serve homes, businesses, and public communities. 

Unlike a decentralized septic tank, all sewer processing takes place off-property at a dedicated treatment facility. 

Sewer systems mainly exist in urban and suburban areas where houses and properties are close together. 

How does a sewer system work?

In a sewer system, all wastewater flows through pipes into a main drain pipe — or house sewer — which runs from the house to the municipal line. The municipal sewer line moves wastewater from multiple homes and buildings into a central treatment plant. 

When water enters the wastewater treatment plant, it goes through a series of cleansing processes to remove pollutants, contaminants, and harmful materials. This includes physical, biological, and chemical methods. After the water is clean, it flows back into the environment.

The pros and cons of using a public sewer

The pros

• Public sewers offer a convenient and reliable way for homeowners to manage wastewater. Homeowners don’t have to worry about things like septic tank pumping, installation, or maintenance, which saves time and money.
• Homes that connect to a public sewer system may have a higher property value; there aren’t any septic system costs to consider. Buyers often view properties that have reliable and well-maintained systems more favorably.
• Sewer systems prevent the need to have on-site wastewater storage. This prevents foul odors and unsightly backups.
• By using a sewer system, homeowners can avoid navigating septic system regulations and permitting processes. When you connect your home to a city or municipal sewer system, you hand over the responsibility of wastewater management to the local municipality, sparing yourself from having to maintain a private septic system.

The cons

• Homeowners still need to maintain the sewer lateral — the piping that connects their property to a main sewer line. These sewer pipes can occasionally clog and lead to backups that require professional repairs. 

• Homes that connect to city sewer systems become dependent on them for wastewater removal. If a system fails to work, it can impact the property and take time to resolve.
• Local governments are responsible for wastewater treatment. Homeowners do not have direct control over their effectiveness and environmental impact. 
• Sewer systems traverse congested urban areas, making them more vulnerable to external disruptions like construction, accidents, and utility conflicts. 

Septic tanks vs. city sewer: Maintenance costs

As a homeowner, you’re going to wind up paying for wastewater maintenance whether you purchase a property with a septic tank or one that’s plugged into the public sewer system. There’s no getting around it. 

Even so, understanding the differences in maintenance costs and responsibilities can help you make a decision that best suits your preferences, needs, and budget. 

With that in mind, let’s take a closer look at how maintenance costs differ between septic tanks and city sewers. 

Septic tank maintenance costs

Pumping 

Septic tanks require routine pumping in order to eliminate scum and solid waste. Failure to remove waste can lead to clogs and overflow.

Septic tank pumping frequency depends on the size of your tank, water usage, and household size. So, if you opt for a smaller tank to save money, you may wind up paying more over time in pumping fees.

When buying a home, it helps to think about how long you intend to stay in the property. If you’re planning to move again in three to five years, you might be able to avoid having to pump your tank — particularly if you have a larger tank and only two people live in the house.

Inspections

It’s critical to inspect your tank regularly for leaks, damage, and proper functionality. Inspection frequency depends on local regulations and the age of your system. Most homeowners inspect their tanks every one to three years. 

Repairs and replacements

Septic systems require routine repairs or replacements due to issues like clogs, damage, and filters. Keeping up with routine maintenance can help avoid costly repairs.  

Sewer system maintenance costs

Monthly fees

Most municipalities charge taxpayers to use public sewer systems, and the average U.S. sewer bill is $66.80 per month. However, this can vary depending on water usage, the availability of local water supplies, and location. 

Connection fees

If your property doesn’t have a connection to a sewer system, you’ll need to pay a hookup fee to access public lines. This fee covers the cost of extending the sewer from the property to the main network.

In most cases, local governments don’t directly charge for sewer abandonment or disconnecting from a network. However, you may wind up paying indirectly for disconnection permits, plumbing changes, and inspections. Disconnecting from a sewer may also negatively impact your property value.

Permit fees and inspections

Some municipalities charge homeowners to connect to local sewer systems or perform repairs or construction. You may also need to pay for local inspections to ensure compliance with building and safety codes.

Sewer lateral and service

While homeowners don’t need to maintain public sewer infrastructure, they are typically responsible for the sewer service line that connects their property to the main sewer line. This can require maintenance, repairs, or replacements.

Need some advice? Home Approach is here to help

As you can see, wastewater management is a big topic of concern for home buyers — and something that requires careful consideration. Both options have pros and cons, making it difficult to determine which is right for your specific needs. 

Home Approach specializes in helping home buyers like you navigate the first-time purchasing process. Our experts specialize in breaking down complex real estate topics so they’re easy for you to understand. If you’re on the fence about whether to go with a home that has its own septic system or one that’s connected to a public sewer system, Home Approach can provide guidance and support. 

Ready for a consultation? Sign up for Home Approach and speak with an expert today.

What is Private Mortgage Insurance (PMI)?

Conventional wisdom says paying less for something like a car or computer upfront is better. But when it comes to real estate and homeownership, this doesn’t always apply. In some cases, paying more upfront can lead to substantial long-term savings. 

While it may seem counterintuitive to part with a larger sum upfront when you’re buying your first home, you can potentially avoid paying private mortgage insurance (PMI) and lower your monthly mortgage payments by putting down at least 20%. While you might find yourself more cash-strapped in the immediate future, you’ll have more money to stash in the bank or make upgrades and renovations over the long term. 

If you’re wondering how PMI works, you’ve come to the right place. This primer provides a complete overview of PMI and addresses the following topics:

• What is private mortgage insurance? 
• Who needs private mortgage insurance?
• What is the cost of PMI?
• PMI vs. homeowners insurance
• How to minimize or avoid PMI
• FAQs about PMI

What is private mortgage insurance?

PMI is a type of insurance that lenders require from borrowers who have a conventional mortgage with a down payment of less than 20% of the home’s purchase price. PMI is designed to protect lenders in the event borrowers default on their loans.

When a borrower puts less money into a property as a down payment, the lender’s potential financial loss from a default is higher. PMI offsets this risk by providing a financial safety net that protects lenders in the event homeowners can’t keep up with mortgage payments.

Who needs private mortgage insurance?

Lenders typically require PMI when a borrower puts down less than 20% of the home’s purchase price. This is due to the fact that lenders often perceive this as a higher-risk investment because homeowners have less equity in the property from the outset. 

When a borrower puts down 20% or higher, this indicates a lower loan-to-value (LTV) ratio, which signifies that a borrower only needs financing to cover a smaller percentage of the home’s value. As a result, the lender is in a less risky position because the borrower has a significant equity stake in the property the day they move in. 

What is the cost of PMI?

According to the Urban Institute, the average cost of PMI with a conventional home loan can be anywhere from 0.58% to 1.86% of the original loan amount. On a $300,000 mortgage, this could translate to anywhere between $145 and $465 extra per month. That said, the total cost of PMI can vary based on several factors, which we’ll examine in this section. 

The loan amount

The PMI rises proportionally as the overall loan amount — or principal balance — increases. This makes sense since a larger loan amount presents a higher risk to lenders. As a result, larger loans typically command higher insurance premiums. 

Credit score

Lenders rely on credit scores to assess borrowers’ creditworthiness and ability to manage debt responsibility. They tend to view homebuyers with higher credit scores as less risky, which translates into offering them lower PMI rates. 

That being the case, it’s critical to check your credit score before applying for a loan. If your score is lower than you’d like it to be, start paying down revolving debt and making on-time payments to credit card bills. By doing so, you can potentially boost your score, resulting in a lower PMI rating. However, paying down your debt leaves you with less money to put toward a down payment — which is just a tradeoff you’ll need to consider. 

Size of the down payment 

Generally speaking, you should aim for an LTV ratio no higher than 80%. For example, suppose you’re buying a house for $300,000 and planning to finance the bulk of it via a conventional mortgage. In this scenario, you need to put down at least $60,000 to avoid paying PMI. 

Home value and appraisal

When calculating potential PMI costs, it’s also necessary to consider the appraised value of your home. As a brief reminder, a home appraisal is conducted by a third party, who assesses the property’s current market value.

Of course, property values can change over time. If your home’s value appreciates significantly, the LTV ratio could drop, decreasing PMI costs — or even eliminating them altogether. 

The terms of the mortgage payment 

PMI requirements tend to vary depending on the type of loan. For example, government-backed Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and United States Department of Agriculture (USDA) loans all have different rules regarding PMI and down payments: 

• FHA loans require a minimum down payment of just 3.5% and include mortgage insurance premiums (MIP). Unlike PMI, MIP lasts throughout the loan’s entire life if the down payment is less than 10%. However, the homeowner can eliminate MIP after 11 years if the down payment is 10% or more. 

• VA loans don’t require any down payment or PMI. Such loans are only available to eligible veterans, National Guard and Reserves members, and active-duty service members.
• A USDA loan doesn’t come with a PMI. Instead, USDA loans have a guaranteed fee which provides insurance to the lender in the event the borrower defaults. This upfront fee often rolls into the monthly mortgage payment amount. 

PMI vs. homeowners insurance

Any time you use a mortgage to buy a house, you’ll also need homeowners insurance — also known as hazard insurance — which protects the buyer against property damage from covered events like fires, floods, hurricanes, theft, or vandalism.

