On this episode of Financial Discretion Advised, Tyler and Abrin tackle the Maine Real Estate Market and some homebuying tips.
The Market is Hot!
Abrin and Tyler start off talking about the current state of the Maine Housing Market. Right now, things are extremely competitive with a lot of out of State money coming in and driving property valuations sky high. This has led to offers being made above asking price and a preference for buyers who are bringing cash to the table.
Tyler explains the advantages for sellers if someone is making a cash offer:
- It speeds up the process
- No need for inspections
- No need for bank appraisals
These advantages have left a number of first-time home buyers or people trying to get into the market with a traditional mortgage at a bit of a loss. Additionally, the pandemic has created an opportunity for people to work from home and that has allowed folks who live in cities like Boston and New York to move north to the beautiful state of Maine and create a ton of competition in the housing market.
Abrin and Tyler also dive into the current mortgage rate environment and how that is only adding fuel to the fire. This leads into a discussion around refinancing your current mortgage. With rates as low are they are, you can either look to free up some day-to-day cash flow by refinancing out over the next 30 years, or possibly keep a similar payment as you do today but eliminating a ton of interest by refinancing to a 15-year loan.
This leads Abrin to explain that when rates are this low it probably makes more sense for folks to put their money to work in the market or pay down other debt before allocating that money towards paying down an existing mortgage. If rates are around 3%, your hurdle to being able to earn more by putting your money into the market is quite low. Additionally, it may create an opportunity for some people to consolidate debts by refinancing with a cash out to cover any existing debt that may being held at a higher interest rate.
First Time Home Buying
Abrin breaks down the 5 (hopefully only 4) pieces of your mortgage payments
- Principal – This is what you owe the bank for the home
- Interest – what you owe to the bank for them lending you the money
- Escrow – Fancy word for taxes and insurance
- Private Mortgage Insurance (hopefully you don’t have this) – This is additional insurance the bank charges you if you are unable to put 20% of the home in a down payment.
Any first-time home buyer should explore any loan options out there that may wave the PMI or allow for a smaller down payment.
Tyler breaks down how much you can “afford”. A good rule of thumb is making sure your housing costs (Principal, Interest, Taxes and Insurance) do not exceed 28% of your gross income, and your total debt (all payments on your house, car, credit cards, ect) should not exceed 36% of your gross income. While these are good places to start, if you are close to the 28% and 36% ratios, things are going to be tight.
Paying Uncle Sam
Abrin breaks down how the taxes on your new home are assessed. Property taxes are based on a Mill Rate and this is and the tax amount that is charged on every $1000 your house is worth. For example – if you live in a town with a Mill Rate of $15 and the town has assessed your home for $200,000 your taxes would be $3000 ($200,000/$1000 = $200 -> $200 x $15 = $3000).
Abrin and Tyler leave listeners with a tip of exploring the Maine Homestead Exemption. If you have lived in your home for over a year you can apply for the Maine Homestead Exemption which will reduce the towns assessment of your property value by $25,000. In the example above, that would result in a savings of $375 a year! Click HERE for Abrin’s blog explaining the ins and outs of the Maine Homestead Exemption!
DISCLAIMER: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security.
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Abrin Berkemeyer: Welcome to Financial Discretion Advised. I’m Abrin Berkemeyer.
Tyler Hafford: I’m Tyler Hafford. Let’s cue the music.
Abrin Berkemeyer: Hey everybody, thanks for joining us today. We’re going to be talking about the Maine real estate market and real estate in general. First wanted to start out on just where the market’s at because it’s pretty crazy if you’re looking to buy a home right now. Also, we’ll talk about refinancing and then just a grab bag hodgepodge of other real estate topics, all related to Maine real estate.
Tyler Hafford: It’s hot right now. Anyone who’s trying to buy a house can probably attest to it. It’s a tough process. You’ve got to get offers in quick and a lot of times you’re going above and beyond what they’re asking for.