Homeowners insurance covers the physical structure of the home, as well as personal belongings, injury liability, and additional living expenses if the house becomes uninhabitable. Some homeowners use homeowners insurance to cover valuable items, like engagement rings and expensive artwork.

That said, homeowners insurance doesn’t protect you against defaulting on a mortgage. There are insurance products, like MPI and mortgage payment protection insurance (MPPI), that do cover you. This insurance specifically provides financial assistance to homeowners who face difficulty making their mortgage payments due to disability, critical illness, or job loss. 

How to minimize or avoid PMI

The only real upside to having PMI is that it helps you buy a house while putting less down. Beyond that, there isn’t any glory in making PMI payments; PMI doesn’t build equity or help you financially in any way. As such, it can become a financial burden over time. In light of this, there are some things you can do to minimize your PMI commitment.

Save for a larger down payment

The easiest way to avoid paying PMI is to save as much money as possible when buying your new home. Aim to make a down payment of at least 20% and eliminate the need for PMI. 

That said, in addition to putting 20% down, you’ll also need to set aside cash for closing costs — like loan origination fees, property taxes, inspections and appraisals, and attorney expenses. Unfortunately, closing costs can tack on thousands of extra dollars during home buying, leaving you with less money to put down.

Ask your lender about different options

Don’t be afraid to ask your lender about loan programs that offer alternatives to PMI. For example, you may be eligible for lender-paid mortgage insurance (LPMI). While this might result in a higher interest rate, it could prevent you from having to make separate PMI premiums. 

Review your lender’s PMI policies

If you don’t like a lender’s PMI rate, shop around and compare different options. You may be able to qualify for a lower rate from another lender.

Request PMI removal

Keep in mind that PMI payments aren’t forever. Once your equity reaches 20% of the home’s value based on the original LTV ratio, you can request PMI removal. For conventional mortgages, automatic cancellation occurs when the loan reaches a specific LTV ratio (e.g., 78%).  

Make rapid payments 

If you’re in a position to do so, consider making additional payments on your loan balance. Reducing your mortgage balance can help you reach the 20% equity mark faster and reduce the overall duration of your expenses. 

Choose a shorter loan term

Another option is to opt for a shorter loan term. For example, you may select a 15-year mortgage instead of a 30-year loan. Requesting a shorter mortgage helps build equity faster and repay the loan sooner. The only downside is your monthly mortgage payments will go up.

Refinance

While refinancing doesn’t automatically eliminate PMI, it can save you a lot of money if you have substantial equity in your property (e.g., if you bought your house in 2019). It’s worth talking to your lender or financial advisor to determine whether refinancing can impact what you pay each month. 

Private mortgage insurance: FAQs

How do you pay PMI?

Most lenders allow borrowers to pay PMI in monthly installments tacked on to their regular monthly payments. However, some lenders also give the option to make annual lump sum payments or access lender-paid arrangements. 

Is PMI for conventional loans?

PMI is often attached to conventional loans that lack the support of a government agency like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), which come with their own insurance and guarantee mechanisms. Unless you put down at least 20%, PMI applies to both fixed-rates and adjustable-rate mortgages.  

What is split-premium PMI?

Split-premium PMI is a type of insurance where the borrower pays an upfront premium and ongoing monthly payments. 

With split-premium PMI, the upfront premium is a one-time payment at the beginning of the loan. It’s similar to paying upfront fees with a mortgage. The upfront payment reduces the monthly payment amount, leading to lower overall PMI costs over the life of the loan.

Availability for split-premium PMI can vary among lenders. As with any other aspect of home financing, it’s important to review the terms, costs, and benefits of split-premium PMI compared to other options. 

Is PMI tax-deductible?

Unfortunately, the PMI tax deduction isn’t available for the 2022 tax year. However, some homeowners may be eligible to deduct PMI payments for past tax years (certain restrictions apply). Of course, Congress may act to make PMI deductible once again in the future; time will tell.

What is piggybacking?

Piggybacking is a financial strategy where a borrower uses two loans to purchase a home. In certain circumstances, piggybacking can enable you to avoid paying PMI. 

For example, a borrower might take out a conventional mortgage for 80% of the home’s purchase price and a second mortgage for 10% of the home’s value. Combining these two loans with a down payment of 10% or more covers the entire purchase of the house, enabling you to avoid PMI. 

Do lenders require PMI if you use a HELOC?

Lenders may require PMI if you use a home equity line of credit (HELOC). In this scenario, the primary mortgage and HELOC contribute to the combined loan-to-value ratio (CLTV). If the CLTV ratio reaches a certain threshold, the lender might require PMI to mitigate risk. 

When it comes to PMI, lender policies tend to vary. For example, some may offer alternative options like higher interest rates. To increase the chances you make the best decision, it’s important to communicate with your lender about your situation and explore different options.

Is it better to put down 20% or pay PMI?

If you can afford it, putting down 20% is smarter than paying PMI. Not only will you be responsible for covering lower monthly mortgage payments, you’ll also start your homeownership journey with more equity in your home, leading to greater financial security. 

On the other hand, paying less upfront frees capital for other investments like home improvements and emergencies. A lower down payment also allows you to become a homeowner sooner — something that may be worth it due to skyrocketing home prices. 

At the end of the day, you need to consider your financial goals, timeline, and risk tolerance to determine whether to put down 20% or pay PMI. To increase the chances you make the best decision, consult with a financial advisor or mortgage professional to learn which option is better for you.

Is it common for borrowers to default on their loans?

While most homeowners don’t default on their loans, it is not uncommon for homeowners to be incapable of paying their mortgages. Even so, the latest data indicates U.S. mortgage delinquency rates reached an all-time low in May due to a strong labor market that helps borrowers make their mortgage payments on time. 

Currently, the share of all delinquent mortgages is hovering around 2.6%. Of this, just 1.3% include early stage delinquencies (30 to 59 days past due) — a 1.1% year-over-year increase. That said, 14 states and almost 170 metropolitan areas saw delinquencies increase annually in May. 

Does Freddie Mac provide mortgage insurance?

The Federal Home Loan Mortgage Corporation (Freddie Mac) is a government-sponsored enterprise that purchases mortgages from lenders. While Freddie Mac doesn’t directly provide any mortgage insurance policies, it influences the market and the availability of loans with PMI through its guidelines and requirements. 

Ready to start shopping for a loan estimate? 

To encourage activity, more and more lenders are now issuing loans to folks who put down 5% or less when they buy a house. As a result, homebuyers are increasingly considering putting less money down and paying monthly PMI to cover a portion of their loans. 

Signing up for PMI is a major personal finance decision that will have a big impact on your monthly mortgage payments. That being the case, it’s critical to assess your financial situation and determine whether it’s a good fit. 

Before you start thinking about PMI, it helps to understand what kinds of loans are available to aspiring homeowners like yourself. In case you’re unaware, there are tons of different mortgage loans available for first-time homebuyers — each with varying requirements for down payments, insurance, mortgage terms, and eligibility. 

To learn more about how to secure financing for a property, check out our mortgage loan primer.

Let’s be honest: Nobody likes bugging family members to tweak the thermostat or air conditioner for energy savings gains. Facing record-setting temperatures and rising energy costs, most homeowners need to figure out how to strike the perfect balance between comfort and cost-efficiency — which is no easy feat.

But with climate change wreaking havoc on local power grids and wallets, finding ways to keep your home comfortable without draining resources is more important than ever before. 

To keep costs down but stay cozy all year long, you should do everything you can to reduce your carbon footprint by creating an energy-efficient house.

Read on to learn more about energy efficiency, why it’s essential, and some home improvement tips for making your slice of real estate more sustainable and cost-effective.

What is an energy-efficient home?

An energy-efficient home is a property that optimizes energy usage and minimizes environmental impact. Energy-efficient homes are built with features and technologies designed for efficient energy use throughout the house, including heating, cooling, lighting, and appliances. 

Most new homes today come with built-in mechanisms engineered for maximizing energy. But you can also make an older home energy-efficient by making upgrades and repairs. So, in the event you’re eyeing a dream house that’s behind the times, don’t let dreams of energy efficiency hold you back.

Why does energy consumption matter?

According to a recent report, U.S. electricity use per capita is the highest out of any major economy — by far. Each person in the U.S. consumes about 12.87 megawatt hours of electricity each year, which is three-and-a-half times higher than the global average.

What’s more, electricity generation is the second largest source of greenhouse gas emissions in the U.S. after transportation, accounting for 25% of national emissions. Looking forward, the country’s demand for electricity will only increase as auto fleets become increasingly electric. 

Good news: As a new homeowner, you can help reverse this trend by embracing energy-efficient practices. With all this in mind, let’s take a look at some key reasons why reducing your energy footprint at home is the smart move.  

Save energy

Excess energy usage puts pressure on local infrastructure, impacting the entire energy supply chain. When households consume excessive energy, the power grid has to work harder to meet demand. As a result, energy companies may have to adjust their pricing structures to accommodate peak usage times. 

By curbing energy consumption at home, you’ll do your part to promote efficient resource consumption. This helps keep costs down for everyone while preventing overloads and reducing the likelihood of disruptions.

Reduce emissions 

Energy consumption from fossil fuels produces greenhouse gas emissions, which create air pollution and contribute to climate change. 

Lowering energy consumption at home reduces emissions, helping mitigate the harmful effects of climate change like rising sea levels and extreme weather events.

Lower energy costs

You’ll also save money by incorporating energy-efficient features and practices that minimize energy and resource consumption. 

According to the U.S. Office of Energy Efficiency and Renewable Energy, the average American spends $2,000 paying for energy each year. Making matters worse, $200 to $400 of this chunk is wasted on drafts, air leaks around openings, and outdated heating and cooling systems. 

By making energy efficiency upgrades, you can reduce financial waste and make your home more comfortable — all while doing your part to protect the environment.

What upgrades can you make to lower your energy bills?

Making small changes and investments can go a long way toward reducing energy consumption and lowering your bill. Here are some of the ways you can improve energy efficiency in your home.

Modernize your HVAC systems

If you have an older property, your heating, ventilation, and air conditioning (HVAC) systems could contribute to energy waste. Consider upgrading to eco-friendly systems to reduce energy consumption and lower monthly bills. While you’re at it, get in the habit of paying for routine maintenance, which can also help improve efficiency. 

Install a programmable thermostat

Consider replacing your outdated thermostat with a programmable model that will enable you to set different temperatures throughout the day. Such devices enable you to optimize heating and cooling based on your schedule so you can avoid unnecessary energy consumption when you’re not at home. 

Insulate and seal cracks

One of the secrets to energy efficiency at home is preventing heat loss in the winter and cool air leakage during the summer. To accomplish this, identify areas where air escapes through cracks and gaps. You can do this by installing foam insulation and air sealing any gaps or cracks, which can reduce the load on your systems and save energy. 

Install LED lighting

Light-emitting diodes (LEDs) are an energy-efficient and long-lasting alternative to traditional light bulbs. High-quality LED light bulbs can last for tens of thousands of hours, saving you a good chunk of change over the lifecycle of the unit. 

In addition to savings, LED lights don’t contain hazardous materials like mercury, which is common in fluorescent bulbs. They are also recyclable and help reduce carbon emissions. Plus, they fit into standard light sockets, so you don’t have to rip and replace any fixtures to install energy-efficient lighting. 

What is a smart home?

A smart home is a residence that uses automation and connected technology to enhance comfort, security, efficiency, and convenience. Inside a smart home, devices and systems — like smart thermostats, refrigerators, stoves, heat pumps, security systems, and lighting systems — are connected through the internet of things (IoT), and you can control them via your smartphone. 

Did you forget to turn the lights off when you went to work in the morning? There’s an app for that.

In addition to curbing energy usage, intelligent devices can make your home more attractive to potential buyers. As a modern feature, they can also increase the value of your home.

Tips for making your home more energy efficient

You don’t have to go overboard when making your home more energy-efficient. In fact, making a few minor changes can have a big impact. With that in mind, the following tips can help you slash home energy use. 

Conduct an energy audit

Before you make any changes, conduct an energy audit to identify energy waste and form an improvement plan. Start by gathering utility bills from the last year and begin analyzing your energy consumption patterns to see if there are any significant changes and seasonal variations. 

Once that’s done, walk through your home and see if you notice specific areas that may contribute to energy loss — like drafts, inadequate insulation, and inefficient appliances. While you’re at it, evaluate lighting fixtures and your HVAC system to see what shape they’re in. 

Embrace renewable energy and install solar panels

By installing solar panels on your property, you may be able to power your home with renewable energy and reduce your reliance on the power grid. While solar panels can be expensive to install, you can potentially lower your utility bills over time — assuming you stay in your house long enough to break even on the investment.

Some power companies also incentivize solar panels by allowing you to sell power back to the grid — a strategy known as metering. If you have a home that’s capable of producing more solar energy than you consume, it’s worth checking whether this is an option in your area. 

Upgrade to energy-efficient appliances 

One of the most surefire ways to improve energy efficiency is to replace older appliances with Energy Star-certified models. These appliances — including refrigerators, dishwashers, dryers, and washing machines — use less energy while providing the same functionality as their older counterparts. Sometimes, they’re even better. 

As an example, water heaters are a common source of energy waste, accounting for roughly 13% of annual residential energy usage and consumer utility costs. If you have an old water heater, consider lowering your water heater temperature or upgrading to an eco-friendly model.

Limit screen time

The average person now checks their phone 144 times per day — in addition to watching television, using a laptop or tablet, and playing video games. Multiply that times three or four family members, and it’s easy to see how devices can consume a lot of energy. 

Limiting screen time at home reduces power consumption and contributes to a more energy-efficient lifestyle. Plus, it gives you time to engage in the old-fashioned art of having actual conversations with real human beings!

Unplug devices

Look around your house and try to find all the items that connect to an outlet when they aren’t in use — like floor fans, television monitors, charging docks, and coffee machines. Believe it or not, these devices contribute to phantom energy consumption even when they’re not on. When devices are off or in a standby state, they consume small amounts of power. By making sure devices you aren’t using are unplugged, you can cut off standby power consumption and reduce energy waste.

Learn to love cold water

Everyone uses hot water throughout the day. We take hot showers, we wash our clothes and dishes in hot water, and we use hot water to cook. Unfortunately, hot water doesn’t appear out of the ether. You need to heat it up, which requires energy. 

Consider washing clothes with colder water and start taking cold water showers to reduce your consumption. As a bonus, you’ll probably take shorter showers and use less water!

Plant shade trees

Another way to make your home more eco-friendly is to plant shade trees in areas with a lot of sunlight. This landscaping hack can reduce the need for home cooling. As an added bonus, you may also increase your property value by improving your property’s visual appeal. 

There are all sorts of shade trees; some common examples include maple, oak, elm, cottonwood, beech, and ginkgo. If you’re thinking about planting some of your own, check with your local environmental agency and ask what they recommend for your area. 

Reduce your reliance on air conditioning 

If you’re the kind of person who keeps their house frozen during the summer, you’re wasting a ton of energy. Even with soaring temperatures, many homeowners go overboard with cooling. 

If you want to reduce energy waste, consider turning your air conditioner up a bit. Better yet, turn it off when you can and open windows to let the fresh air in. Of course, you can also switch to ceiling and floor fans, which can help distribute air and cool things down. 

Air dry clothes

If you have space, ditch your dryer for a clothesline or drying rack. In addition to cutting back your energy usage, you’ll also prolong the life of your clothes. Air drying helps maintain fabric quality, reduces shrinking, and preserves elasticity. It’s also a great reason to get outside.

What are energy rebates?

Energy rebates are financial incentives that utility companies, nonprofits, and government agencies like the U.S. Department of Energy offer to encourage individuals to invest in energy-efficient technologies and practices.

Rebates typically involve a partial refund or discount on the purchase price of energy-efficient products and services. Most of the time, energy rebates are attached to appliances, vehicles, HVAC systems, renewable energy systems, and other similar items. 

It pays to prioritize energy efficiency! 

While making a house energy-efficient takes time and money, that money’s well-spent. Not only does an energy-efficient house put more money in your wallet each month, it also helps you reduce your impact on the environment. 

That said, it’s much easier to buy a property with smart appliances, solar panels, and energy-efficient windows than to do all the work yourself.

That being the case, consider prioritizing energy efficiency when you buy your first home. At the end of the day, all homebuyers should research properties before visiting them, ask questions during walkthroughs, and consult with energy inspectors and local agencies to understand how different types of homes consume energy. Before agreeing to a deal, ask the seller to share utility bills with you to get a better idea of how much you can expect to spend on utilities each month.

By asking about energy consumption before making an offer on a house, you can potentially save thousands of dollars in upgrades and enhancements over the years. Who ever thought you’d care so much about a washer or an HVAC system!

Of course, energy is just one thing you should look into before making an offer on a home. To learn more about other considerations you should make, read this: 10 Questions to Ask Before Making an Offer on a Home.

What is a home equity line of credit?

When you buy your first house, you typically have to save a boatload of cash — tens of thousands of dollars or even more — depending on your financial situation and the price of your property. 

It’s a big chunk of change, to be sure. But once you get your foot in the door and start making monthly mortgage payments, you begin to build equity. Build up enough equity, and you may be eligible to take out a home equity line of credit (HELOC) and draw against it if you need some extra cash. 

As a new homeowner, one of the best things you can do is plan ahead and have a game plan for the future. That being the case, it pays to know how HELOCs work, when it makes sense to use one, and when to stay away.  

If you’re looking to learn more about HELOCs, you’ve come to the right place. This article covers everything you need to know about HELOCs, including what HELOCs are, how they work, how you can use them, HELOC alternatives, and more. 

Home equity line of credit defined 

A HELOC is a type of revolving credit line that enables homeowners to borrow money against the equity they’ve built up in their homes. This flexible form of financing is secured using the value of the property as collateral.