Abrin Berkemeyer: Yeah. Yeah. I’ve heard a lot of different anecdotal stories from clients, friends, family, professional network, folks that work on loans, acquiring the loans for our buyers. The Maine real estate market, really tight market, obviously. Places that the more cash you can put down, the more a seller is going to like that because they’re going to get value out of you real quick.
Tyler Hafford: Yeah, value out of you quick. There’s a few other things, right? Someone brings you a loan or they’re going to get a mortgage to buy your house, they’re subject to all bank inspections and appraisals and all of these things that make the process more complicated. A cash offer doesn’t come with any of that, right? You bring the cash and I’ll bring the house and we’ll finish this up. That’s been really attractive and what we’re seeing quite a bit is not Mainers really stoking the fire of the main housing market.
Abrin Berkemeyer: Yeah. We got two competing forces right now. We got a lot of out-of-staters coming in, whether relocating with COVID. Remote work is a big possibility for a lot of folks so that opens up opportunity to work in different parts of the country. If you want to move, more folks might be able to move now because they can do their job remotely. That also attracts people to Maine and then obviously, out-of-state money. Folks that have a lot of money in larger, richer States that want to buy a second house because they’ve had an affinity for Maine, or maybe they’re from Maine originally and they want to buy a camp or a second home. Those are all downward pressures or I guess, upward? Downward?
Tyler Hafford: I don’t know which direction you’re going, but-
Abrin Berkemeyer: It doesn’t matter. It’s-
Tyler Hafford: We’re in Maine, everyone’s coming up.
Abrin Berkemeyer: It just depends on what side of the equation you’re on.
Tyler Hafford: But yeah, you’re right. You have people, let’s say, they’re working in New York City, making quite a bit of money, especially in comparison to what you’d make in Maine and you have some cash. You want to get out of the city. You can work from home now. You might as well have a home that doesn’t have 200 taxis outside the window. You looked at the Maine housing market. You outbid some people by going above what people are asking on the house and you bring cash to the table and it creates this really hot market. And what it’s doing for folks is, if you’re seeing a house you like, you got to put an offer in immediately. And in most cases, you’re putting an offer in that is above what they’re asking too. You’re doing it immediately. You’re putting more money out there than what they’re asking and it’s just a firestorm like you said. It’s-
Abrin Berkemeyer: Yeah, and it really comes back down to everything within all markets, supply and demand. There’s a lot of demand right now in the Maine housing market. Supply is limited even over the time of COVID. People might understand this just by trying to buy a dishwasher or a washer/dryer unit. Even those things are backordered because construction costs are really high and getting basic materials have increased a lot and supply chains have disrupted. Even building new houses right now is really costly with the rise in the cost of lumber and things of that nature everywhere.
Tyler Hafford: I think what we’re trying to say is the housing in Maine is the new toilet paper. It’s flying off the shelves.
Abrin Berkemeyer: Yeah. Yeah, it really is.
Tyler Hafford: There’s a second factor to this, why the housing market’s just hot in general, not just isolated to Maine, but in general, is that mortgage rates today are just rock bottom.
Abrin Berkemeyer: Yeah, really good time for buyers to go out there, take on debt [crosstalk 00:04:27] at historically low rates so it’s this perfect storm between a really good time to buy, plus a lot of people want to buy in our area, driving up costs. Yeah, and their relationship between interest rates and what happens elsewhere in the country with the Fed, obviously interest rates are really low today.
Tyler Hafford: And this is probably going to be a trend for a little while. The Feds has been committed to-
Abrin Berkemeyer: They’ve come out and said they’re going to keep interest rates pretty low.
Tyler Hafford: Keep them low for a little while. Will they be this low? It’s tough to say how long this will last, but when you’re hearing mortgage rates around 2.5% or something crazy like that, I don’t want to say it’s stealing money, but in the history of borrowing to buy homes in this country, it is definitely historically low and creating a lot of opportunity for folks, especially… You don’t have to be buying a new home to take advantage of that, right?
Abrin Berkemeyer: Right. Yeah, you could be refinancing.
Tyler Hafford: Exactly, and which a lot of people are looking into right now and I have a lot of conversations with clients and I’m sure you do too, it comes up quite a bit of, “Should I refinance my mortgage?” And I know we’ve touched on this a little bit in past podcasts, but I think there is an advantage or an opportunity out there for folks to… Depending on where you are, if you want to save some cash flow in your day to day, maybe refinance. Maybe you bought a house a couple of years ago, but you’re like, “Geez, these rates are just half of what I got then, which seemed like a good rate.”
Tyler Hafford: Refinancing it out that 30 years at the lower rate will give you a lower payment so you’re going to have more cash today. It gives you more cashflow, positive stuff in the short term, but you ultimately have the opportunity of refinancing out to maybe a 15-year loan. And you won’t see the savings today, but your payment probably won’t change all that drastically. But what you’ve done is cut a ton of years off the end of your loan and you have this long term interest savings because you’re not paying 30 years at 5% instead of 15 years of two.
Abrin Berkemeyer: Right Yeah, you cut your payments in half, more of your payments are going towards the principal. You’ve lowered your interest rate, which helps keeps your payment a little bit lower. Plus, you’re paying less interest to the bank and you’re paying less interest to the bank for half the time. Yeah, definitely opportunities there for folks to run the numbers, mortgages in comparison to what you have left on your current mortgage and the interest rate versus what you can refinance to and the closing costs. Those are all just numbers you can run and get the cost comparisons as long as you know how to do the math.
Tyler Hafford: I also mentioned it to some clients who have a hard time figuring out if they need more cash today, if that’d be helpful, or maybe cashflow just seems a little unsteady. It’s COVID. What’s going to happen? I also think rates are low enough that taking on a 30-year loan at two and whatever, and if you have the ability to make prepayments on the principal, do that, and that’ll help you down the road on eating up the interest anyway. But you have the lower payment requirement if there’s months where maybe things are a little tighter. I think the rates are low enough that that’s not a bad strategy to take for someone who’s just maybe a little uncertain on what cashflow is going to look like month to month.
Abrin Berkemeyer: Yeah. Yeah. It gives you that flexibility and if you do refinance out to another 30 year and you only have 25 left on your old loan and you want to keep the same schedule, if you’re able to continue making those higher payments earlier on, it’s only going to benefit you more. Mortgages, they take their interest upfront and as you see with any amortization table when you buy a house, the first couple of payments, you’re like, “Wow, I’m paying a lot of interest.” As time goes on, eventually more of your payment is being applied to principal. That’s always on the back end because the bank is going to get their money up front with the interest payments.
Tyler Hafford: I think it’s the first few years that you’re paying the interest. It’s not the first couple of payments. You pay quite a bit on the interest for a little while, but mortgages are good debt. They’re good debt to hold, especially low mortgage rates like that. This isn’t something that we talked about prior to coming on, but I think it’s something I can throw at you here is, a lot of people ask, “Should I be paying off my mortgage? I have some extra cash. Should I be throwing it at the house right now?”
Abrin Berkemeyer: Yeah, just think about that.
Tyler Hafford: Yeah, rates so low, I think there’s a pretty good argument to say, “No, you don’t need to be prepaying or paying down the house,” right? You have this good debt. Rates are extremely low. Market is doing really well. You might be better served putting your money elsewhere.
Abrin Berkemeyer: Yeah, it goes back to the whole notion of, “Do I invest or do I pay down debt,” and that time old question. Yeah, generally if you’re paying down your mortgage faster and say you got a 2.5% interest rate and you’re guaranteeing to save 2.5% interest, and that’s your rate of return. If you’re parking that in a high yield savings account today, you might be earning half a percent. Yeah, pretty clear, easy there. Save yourself an extra 2%, that difference that you can make by paying off the mortgage instead of having excess cash savings.