If you’re like most people, you’re going to need to secure a mortgage when you buy your first home. If you’re able to cobble together a 20% down payment, you’ll need to finance the other 80% of the house. In this scenario, you’ll own 20% of your property when you close the deal, and the bank will own the remaining 80%.

From that point on, each monthly mortgage payment you make increases your equity, meaning you own more of your property over time. If you ever need some extra cash and have enough equity in your home, a HELOC may be appealing to cover things like renovations, home improvement costs, and upgrades.

Essentially, HELOCs are revolving credit lines that can be borrowed against as needed; you’ll have to pay interest on whatever funds you draw. As you repay your balance, the credit line is replenished, and you can continue drawing against it.

Is it common to use a HELOC?

In the past, using a HELOC was less common. But in today’s inflationary environment, things are becoming increasingly expensive. This, in turn, is making it that much harder for young homeowners to pay their bills. In fact, one recent report found that roughly 34% of 25 to 39-year-olds currently have trouble meeting their financial obligations. Even worse, more than 70% of younger Americans are saving less because of inflation compared to Gen X and Baby Boomers.

In light of this, homeowners are looking for alternative ways to make ends meet while still reaching their family, investing, and real estate goals. As a result, many are exploring HELOCs for the first time.

In fact, HELOC applications increased 30% year-over-year in 2022. What’s more, Google searches for HELOCs hit an all-time high in July 2023. This uptick is mainly due to high prices across the overall economy.

How does a HELOC work?

A HELOC is a personal loan you borrow against your own assets. Just like any other type of loan, you have to pay any funds you use back to the bank, and you also have to pay interest on what you draw. There may be other fees too, like closing costs, annual fees, and late payment penalties, among others.

Considering this, a HELOC isn’t free even though you’re borrowing against your own equity. After all, banks offer products like HELOCs to make money.

Even so, HELOCs can be particularly beneficial in certain circumstances. If you’re thinking about applying for a HELOC, here’s the process you can expect to encounter.

1. Determine eligibility 

First, a lender runs a credit check to determine your credit score and assess your credit history. This helps the lender determine your trustworthiness and ability to repay loans. 

At this stage, the lender will also evaluate your overall financial situation. Typically, they’ll look at your debt-to-income ratio, your employment history, and any other assets you might have — like houses, cars, or investments.

2. Calculate your equity

Next, the lender will assess the value of your home and subtract your outstanding mortgage balance. If your home is worth $400,000 and you owe $150,000 on your mortgage, you’ll have $250,000 in equity.

The lender will also calculate a loan-to-value (LTV) ratio, which measures the total mortgage debt compared to the property’s appraised value. Having a lower LTV means that you have more equity in your property.

3. Get approved

After assessing your eligibility, credit history, income, and debt, the lender will determine whether you qualify for a HELOC. If you receive approval, the lender will set a credit limit, indicating the maximum amount you can borrow. 

In addition, the HELOC will likely have a draw period — the duration that you can access funds — which typically lasts anywhere from five to 10 years. Some lenders also offer 20-year repayment periods. It’s also important to note that most HELOCs have variable interest rates, which change based on market fluctuations.

4. Access your funds 

Once approved, you can access your line of credit as needed. As you take funds during the draw period, your monthly payments will reflect the interest on the amount you borrow — just like a credit card. 

How can you use a HELOC?

One of the advantages of a HELOC is that it’s a highly flexible type of loan compared to other forms of borrowing. In fact, you don’t even have to use the funds for real estate purposes. Simply put, the bank doesn’t care how you use the money; all spending is at your discretion.

For this reason, keep an eye on your spending and current interest rates when you use the funds. It’s easy to burn through your HELOC and wind up in serious debt.

With all this in mind, let’s examine some of the more common ways homeowners use HELOCs.   

Finance home improvements 

You can use a HELOC to renovate or upgrade your existing home — potentially adding value and enhancing your living space. For example, you might decide to finish your basement, build a garage, pave your driveway, or replace your roof.

Whenever you make a major home renovation, consult with a real estate professional to determine its impact on your home value; never assume that a project will automatically make your home worth more. For example, something that seems like a lock-in for extra value — like adding an in-ground swimming pool — may actually detract from your property. 

Consolidate debt

If you aren’t careful, it’s easy to rack up debt after a few years of homeownership. On average, Americans now carry around $5,733 in credit card debt. 

If you wind up in this situation, a HELOC can help with debt consolidation. You can pay off high-interest debts — like credit card balances and personal loans — with a lower-interest home equity loan.

Just remember that high credit card debt can impact your eligibility for a HELOC, along with its terms, since lenders analyze things like debt, credit scores, and available credit before issuing loans. As such, it’s essential to consider your overall financial situation before using a HELOC to pay down high-interest debt.

Cover emergencies

Life comes at you quickly. One minute you’re relaxing on your back porch without a care in the world, and before you know it, you’re racing to the emergency room, scrambling to find a job, or calling your insurance company about a flood. While it’s advisable to have a few months of savings to cover surprise events, 53% of Americans say they don’t have any emergency funds.

HELOCs can serve as an emergency fund, helping you cover things like unexpected medical bills or car repairs. Depending on your interest rate and terms, this could be cheaper than securing a traditional bank loan.

Of course, HELOCs can cover non-emergency purchases, too. Some homeowners use HELOCs to protect big-ticket items like new cars, boats, or weddings. 

Invest 

Investing can be challenging when you’re struggling to make mortgage payments or put food on the table. Some investors use HELOC funds to overcome cash flow limitations and access the funds they need to invest in stocks and real estate instead of tapping into their paychecks. However, this is generally risky since you can lose money from investments and potentially wind up in a bigger financial hole. 

Start a business

Launching a business can be very resource-intensive. Companies often require significant capital to get off the ground and many operate in the red for several months or years before becoming profitable. 

Using a HELOC to launch a business is risky since 20% of small businesses fail in the first year. Remember, in addition to increasing your debt burden, you’ll also have to make interest payments — which could put pressure on you to make the business succeed faster. 

Before using a HELOC to fund a business, thoroughly evaluate the business idea, create a plan, and assess your risk tolerance.

Cover education costs 

Education costs are going up yearly. Today, the average price of college is upwards of $36,000 per student. This trajectory is forcing parents to explore alternative types of financing apart from traditional student loans and scholarships.

Families often make HELOC withdrawals to pay for tuition, books, food, housing, transportation, and other education expenses. Financing education with HELOC funds can potentially create a sense of commitment for students to complete their studies, helping prevent financial hardships for their families.

That said, roughly 40% of undergraduate students leave universities and colleges annually — resulting in a gigantic waste of money. Think twice before using a HELOC for education. 

Finance a new home

One of the best ways to use a HELOC is to finance a new property as an investment or permanent residence. This option can be advantageous if you’re looking to upgrade your existing home and jump into a new space without putting all of your savings on the line. 

If you have a significant amount of equity, you may be able to use these funds as a down payment on a new home. This can be particularly useful if you want to preserve your cash reserves or if you’re in a situation where you don’t want to sell your current home before buying a new one.

The significant disadvantage to using a HELOC for a down payment is that it can lead to overleveraging, which occurs when you owe more on your new property than it’s worth. This could happen if the real estate market value takes a sudden downturn. 

How is your credit score impacted by a HELOC?

HELOCs can impact your credit score in both directions. Here are some considerations to keep in mind about the link between HELOCs and credit scores:

• If you’re a responsible borrower, HELOCs can help diversify your credit mix and improve your payment history.
• When applying for a HELOC, it helps to have a decent credit score. The better your score, the better the loan amount, interest rate, and terms. For example, borrowers with higher scores may be eligible for more favorable loan terms — like longer repayment periods or lower interest rates.
• When you apply for a HELOC, your account will be hit with a credit inquiry, which can slightly lower your credit score in the short term. Using a HELOC and running up a balance could also increase your debt and credit utilization rate, potentially negatively impacting your score. Other risks include missing payments and lowering your creditworthiness. 

Remember: Taking out a HELOC is a major financial decision that could jeopardize years of progress of building equity in your home. If you want to take out a HELOC, consider consulting with a financial advisor or conducting a top-down financial assessment to ensure you can take on extra risk.

Alternatives to HELOCs to know about 

Is a HELOC the best financial instrument for you? Here are some additional financing options for homeowners: 

• Unsecured personal loans, which can be obtained from banks, online lenders, and credit unions, don’t require any collateral. In exchange, they typically have higher interest rates.
• 401(k) loans, which involve borrowing money from your 401(k) retirement plan. Most 401(k) loans come with strict repayment deadlines.
• Unsecured home improvement loans, which are available from some lenders and are specifically earmarked for home improvement projects and repairs. These loans tend to have higher fixed interest rates because they don’t require any collateral. 
• Credit cards can also help fund small projects around the house. Some cards also have lucrative reward options, providing cash back or other incentives. However, you’ll need to pay your balance off in full each month unless you want to pay massive interest rates.

What is a home equity loan?

A home equity loan is similar to a HELOC; it enables homeowners to borrow against the equity they have in their property.