Abrin Berkemeyer: But if we’re going to take that money and put it in the market and say we got 15 years left on this loan and you’re prepaying and you’re trying to get it paid off more aggressively, save yourself that 2.5% interest. 15 years is a long time. Over 15 years, if you’re in a moderately aggressive portfolio, maybe you’re able to earn five, 6% a year. Then you come out, you’re still paying the bank 2.5%, but you’re now netting 2.5, 3.5% above and beyond what you paid the bank because you invested the money. The longer the timeframe that we have, the more likely that we’ll be able to achieve the success rate of returns-
Tyler Hafford: And then-
Abrin Berkemeyer: … but the shorter the timeframe, the more up in the air it is just because nobody knows what’s going to happen in the market in a year or two or three. But the longer the timeframe, historically, the more likely it is that you’ll end up on top.
Tyler Hafford: And it’s easier to have that conversation when the bar is so low on the interest rates on the mortgage, right? If you’re looking at interest rates of, I don’t know, maybe you have an older auto loan out there at 7% or something like that, that hurdle starts to become a little harder to make if we’re-
Abrin Berkemeyer: Yeah, if you’re guaranteeing 7% interest rate savings and you’re saying, “Hey, maybe I’ll be able to learn five or 6%,” take the guarantee.
Tyler Hafford: Yeah, the length of the loans are short so really, you’re playing a short game. Yeah, I don’t think if you have a ton of cash sitting on the sidelines right now that you got to be piling it in the house, depending on your interest rates. Certainly take a look at your interest rates, but if you are having any thoughts about refinancing, I think right now it’s worth at least having a conversation with a loan officer about what available out there.
Abrin Berkemeyer: Yeah. Yeah, and I think the other important thing to remember is that with the length of your loan, you might qualify for better rates. If you originally had a 30 year mortgage and now you paid off 15 years and now you might be looking at refinancing at a 15-year mortgage, then generally, the way it works with the bank like it does with bonds, is that the longer the loan, the higher the interest rate because if you have a 30 year loan, that’s 30 years that something bad could happen and the bank doesn’t recoup its capital. If you have a 15 year loan, that’s half the time that something bad could happen, then the bank doesn’t recoup its capital.
Abrin Berkemeyer: The bank understands this and the bank knows that 15 years, a lot less risk than a 30 year loan with somebody because it’s just less time that something bad could happen where they don’t get their money back. Generally, if you’re looking at shorter-term refinancing, you might be able to get even better rates than if you’re looking at 30-year rates. If you look at a 15-year rate, it’d be going down a couple 0.1, 0.2, 0.3, 0.4, whatever percentage it is and get a lower interest rate because the bank knows there’s less risk in the shorter-term loan.
Tyler Hafford: And I think it’s worth noting too for folks who are considering the refinancing thing, this is a question I get quite a bit, is just closing costs on that loan, worrying about having to bring money to the table to do it. Now, this is a bit anecdotal just from my experience so certainly things… Anyone listening too, I would investigate, talk to a loan officer, talk to the bank, but a lot of times I’m hearing that people are coming in with no money down and just rolling those into the cost alone, doing out the calculations and still ending up saving money down the road, just because the rate change is so drastic.
Abrin Berkemeyer: Yeah, you might increase your principal right off the bat by rolling the closing costs in but if it’s been a couple of years since you got the loan, then the house value might’ve appreciated. In today’s market, it’s more than likely it’s appreciated and then there’s more equity that you have to pay towards the closing costs. I think the other nice, important, fun topic with mortgages is that it could be another time to consolidate debts if you’re refinancing.
Abrin Berkemeyer: You could do what’s called a cash out loan refinance where you actually take cash out of your equity. If you’ve got a $300,000 house, you’ve got $150,000 left on your mortgage and you’re looking to refinance and say you’ve got $50,000 of student loan debt and it’s 6%. You could take out a new mortgage on your house for $200,000, pay off the student loans with the cash you get out of the mortgage and then just pay the mortgage back at a lower interest rate, maybe at that 2.5% rate compared to that 6% rate that we were talking. And that’s another good option for folks looking to get rid of some other debts. Only make it down to one payment, get a really low interest rate and then they go through refinancing.