However, unlike HELOCs, this type of loan provides a one-time lump sum based on your home’s equity. With a HELOC, you get a revolving line of credit that you can tap into when you need to. Home equity loans are more like mortgages; you have to cover fixed monthly payments for the loan term. That being the case, you should only take a home equity loan if you’re comfortable paying monthly installments.

When you take out a home equity loan, your house serves as collateral. If you fail to repay, your lender can take possession of your property through foreclosure. 

Home equity line of credit: FAQs

What are the pros and cons of HELOCs?

Pros 

• HELOCs provide a great deal of flexibility. You can use them for various needs ranging from home improvement and education to paying down debt and buying a new car. At the same time, you can tap into a HELOC as you need to. As long as you replenish your credit line, you can continue borrowing multiple times over the life of the loan.
• During a draw period, you can usually make interest-only payments. This can help keep your monthly obligations lower. 

Cons

• HELOCs tend to have variable interest rates and can change over time. As a result, your monthly payments could increase when rates rise. 

• It can be tempting to overspend or overborrow with a HELOC.
• Defaulting on a HELOC could result in the bank seizing your property and foreclosing your home. If you tap into a HELOC, you need to use it responsibly. 
• Since lenders look at your equity, finances, and creditworthiness, it may be harder to get approved for a HELOC compared to other types of loans.

Is a HELOC tax deductible?

When it comes to taxes, it’s always wise to consult with a licensed professional. That said, you can deduct HELOC interest on your taxes if you use the money to buy, build, or improve your home — but only if you itemize your deductions. 

Is it possible to extend a HELOC draw period?

Some lenders may allow you to extend a HELOC draw period. However, it depends on the specific terms of your HELOC agreement and your lender’s policies. Some lenders offer flexible draw periods while others take a more rigid approach. When applying for a HELOC extension, your lender will likely consider several factors, including your eligibility and market conditions. 

What is a cash-out refinance? 

Cash-out refinancing involves restructuring your existing mortgage to increase the amount you owe and taking the difference in cash. If you own 50% of a $500,000 home, you can exchange half of your equity for $125,000, minus fees.

This strategy changes your mortgage terms by allowing you to make payments on a larger loan. Your new mortgage will include the remaining balance from your old loan and the extra funds you take out. Since you’re changing the terms, you’ll also have more time to pay the loan back. 

While this can lengthen your mortgage repayment timeline and increase the amount you owe, it can help you solve temporary cash-flow issues.

Should I refinance my home?

Refinancing may make sense if you can get a lower interest rate. But with interest rates closing in around 7%, it’s probably not the best time to refinance. 

When weighing a possible refinance, look for the break-even point: the time it takes for your monthly savings to offset the cost of refinancing. As a rule of thumb, you should only refinance if you plan to stay in your current home beyond that point.

How much does a HELOC cost?

HELOC costs vary by lender. Your HELOC may include:

• Closing costs, like application fees, appraisal fees, attorney fees, title search fees, and more.
• Origination fees, which cover the administrative costs associated with opening a HELOC.

• Interest costs, which depend on how much you borrow, the interest rate, and the loan duration. Interest rates are usually based on the prime rate plus the lender’s margin.
• Annual fees, which could add to the ongoing cost of maintaining your HELOC. 
• Application fees, which could also be necessary when requesting a line of credit. 

Additionally, you should also be aware that your home’s appraised value can impact the overall cost of your HELOC. There may also be prepayment penalties in play, too.

Before applying for a HELOC, it’s a good idea to talk to multiple lenders to evaluate different HELOC rates and learn about potential hidden fees. 

What happens if a lender denies a HELOC?

If your HELOC application is denied, the lender must provide an adverse action notice outlining the reasons for the rejection. Some reasons may include a low credit score, insufficient income, or low equity in your home. Should you be rejected, carefully review the reasons for the refusal to understand what aspects of your profile may require improvement. 

That said, just because one lender denies your application doesn’t mean you can’t get a HELOC elsewhere. It may be worth it to apply for a HELOC with another lender that has different eligibility criteria or underwriting standards. 

If your financial situation changes, you can also choose to reapply with the same lender down the line. For example, after you’ve paid off debts, increased your savings, and built more equity, you may be a more attractive candidate.

Do HELOCs use the Nationwide Mortgage Licensing System (NMLS)?

The NMLS is a database for licensing and regulating mortgage professionals and entities. It primarily serves to protect consumers and streamline licensing. 

Since HELOCs are a mortgage product, they are subject to the NMLS. However, the application process can vary based on different state and federal regulations. Additionally, the professionals who originate HELOCs may also be subject to NMLS regulations.

Are HELOCs FDIC insured?

HELOCs do not typically have Federal Deposit Insurance Corporation (FDIC) protection. This is because FDIC insurance primarily covers deposit accounts — like checking accounts, savings accounts, certificates of deposit (CDs), and money market accounts. HELOCs, on the other hand, are a form of borrowing. 

Brush up on mortgage loans!

Before you start worrying about things like HELOCs and refinancing, you have to secure a property and mortgage first — and that requires careful planning.

One of the best things you can do as a first-time homebuyer is to read up on the different types of mortgage loans that lenders offer. Check out our FREE guide to learn which type of mortgage is best for you.

What You Need to Know

It’s every homeowner’s worst nightmare: You get up in the middle of the night to get a glass of water and something scatters in the kitchen. It’s small, fast, and has more legs than a city marathon. 

Often, people buy a home that looks clean and bug-free only to discover unwanted guests living in cabinets, the ceiling, and the floor. This tends to happen when houses sit vacant for a while, providing ample time for critters to enter and multiply. It also happens in older, dilapidated houses that haven’t been sealed in some time. 

Unfortunately, it’s impossible to keep a home entirely pest-free. That said, there are active measures you can take to control vermin and maintain a sanitary and livable environment. 

Keep reading to learn more about how infestations work, some common signs to look for, and tips for treating pest problems. 

Termites and cockroaches and bed bugs, oh my

No matter where you live or what kind of house you buy, pest control is a top challenge for homeowners. In fact, 76% of homeowners report experiencing a recent pest issue — with 60% worrying significantly about the problem. Unsurprisingly, concern for infestation is higher among pet owners (65%) and parents (70%).

The pests you experience on your property can vary depending on your location. Some common household pests in the United States include: 

• Rodents 
• Cockroaches
• Bedbugs
• Spiders
• Moths
• Carpenter ants
• Termites 
• Earwigs
• Mosquitoes
• Wasps
• Silverfish
• Fleas 
• Centipedes
• Millipedes 
• Scorpions 
• Crickets

Depending on where you live, you may also experience larger critters like raccoons, iguanas, snakes, or even alligators.

Almost all homes have minor nuisances like ants or wasp nests. Some pests are seasonal while others can bother you year-round. Depending on how badly your property is affected, you may need to take action to enforce animal or mosquito control in your yard. 

Infestations are much more than minor nuisances. Typically, they indicate a sustained and sizable presence of pests within a confined area. This goes beyond isolated incidents and suggests a breeding population within or around the house. 

How infestations impact a house 

Infestations may seem harmless at first. But left untreated, pests can quickly multiply and turn into a much larger issue. What starts as a minor inconvenience can become a significant financial and emotional burden. Over time, it can also lower your property value — or at least stick you with expensive repair bills. With that in mind, let’s examine some of the more common ways that infestations can impact a house. 

Structural damage

Certain pests can target a home’s overall structure, including critical support beams. For example, wood-boring beetles, termites, carpenter ants, and carpenter bees all target wood and can weaken the integrity of buildings, decks, and other wooden structures. 

Additionally, wood-decaying fungi and mold can also break down the cellulose in wood, making it weak and brittle. This type of growth tends to occur in damp, humid environments with relatively high moisture levels — like forests and wooded areas. 

Cosmetic damage

Pests can also cause cosmetic damage to property. For example, some pests may target furniture, walls, and floors and require costly repairs or replacements. They can also target belongings like books, upholstery, clothing, and food. Mitigating such damage can require time, effort, and resources. 

Health hazards

Your health is your greatest asset. Unfortunately, pests can pose health risks as well. For example, cockroaches and rodents may transmit diseases or trigger allergies with their droppings. Some people are also sensitive to chemical treatments, making removal increasingly burdensome.

What’s more, pest issues may contribute to emotional distress and anxiety for homeowners and occupants. A massive wasp nest hanging above your front door won’t exactly make you feel calm when you’re coming and going. Such occurrences can adversely impact mental and physical well-being.

Odors 

Certain types of pests may omit odors that can permeate a house, making it highly unwelcoming. Odors may arise from feces or pests dying in crevices or crawl spaces.

Legal concerns 

In some cases, pests can lead to legal issues when they infest areas with shared spaces — like condominiums and apartment complexes. Certain infestations can trigger mandatory reporting, potentially leading to regulatory actions like fines or even foreclosures.

Infestation signs to look for 

When it comes to detecting pests, homebuyers are at a disadvantage. Most buyers only get a few chances to view a property and determine if they want to make an offer. Beyond that, you have to trust the inspector to determine whether there are any signs of an infestation. 