Tyler Hafford: Yeah. It’s cheap money and in the past, the downside of doing a cash out like that is that you wouldn’t be able to deduct the interest off of the loan that wasn’t on the home, any money that was outside, any of the cash out, that wasn’t protected by the home. But today it is so difficult to get above those deduction limits, those standard deductions at the… And the rates are so low that your home interest isn’t really getting you to itemize anyway. It doesn’t have that drawback anymore and like Abrin said, if you can get a cheaper access to money like that, take care of some other debt, geez, it’s a good opportunity.
Abrin Berkemeyer: Yeah. Yeah, definitely could be a really good planning tool for some folks, but like always, just run the numbers.
Tyler Hafford: Yeah, I mean all of this, right? Just to let listeners know or people watching us know how the donuts are made, Abrin and I, when we sit down with clients, we’ll do out a calculation and tell you, “If you switch this rate in this term, this is how much you’d save in interest. This is what your payments would be.” These are all things, I think, if you’re working with a financial advisor, they should be qualified to do for you. Certainly run the numbers, have that conversation. It can’t hurt you to have the conversation. You might as well to see, “Will this benefit me?” And I think what you need to decide is do you want it to benefit you today or are you okay today and you want it to benefit you down the road, and that’ll help you decide on what that mortgage term should be.
Abrin Berkemeyer: Definitely, and I think, sticking with running the numbers, why don’t we switch gears a little bit and talk about first-time home buyers because first-time home buyers running the numbers is something I do all the time for.
Tyler Hafford: Yeah. Well, you run the numbers anyway. I make the coffee.
Abrin Berkemeyer: Yeah. Obviously, looking at taking on a major debt obligation like a mortgage, want to look at, “What’s my monthly payment going to be,” and talk it through, first-time home buyers, “What are the components to, your mortgage debt and what you’re actually paying for?” Why don’t we start there because it’s just like the most basic and we’ll touch on some other topics that’ll be good for regular homeowners, just if you want some more information as well, even if you already own a house, but yeah, you get five key components to any mortgage. “Hopefully, you only have four,” is what I tell clients. And the main four are… Obviously your mortgage payment gets split up into these four parts.
Abrin Berkemeyer: One is principal, and that’s the amount that you’re paying down on your debt. If you owe 200,000 and 500 of your payment goes towards principle, the next month, you’ll only owe 199,500. That’s the amount that you’re paying down on your debt. Obviously, you have interest service on top of that so whatever your interest rate is, divide that by 12, multiply that times your $200,000 balance and that’s how much you’re going to pay in interest. We can add up those two real easy. And then the other payments that you’ll make generally with a mortgage are going to be your escrow payments, and escrow is just a fancy word for taxes and insurance. It’s an account that the mortgage servicer will pay those bills for you out of the escrow account.
Abrin Berkemeyer: And so, those are other considerations that you’ll have to pay on top of your mortgage. Then the fifth one that I said that hopefully you don’t have is private mortgage insurance. Private mortgage insurance is the one that we like to avoid if we can. Obviously some younger folks getting that steep 20% down payment on a conventional loan is difficult and may not be in the cards, depending on what the timeframe is of the goal. And-
Tyler Hafford: And just to back up for listeners, private mortgage insurance is something that the bank is going to have you pay if you can’t put up 20% for the house, or until you own 20% of the home. And what they’re doing there, it’s just like Abrin talked about in the interest rates is there’s a higher risk of them not getting their money back. And if you can’t put money up, the bank wants to ensure that you’re going to pay for that extra risk. There’s this private mortgage insurance. And the reason why we say you don’t want that piece is because it’s the one part of the puzzle that you can avoid, right?
Abrin Berkemeyer: Right, if you can avoid it.
Tyler Hafford: If you had the down payment, or if you found a loan option that will allow you to come in with lower money and no PMI, but yep. Sorry, I didn’t mean to cut you off there. I just-
Abrin Berkemeyer: I was going to explain it, but you explained it very well. Yeah, and really, if you think about it, it’s not getting you anything, right? The principal, that’s getting you equity. The interest, that’s getting you the house now because they’re giving you the money for the house. The insurance, that’s giving you insurance, that if anything happens to your house or something happens at your house, that you’re covered. And then obviously, the taxes are ensuring that you get to remain in your house and stay. But the private mortgage insurance, you’re not getting anything out of that, except for added cost to buying the house. Now the bank is the one reaping the benefits of the mortgage insurance, if anything happens.
Tyler Hafford: Yeah, and I think another good thing is, I get this question a lot of people asking me, “How much can I afford?” There’s some rules of thumb out there on how much your payments should allocate toward, or how much of your payments should be designated to your house and there’s some ratios there. What they’re going to say is that 28% of your income should be allocated to your home, or up-
Abrin Berkemeyer: On the high end, yeah.
Tyler Hafford: On the high end. What I tell folks is that is the high end of it, right? You’re probably going to be pushing the envelope a little bit if you’re in that range. Going lower is always better. And then there’s another ratio where they’re going to say that your total debt, you’re payments on the house, the car, or any other debt out there should only represent about 36% of your income. Again, if you are at the top end of that, things are probably tight.
Abrin Berkemeyer: Yeah, and some banks might even go even higher than that, which definitely as a financial advisor, starts screaming “Scary area.” Some banks might lend you money up until say a 43% debt to income ratio and that’s just… Okay, that’s a lot of leverage that you got going on [crosstalk 00:20:00].
Tyler Hafford: I think there’s some scarring from 2008, 2009 around that, right? We don’t have to go too far back in history to see the damages when you are starting to overextend yourself on loans like that. And what happened there was that people were taking out loans that were just too big and the house values fell and couldn’t back up those loans anymore and people got in trouble. But those subprime loans, those big loans… Know your budget. Those are the rules of thumb. Just like we talked about in the last podcast, rules of thumb are great, but they’re just rule of thumb. You got to look at it. If you’re pushing 36% of your income on debt and house payments, like I said, things are tight. It’s going to be tough and any disruption to your income is probably going to cause you to lose the home or have some adverse effects.
Abrin Berkemeyer: Right. Right. Yeah, definitely don’t want to accidentally put your self in a situation where a tighter budget might end up being a no budget, no incident
Tyler Hafford: And a lot of people through COVID saw some things happen from disruptions, like being furloughed or taking a pay cut to keep your job and things like that and those are unknowns, right? If you bought a house two years ago, if I would have come to you and said, “Hey, there’ll be a virus in two years. You’re probably going to have to cut your pay by 20%. You should go lower on the mortgage.” You would tell me, “Nope, that’s probably not going to happen.” I don’t know what’s out there in front of us and none of us do, but being prepared for those things, I think, is all part of the financial planning process. You don’t want to be overextending yourself, especially if you’re a first-time home buyer because it can be really difficult. Sorry, I hit the table. Abrin yelled at me before the podcast not hit the table.
Abrin Berkemeyer: It shakes the camera.
Tyler Hafford: Especially if you’re just starting out, I think if you are really strapping yourself… I know they call it house poor but if you were really strapping yourself to a house payment that is just too large, that’s really going to… It’s going to impact your savings. It’s going to impact you setting stuff away for retirement, paying down debt, student loan, all of the things that people who are just starting out have to deal with is only going to be harder if you’re thinking, “Geez, I need that dream home,” and the payment’s just higher than what you can afford.