As such, it’s critical to use your time wisely while you’re considering a property and be on the lookout for potential signs of pests. As you walk through a property, keep your eyes peeled for the following pest indicators. 

Droppings or tracks

One of the best ways to detect pests is to look for droppings from insects, rodents, or other critters. You may see small, pellet-like droppings or trails of fecal matter in places like cabinets, windowsills, and baseboards. 

Eggs or casings 

As you inspect the property, keep your eyes peeled for small eggs or casings. This may indicate the presence of pests like cockroaches, spiders, or beetles. You will typically find these items in places that are damp or out of view — like on the top of cupboards, under furniture, or in the back of drawers.

Unusual noises

Spend some time walking through the property, and listen for sounds like scratching, squeaking, and scurrying. This could indicate the presence of unwanted critters. 

Keep in mind that these noises can be hard to detect. Some critters can also be more active at night or early in the morning. Consider pressing your ear to the floorboards to pick up the sound better or even using a wall microphone to detect faint noises. 

Pet behavior

Oftentimes, buyers are allowed to bring a dog for a home visit when buying a house. If you have a furry friend in your life, bring them along. Your dog may be able to pick up on scents, sounds, or visual clues that you won’t be able to detect. If your pet acts unusual in a new house by barking, sniffing excessively, or scratching, it could indicate that other creatures are present. 

Gnaw marks

Homeowners and real estate agents typically sweep through a property and clean it up before showing it to buyers. While you want a clean house, this can make it challenging to spot cosmetic damage from pests. However, if a house has an infestation, it can be difficult or even impossible to hide it completely. 

As you look around, watch out for things like gnawing or chewing marks on walls, furniture, wires, and walls. Other indicators can include holes or entry points in ceilings, floors, and panels.

How do you treat pest problems?

If you buy a house with a pest problem, the best thing you can do is take action — and quickly. If you allow pests to persist for long periods, they can become unmanageable and potentially attract other critters, too. However, most pest problems are treatable if you catch them early and follow through with an effective eradication method.

With that in mind, here’s a quick overview of how to approach pest management.

1. Consult with a professional

If you suspect that your house or one you’re considering buying has an infestation, you may want to consult with a professional pest removal service. Aside from being a major hassle, attempting DIY pest removal or insect control can potentially make the problem worse. And if you don’t know what you’re doing, you could damage your property or create additional health hazards for family members or pets. 

Working with a professional service can also help avoid local environmental violations. For example, there are certain types of pests that you cannot legally remove due to conservation laws and regulations — like endangered species, certain birds or nesting sites, or nuisance wildlife. Some invasive species may also have rules governing their removal to prevent further spread. 

2. Identify the pests you are dealing with

A professional pest removal specialist can tell you what you are dealing with and the severity of the situation. During a routine inspection, specialists may uncover additional critters you aren’t aware of. 

After the initial inspection is complete, ask the inspectors for an official report for your records. Depending on how you’re feeling, you may choose to follow up with another service and collect additional feedback. Whatever you decide, don’t be afraid to shop around before agreeing to a treatment plan.

3. Set a course of action

After an initial inspection, a pest removal company will likely issue a remediation plan. At this point, you’ll need to determine whether you want to proceed. The best pest control products and services tend to be very pricey. But depending on how severe the infestation is, it could be the best money you’ve ever spent. 

Home pest control solutions and costs can vary depending on the scope of the infestation, the home’s size, the location, and the type of service. An initial pest control visit can cost anywhere from $150 to $350 or even more, while monthly or annual visits can cost hundreds or thousands of dollars. 

Depending on the type of infestation, a company may recommend the following pest control treatments: 

• Traps and baits for capturing and eliminating pests like insects or rodents.
• Natural remedies like diatomaceous earth, beneficial insects, or essential oils to deter or control pests.
• Regular cleaning and sanitation to remove potential sources of water, food, or shelter that attract pests.
• Sealing or refurbishing siding to close gaps and entry points for pests.
• Chemical treatments — like pesticides, insecticides, and repellents — that eliminate pest populations.

The pros and cons of pesticides

Pesticides are chemical substances that can help you eliminate common household pests like small rodents, insects, fungi, and weeds. This approach is prevalent among homeowners, with 75% of U.S. households using at least one pesticide product indoors. Pesticides are common for landscaping, gardening, and indoor pest removal.

While pesticides can be very effective in eliminating populations of pests, they also come with some drawbacks. Let’s take a closer look at the advantages and disadvantages of using pesticides on your property. 

The pros 

• Pesticides can quickly reduce or eliminate pest populations. It’s one of the fastest and most effective ways to remove undesirable vermin and prevent property damage. 

• Chemical treatments can prevent some types of health hazards. For example, they can help avoid disease transmission, control allergies, and prevent contamination on surfaces and food.
• Using pesticides as part of an ongoing preventative maintenance plan is common. Regular pesticide use can help avoid infestations and keep pests manageable. 
• Pesticides come in a variety of forms like sprayers, pellets, powders, and foggers. 

The cons 

• Pesticides can expose your family to other health risks — especially if you don’t apply them properly or come in contact with residues. Pregnant women, children, elderly individuals, and people with sensitivities may be at a greater risk.
• When you use pesticides frequently, pests can become pesticide-resistant. This can make it harder to control and remove them from your property. 
• Overusing or misusing pesticides can create pollution and impact soil or water. This could create conflicts with neighbors, local environmental groups, and even government agencies.

What to look for in a professional pest control company

If you have a severe infestation, you will likely be best off hiring an experienced pest control company to mitigate the problem for you. After all, the pest control company you partner with will impact your property, quality of life, and wallet.

Because of this, it pays to research thoroughly and pick a reputable and effective pest control company like Orkin or Terminix. This holds true whether you have a small ant or spider problem or require industrial-level termite control.

As you begin your search for a pest control vendor, keep these tips in mind.

Licensing and certification

Ensure the pest control company you work with has proper licensing and certification and meets the local standards and regulations for your specific area. 

Reputation

Before working with any exterminators, check online reviews and testimonials from other customers. Look for a company with positive feedback and a strong reputation. 

Transparent pricing

Request detailed pricing information before a pest control service begins work on your property. Watch out for hidden fees like extra treatment charges, preparation fees, after-hours fees, and material or chemical charges.

A commitment to sustainability 

Consider asking the vendor about their use of environmentally friendly methods or products. You can avoid using harmful chemicals in favor of eco-friendly alternatives. 

Should you buy a home with pest problems? 

At the end of the day, there isn’t a such thing as a perfect house. Your decision to buy a house with pest problems will ultimately depend on a variety of factors, including the severity of the problem, the cost of remediation, and your willingness to address the issue. 

Depending on your perspective and the scope of the infestation, having pests can either be a small nuisance or a major issue. Some homeowners can manage small infestations, while others need a pest-free environment for peace of mind. In either case, it’s important to be honest with yourself before agreeing to buy a house. 

If you suspect that a house has a pest problem during your home search, don’t hesitate to ask your real estate agent for guidance. And keep in mind that you can still back out of a deal after you submit an offer on a property if an inspection reveals a need for something like large-scale termite treatment, rodent removal, or cockroach elimination — particularly if the homeowner refuses to remedy the situation.

Curious to learn more about home inspections, how they work, and what you need to know? Check out Home Approach’s beginner’s guide to home inspections. 

What is included in a total monthly mortgage payment?

When you rent a home or apartment, you probably don’t think twice about where your monthly payment goes. You give your landlord a check, they cash it, and everyone sleeps soundly. 

But since you’re about to experience homeownership, you need to change the way you think about your housing costs. That’s because when you have a real estate mortgage, your monthly payment doesn’t just go to a lender; it goes to several different parties. If you want to stay on top of your finances and keep costs down, you need to understand where each penny flows. 

Pour a cup of coffee, sit back, and let’s demystify what a total monthly mortgage payment includes. 

What is a down payment?

When you buy a house, you typically have to make a down payment — or initial lump sum offering — towards the purchase price of your property. 

For example, suppose a property costs $350,000, and the lender requires a 20% down payment to avoid private mortgage insurance. In this scenario, you would need to come up with $70,000 upfront to secure financing. 

There are other expenses in the homebuying process, like closing costs, agent commissions, inspections, appraisals, and insurance. These additional costs can vary based on the location and property type, so it’s advisable to consult with a real estate professional or lender to get a more accurate estimate of how much you might be on the hook for. 

While the initial payment may seem significant, remember that the buying process is a financial test. Homes can be expensive to maintain and unexpected costs may — and, let’s face it, almost certainly will — arise over time. 

Just wait until your kids break windows, appliances stop working, or your basement floods. The more you can save now, the better off you’ll be when an emergency happens.

What is a mortgage?

Unless you’re paying off the entire home price in cash, you’ll cover the remaining property cost by securing a mortgage or home loan. To continue our example, after putting down 20% on a property worth $350,000, you would need a $280,000 mortgage to cover the rest of the home’s value.

Homeowners often pay mortgages in monthly installments lasting anywhere from 15 to 30 years or longer. This allows you to spread the loan balance over a long period of time.

Monthly mortgage payment: A breakdown

A monthly mortgage payment contains several different components. Every month, you can expect your total monthly payment to flow to each of the following items.

Principal

The principal amount balance refers to the money that applies to reducing the original loan balance. If you borrow $280,000, that’s the number you’ll be whittling away each month after taxes and interest are accounted for. Generally speaking, fixed-year mortgages are frontloaded with interest, so your monthly checks only take small bites out of the principal at first.

Interest 

Interest is the cost of borrowing money from the lender. Mortgage providers calculate interest as a percentage of the remaining loan principal. Interest typically accounts for the bulk majority of mortgage payments. The total amount of interest you’ll pay primarily depends on the rates set by the Federal Reserve at the time you apply for a mortgage. They are also influenced by whether you have a fixed-rate mortgage or an adjustable home mortgage. 

• In a fixed interest rate mortgage, interest is constant throughout the life of the loan. In other words, it doesn’t fluctuate with changes in market interest rates or economic conditions. If you bought a house at 3.5% interest using a fixed 30-year loan, your interest rate won’t change over those three decades (unless you choose to refinance to get a lower interest rate).
• An adjustable-rate mortgage (ARM) changes over time depending on market conditions. Commonly, homebuyers start with an initial fixed interest rate for a few years, and then the mortgage rates reset depending on what the market is currently charging. ARMs can be risky because you never know when you’ll end up with a higher rate after the loan recalibrates. However, if you’re only planning to stay somewhere for a few years, this could be a more affordable short-term option.

Private mortgage insurance

Private mortgage insurance (PMI) is a type of insurance that protects lenders when the borrower defaults on their mortgage loan and forecloses. 

Lenders typically require homebuyers to purchase PMI when they put less than 20% down on a property. While it’s always advisable to put down at least 20%, you can afford a property by putting down as little as 3.5% by securing a loan from the Federal Housing Authority, also known as an FHA loan.

PMI is usually temporary and automatically cancels once the borrower’s loan-to-value (LTV) ratio reaches 78%. Borrowers can also request a cancellation or wait until the midpoint of the loan term for automatic termination under the Homeowners Protection Act (HPA).

Do mortgage payments cover homeowners association fees?

Mortgage payments do not cover homeowners association fees, or HOA fees, because HOAs are separate entities from lenders, and funds given to them are put toward improving the community. If you end up living in a property governed by an HOA, you need to pay them separately to cover services and amenities (e.g., pools, fitness centers, and common areas).

Do mortgage fees include property taxes and insurance payments?

Mortgage payments do not always include homeowners insurance premiums and property taxes. However, it’s common for mortgage lenders to include them as part of the monthly payment. The corresponding acronym for payments that cover all of these is principal, interest, taxes, and insurance (PITI).

Sometimes, a lender might make a homeowner pay for the first year of insurance at closing. After that, the homeowner is responsible for paying the insurance company directly. Generally speaking, the decision to include insurance and tax bills in mortgage payments depends on the type of home loan (escrow or non-escrow) and the borrower’s financial situation.

Escrow account

Lenders often require borrowers to have an escrow account. These accounts hold a portion of the monthly mortgage payment, which the lender manages and uses to pay property taxes and, in some cases, the homeowner’s insurance policy.

An escrow account helps the homeowner stay current on their monthly obligations and simplifies budgeting for the borrower. The downside is that the homeowner usually has to maintain an escrow balance.

Non-escrow account

A non-escrow — or non-impound — account is one where the lender allows borrowers to manage their own taxes and insurance independently. In other words, the borrower becomes responsible for paying property taxes and insurance to their local government and insurance company. 

Sometimes borrowers can ask their lenders to switch to a non-escrow account and take full responsibility for their taxes and insurance. For this type of request, the lender may ask for documentation to assess eligibility and financial responsibility. In the event your escrow account has a shortage due to increased taxes or insurance costs, you may first need to pay off the deficiency before the lender agrees to make the switch. 

What is amortization?

Amortization is the process of paying off a loan over a specific term through regular installments. The two most common examples of amortization include home and auto loans. 

With an amortizing loan, each payment amount covers a portion of the loan’s principal and a portion of the mortgage interest payments for the remaining balance. Any time you have an amortizing loan, the goal is to fully pay it off by the end of its term. Better yet, if you want to reduce your interest expenses, you might even want to pay it off sooner than that.

Best practices for monthly mortgage payments 

Having a mortgage is nothing to lose sleep over. In fact, you could potentially wind up with a mortgage that is comparable to or even lower than what you’re currently paying in rent — especially if you put in a sizable down payment and choose a property in a favorable housing market. 

What’s more, you’ll essentially pay yourself a portion of each monthly installment by building equity — or ownership — instead of forking over payments to a landlord. As time passes, your principal will drop, and your ownership equity will increase. In other words, you’ll own more of your house!

As you begin getting ready to make mortgage payments for the foreseeable future, keep these tips in mind to streamline the process and avoid complications.

Always pay on time

Always make your payments on time, before the due date. Late payments can result in late fees and penalties. They can also negatively impact your credit score. 

Create a budget

Currently, 61% of Americans live paycheck to paycheck, even with inflation cooling. If you fall into this camp, be extra careful if you’re aiming to carry an expensive mortgage.

By creating a budget and sticking to it, you can ensure there’s enough money left over at the end of the month to make your mortgage payment. You may be unable to eat, put gas in your car, or buy basic household items — but at least you’ll have a roof over your head!

Make extra principal payments 

Consider making extra payments toward your principal balance every month. This can help pay down your mortgage faster and reduce your interest costs over the life of the loan. If you take this approach, be sure to check with your lender about potential prepayment penalties. 

Review your mortgage statements 

Each month, review your mortgage statements to ensure they are correct and there are no errors or discrepancies. This is especially important any time you switch lenders during a loan. 

Be careful about refinancing 

At some point, you may consider refinancing your mortgage to lower your monthly payments. This might be a good idea for someone who buys a home when interest rates are high and then decides to refinance when they fall back down to earth. However, excessive refinancing could result in higher costs over time when factoring in loan term extensions and closing costs. 

Try these mortgage calculators

Before you start aggressively looking for homes, it helps to understand what you can afford. Start by using a free mortgage calculator to estimate your potential payments. 

Here’s how they work: A mortgage calculator asks you to input specific details about your home purchase and then generates an approximate monthly payment. For example, it may ask for items like your loan amount, interest rate, loan term, down payment, property taxes, and insurance costs.  

Looking to get a better idea as to how much you can afford? Try free mortgage calculators from sites like Bankrate, Zillow, and Calculator.net. 

Thinking about a mortgage? Explore our pre-approval checklist 

Now that you know what makes up a mortgage bill, you can move on to the next step of the homebuying process: preparing for mortgage pre-approval.

This is an initial step for first-time homebuyers where a lender reviews your financial information to determine how big of a mortgage you can afford. 

To learn more about how you can get a head start on buying your new home, check out our ultimate mortgage pre-approval checklist.

Buying a home is one of the most significant financial decisions of your life. It can also be complex and overwhelming. To navigate the process as smoothly as possible and make the best decision, you need to be aware of a seemingly endless amount of factors. 

That being the case, it’s smart to work with a trained and licensed real estate agent throughout the homebuying process. No matter how much you know about the housing market, construction, and negotiating — or how much you think you do — partnering with the right real estate agent can be a godsend when you’re buying your first home. 

With all this in mind, let’s take a closer look at what real estate agents are, what they bring to the table, and the pros and cons of hiring one to buy a new home.  

What is a real estate agent?

A real estate agent is a licensed professional who helps buy, sell, or rent properties for their clients. Real estate agents serve as intermediaries for buyers and sellers and provide expertise and assistance throughout the transaction.

When it comes to buying homes, the vast majority of consumers opt to join forces with real estate agents. In fact, the latest data reveals 86% of buyers purchase a home through a real estate agent or broker. What’s more, 89% of buyers would use their agent again or recommend their agent to others.

What are the benefits of being a real estate agent?

Before you decide to work with real estate professionals, it helps to understand more about the profession and the role agents play. 

Despite what you may see in the media, most real estate agents will avoid attempting to push you into a home you don’t want or scam you into agreeing to buy a property that isn’t the right fit for your needs. Most agents register through the National Association of Realtors and pledge to act ethically and professionally. Their reputation is paramount to their success. 

Having second thoughts about why someone would want to launch a real estate career? Let’s take a look.

Make your own schedule

One of the top reasons people work in real estate is to become successful and launch their own real estate business. When you have your own business and become your own boss, you can set your own schedule, control your working hours, and achieve a work-life balance. Real estate agents typically work flexible hours, giving them more of a personal life. 

Control your income

Real estate agents have unlimited income potential. In real estate, earning potential depends on having a solid business plan (such as working with home buyers or commercial real estate investors), operating in a desirable market, figuring out how to successfully navigate slow periods, and staying motivated to meet clients and sell houses.  

Help others 

Buyer’s agents typically love working with people and helping them land their dream homes. By working in real estate, agents can directly impact clients’ lives and improve their standard of living. It can be a truly gratifying line of work.