Abrin Berkemeyer: Yeah, definitely. Yeah. Let’s swap over to the mortgages now and specific types of mortgages just because that folds in, and it could be applicable for other folks as well, depending on what type of mortgage they have today and refinancing. Conventional wisdom says we should go with a conventional mortgage and all a conventional mortgage is a mortgage that a bank will put out. And that’s what we alluded to earlier, where you generally put 20% down as a down payment and then that helps you avoid the private mortgage insurance. Banks will still give you a conventional mortgage, even if you don’t have the 20% down. Maybe you can only put 10% down and then you’ll be paying private mortgage insurance until you pay down the mortgage till you have 20% equity in the house and that loan to value is 80% for the bank.
Abrin Berkemeyer: And then they’ll drop the private mortgage insurance so that’s obviously just because the mortgage insurance goes away. But there’s other loan programs out there that you can utilize that have different mechanics to them such as FHA loans. This is obviously a really popular one for first-time home buyers or just folks that are looking to get a new house with a low down payment because FHA loans, they only require 3.5% down to get the mortgage so obviously much lower hurdle to cross though the big catch-22 is they don’t have private mortgage insurance. They have mortgage insurance premiums or your MIP. Very similar. It works the same way. Covers the agency in the case that you stop making payments. But with an FHA loan, that’s a loan where that mortgage insurance never goes away.
Abrin Berkemeyer: Right there, you can see if you purchase a house, you have a big upfront payment, big portion of that goes to mortgage insurance and that expense never goes away, even when you hit 20% equity. That’s another good mortgage to consider refinancing. Even in today’s market, if you don’t think you have 20% equity, because you haven’t paid down your mortgage for that long, go check with the bank. They might appraise it for higher than you think your house is worth and you might be able to cross that 20%` threshold and refinance to a conventional loan, get rid of that mortgage insurance. Lots of good opportunities out there. And then the Bangor Savings Bank, they put out a 10% down, conventional loan for first-time home buyers that actually avoids private mortgage insurance. That’s a really nice product out there that I’d like to talk through with clients.
Tyler Hafford: Yeah, yeah. Yeah, I think it’s worth the conversation right now. The environment is so advantageous to just at least have the conversation, whether it’s with a financial advisor, someone you’re working with or talking to a loan officer at the bank or exploring online lenders. That’s something I’ll tell you, just personally, I used an online lender in my last purchase of my home a couple of years ago and really liked it but-
Abrin Berkemeyer: Yeah. I always say like, “Hey, talk to two to three people.”
Tyler Hafford: Yeah. It’s something you want to shop around. You want to take a peek at if you want but you can find out a lot of these things. If you have an FHA loan, talk to the bank. Am I close enough to get rid of that PMI if I refinance? What happens if my house gets appraised and we’re higher? Do I kick that off? That can be worth it. It’s something to… Have the conversation. I think it’s a good time to be doing that.
Abrin Berkemeyer: Yeah, definitely. And let’s end the conversation with everybody’s favorite topic of all time, taxes.
Tyler Hafford: Ah, taxes. When did Uncle Sam show up?
Abrin Berkemeyer: Right. Anytime there’s a transaction.
Tyler Hafford: I was going to say, pretty much every time you do anything, he’s there with his hands out.
Abrin Berkemeyer: Yeah. Property taxes, pretty simple concept. You pay it to your locality. The way property taxes work is you have what’s called the mill rate and that mill rate is just how much in tax you pay per thousand of value house. All over the state of Maine, you’ll notice that there are varying mill rates. Obviously Portland, hot area, really high mill rate, higher taxes. You go to somewhere like Harpswell, you might be paying some of the lowest taxes in the state of Maine. It’s because they have a lower mill rate per thousand dollars value of your house.
Tyler Hafford: And what I think is important when you’re looking at mill rates, I remember when I was first looking for my home, always wanted low taxes, right? That’s something to consider, but there is a trade off there. Low tax towns maybe don’t have a police station or fire station and-
Abrin Berkemeyer: Or their school system’s lumped in with other localities in this whole area.
Tyler Hafford: Yeah that’s the other one. School systems are directly tied to property taxes in Maine. You’ll notice higher mill rate places tend to have higher quality schools and it’s just a direct relation there. There is a trade off for getting those lower taxes. I just know that when we were originally looking, taxes were a big part of the conversation because it’s lumped into that payment and you’re like, “Geez, well, how much am I buying?” You feel like you can get a bigger, nicer house in a town that has a lower tax rate. You certainly can, but you may be maybe trading things off.
Abrin Berkemeyer: Yeah. Yeah, you always got to ask yourself that quality of life question. Maybe lower taxes, a little further away from certain areas, maybe the drive a little more, commute a little more, things of that nature or taking into consideration things like school districts and things like that. One area that all Mainers should be aware of is the Maine homestead exemption. This is one way that you can lower your property taxes. You can lower your property taxes one of two ways. One, you could have a lower mill rate, which might be moving somewhere else, or maybe you’re super involved in your community and you’re lobbying to get folks to lower the taxes in your town or two, lower the value of your home. But who wants to go take a quarter of their house off so they get a lower valuation? Nobody’s going to do that. That’s crazy. One way you can actually lower the value of your home, or let’s call it the assessed rate, which is the rate that the town-
Tyler Hafford: Town uses.
Abrin Berkemeyer: … uses to tax your house. You might see that your market value of your house is say 350,000. Maybe your assessed rate is 250,000 and that 250,000 is the value that the town has assessed your house and what they’re going to tax you on, not necessarily the market value and they’re two different figures.
Tyler Hafford: And you don’t want them. The market value tends to be higher than what the-
Abrin Berkemeyer: Tends to be higher.
Tyler Hafford: … town has assessed you at. You’d rather use that assess rate because remember, they’re basing it off of a thousand dollars of value.
Abrin Berkemeyer: Right. If you had a $100,000 value because the market is willing to pay you more for your house, you’re paying more taxes on that.
Tyler Hafford: Pay more taxes.
Abrin Berkemeyer: It could be a lot. They tax you on the assessed value. In the state of Maine, we have the Maine homestead exemption. It’s quick form, one page. Do that.
Tyler Hafford: Go to your town office. They can give it to you. You can download it online. I want to thank anyone who’s made it to this part of the podcast because this is so important and it’s something that a lot of people aren’t taking advantage of. This is your reward for having to listen to Abrin this long, is look into getting a homestead exemption form. Fill it out. Drop it off at your town. Take advantage of these tax savings.
Abrin Berkemeyer: Yeah. It’s $25,000 off of the assessed value of your house. If you’re in a $20 mill rate, that’s 500 bucks you might be saving.
Tyler Hafford: Right. It’s a big deal, but a ton of people either don’t know about it or they’re not taking advantage of it and it is a simple way to save money. Go out and take advantage of that.
Abrin Berkemeyer: Yeah. If you’re not sure if you have it, you can check recent tax bills. You could call your local town hall and ask them just to make sure that you’re getting those tax savings because it’s available to any homeowner in the state of Maine, as long as you’re a resident and it’s your permanent address.
Tyler Hafford: Exactly.
Abrin Berkemeyer: Yeah, and you’ve been there for more than a year. We’ll leave you with that. Nice tidbit of information.
Tyler Hafford: Yeah, go save some money.
Abrin Berkemeyer: Go save some money. The deadline for that is April 1st every year so if you can get it in by April 1st of this year, you’ll get the exemption for 2021. If you don’t get it in by the deadline, it’ll apply to next year. But either way, get it filed. The sooner the tax savings, the better.
Tyler Hafford: Yep. I’ll do a plug here for Abrin since he didn’t want to do it, but there’s a blog out there on homestead exemption that we’ve put out that’s available. Check out our social media sites. As always, like us on any podcast or you’re listening to us, like us on YouTube. Share us. If anyone you know is buying a home, this is probably a good podcast for them. Shoot it over to them.
Disclaimer: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Thank you.