Why homebuyers use real estate agents

Buying a home is stressful. According to one recent report, top fears for first-time homebuyers include missing out on better options (40.4%), being unable to afford a mortgage (36.8%), and rising home prices (31.6%). Of course, the list goes on and on.

A good real estate agent serves as a go-to resource for homebuyers and helps to alleviate any potential uncertainty. The right agent will listen to all of your questions and concerns and help make the purchasing process easier, more predictable, and more enjoyable by supporting you from the beginning of your search to closing.

Search for properties 

As you begin house hunting, real estate agents can tap into multiple listing services (MLS) databases and other lead generation resources to help you find a home that matches your preferences and needs. 

Often, agents get exclusive access to new properties before they hit the general market. As such, you may be able to find homes for sale before other buyers even know they’re available. In real estate, timing is everything, so early access can be as good as gold.

Provide market knowledge

In addition to discovering properties, agents also have in-depth knowledge of their local real estate market. This includes things like sales data, neighborhood information, and pricing trends. Using this information, you can gain a better understanding of property values and market conditions, which should help you make more informed decisions.

Show properties 

Agents are responsible for finding properties and allowing buyers to visit different homes. As you continue your home search, your agent will let you into houses, give you tours, and help you answer any questions you might have. Spending time with the agent also helps them get to know you better, which makes it easier for them to recommend other properties that match your needs. 

Negotiate with sellers

Worried that you’ll have to negotiate to land your dream home? Don’t be. When you hire a real estate agent, they negotiate on your behalf, working to get the best possible deal on a property’s price and terms. 

Assist with contracts 

Real estate contracts can be very complex and full of legal jargon. Agents help you understand your contract inside and out and make sure you know your rights and obligations before signing on the dotted line. 

Liaison with other professionals 

Homebuyers are typically busy working professionals and must balance other family and work responsibilities while looking for a property to buy. Real estate agents can help you save time by working behind the scenes and looping in other professionals in their networks — like mortgage lenders, attorneys, property managers, appraisers, and inspectors — so you don’t have to. As a result, they can help keep the process moving forward while you manage your day-to-day responsibilities. 

Provide post-purchase support 

The first year of homeownership is challenging. It’s not uncommon for new homeowners to have questions about things like homeowners association (HOA) fees, what to look for in lenders, and what upgrades you need to make after you close. A great real estate agent will provide post-sale support and help you transition to homeownership. 

Remember, reputation is everything for real estate agents. The right agent understands this perfectly and will work tirelessly to help you make a wise decision and end up living in a house you love. Such an approach increases the chances you recommend your agent to folks in your own network when the time comes.

How to find a real estate agent

The agent you hire will have a significant impact on your homebuying experience. As such, it pays to take your time and conduct thorough research before choosing one. With that in mind, here are some tactics to consider as you hunt for a real estate agent. 

1. Ask for referrals 

Start by asking for recommendations from colleagues, friends, and family members with experience buying and selling property. You can also hop on to local message boards and ask your community for their advice. Whether you know them or not, other homebuyers can provide valuable insights and introduce you to reliable agents. 

2. Search online 

Unfortunately, referrals may not always be available in your area. For example, you may be moving to a new market where you don’t know anyone. Other times, you may want to start fresh with your own agent because you’ve heard horror stories about other agents. In these instances, you can use the internet to search for agents in your area on sites like Zillow and Trulia and read reviews about them. 

3. Contact local real estate offices

Another way to find a real estate agent is to visit a local realtor or contact one over the phone. An office manager will ask some basic questions and connect you with an agent who may be able to help. 

4. Attend open houses 

Another way to connect with real estate agents is to attend open houses in your target area. This will allow you to connect with an agent on-site. You never know when a simple decision to show up at an open house could change your life.

Best practices for working with a real estate agent

You can’t just hire any real estate agent and expect a productive, joyful experience. Keep these tips in mind to increase the chances you hire the right agent and end up buying your dream home.

Research thoroughly

Always take the time to research a potential agent — even if that person comes as a recommendation. Not only will you want to verify their licensing and credentials, you’ll also want to read some online reviews to make sure they can meet your exact needs. 

For example, not all agents are great communicators. If you’re not necessarily the most patient person in the world, you might want to work with an agent who instantly returns your calls and texts and also checks in regularly. In this scenario, try to get a sense of their responsiveness before committing. 

Interview the agent

After you’ve narrowed down your options, schedule a formal interview with a prospective agent. During the interview, ask about their experience and determine their overall knowledge of your local market. 

As a word of caution, be careful about working with new real estate agents who may lack experience. These folks may be unable to offer the same level of guidance and expertise as a seasoned veteran. 

Respect the agent’s time

Time is valuable for a real estate agent. So, if an agent clears an afternoon to arrange a series of home visits, make sure to respect their time by showing up, taking notes, and asking questions. Remember, agents don’t get paid until you make a deal.

Be prepared to sign an exclusive agreement

A real estate agent will usually ask you to sign an exclusive buyer agency agreement. Essentially, this document indicates that you agree to work exclusively with the agent or real estate brokerage and allow them to represent you in your property search and negotiations. 

This agreement outlines the terms and conditions and length of the arrangement, as well as the agent’s responsibilities and compensation. If you end up partnering with the wrong agent, you can always dissolve this agreement and find a new agent.

The pros of working with a real estate agent

At the end of the day, you have the freedom to decide whether to work with a real estate agent or handle the homebuying process yourself. Here are some of the main reasons why first-time homebuyers would be wise to work with an agent who knows the real estate industry like the back of their hand. 

Save time and money

There’s no getting around it: Real estate is hard work. A real estate agent will save you a significant amount of time during the homebuying process by recommending properties, coordinating visits, and handling complex administrative tasks.

In addition, using a real estate agent can potentially save you money. These folks can negotiate with sellers and their agents and use data to determine a property’s fair market value. In addition, real estate agents can access off-market or pocket listings that aren’t publicly available, which may offer better deals and reduced competition.

Receive guidance and support

Despite what you might see on social media, real estate is not simple. The truth is that most first-time homebuyers don’t have the experience necessary to navigate the buying process on their own. After all, buyers need to comply with tons of legal and financial requirements, which can be very time-intensive. Agents make this complex process easier to navigate by providing ongoing guidance and support until a deal is done. 

Get objective advice

One of the best reasons to use an agent is to receive objective advice about different properties. Agents can help you see the advantages and disadvantages of different places — enabling you to make decisions that aren’t heavily impacted by emotions. 

For example, a property you might see as a dream house an agent might see a money pit. A savvy agent will be able to ensure that you walk away with a house that you love and a commitment you can live with.

Leverage connections and resources

Agents often have real estate teams full of mortgage brokers, contractors, inspectors, assessors, and other professionals. As a result, they can usually recommend other trustworthy professionals throughout the homebuying process to help facilitate the real estate transaction. Since you’re going to be researching so many properties anyway, you might not want to spend your time finding a plumber. 

The cons of working with a real estate agent

Despite these advantages, working with a real estate agent can be challenging at times. Here are some of the potential drawbacks to working with a licensed buying agent. 

Pay a commission 

Real estate agents work for buyers. They often put in a ton of effort, so they don’t come cheap. Agents typically earn a commission of around 5% to 6% of a property’s sale price, with the buyer’s agent and seller’s agent splitting the fee. While you won’t have to pay your agent directly, the funds come out of the sale price, which could cause a seller to list their home for more money.

Before hiring a real estate agent, make sure you understand their commission structure. That way, you can avoid any surprises during the closing process. 

Avoid a conflict of interest

While it’s rare, an agent may encourage you to make a higher offer on a property in order to close a deal quickly and put more money in their own pocket faster. 

If you suspect the agent is acting unethically, remember that you don’t have to rush into a decision regardless of what the agent says. Ask for a comparative market analysis report to verify the market value and seek other opinions if necessary. You can also talk directly to the brokerage the agent works for. Of course, if you still feel uncomfortable with the agent’s actions, you can always walk away from the deal and find another agent.

Work around the agent’s schedule

Coordinating schedules and finding time to drive around and visit different properties with an agent can be challenging. Because of this, it’s a good idea to treat the house search like a part-time job and budget your time accordingly. Be honest about your schedule and maintain open channels of communication.

Trust the agent to handle negotiations

When you hire a real estate agent, you need to trust them to act on your behalf during negotiations and protect your interests. The agent will also be responsible for handling your sensitive personal information. 

With this in mind, proceeding with an agent you trust and feel comfortable working with at every turn is critical. Otherwise, you may have to switch agents or realtors during the house search — delaying your purchase and potentially causing you to miss out on properties you love. 

Looking to become a homeowner? Home Approach can help

Hiring a real estate agent is just one of many important decisions you’ll have to make during the homebuying process. Before you close on your new home, you’ll need to decide if you want a homeowners association (HOA), figure out how to secure financing, and determine what you want in a neighborhood, among countless other decisions. 

During this process, you’re bound to have some questions. Before starting your real estate journey, we recommend checking out our free guide for first-time homebuyers which explains everything you need to know about becoming a homebuyer, including tips on negotiating a deal, hidden homeowner costs, unforeseen challenges, and much more. 

Read the free guide today.