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Term vs Whole Life Insurance

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Term vs Whole Life Insurance

If you’re shopping for life insurance, there are two main types you’ll likely encounter: term life insurance and whole life insurance.

Depending on who you talk to, you’ll hear different arguments for and against both types, which can make it difficult to figure out which type of life insurance will provide the right protection for you and your family.

This guide breaks it all down so that you can make the best decision for your specific situation.

What Is the Purpose of Life Insurance?

Before getting into the debate over term versus whole life insurance, let’s take a step back and remind ourselves why life insurance is important to begin with.

While there are some rare exceptions, life insurance primarily serves one main purpose: to provide financial protection to people who are financially dependent upon you.

In other words, life insurance makes sure that there will always be money available for the people who depend on you financially, even if you’re no longer there to provide for them.

A good example of this is a couple with young children. A toddler obviously cannot support herself financially, and life insurance makes sure that there would be financial resources to care for her no matter what happens to the parents.

Other examples of financial dependents might include a spouse who would struggle to handle all the bills on his or her own, or parents who have co-signed for your student loans.

So before you start thinking about which type of life insurance you need, ask yourself the following two questions to better understand why you’re getting life insurance at all:

  1. Is there anyone who would struggle financially without your support? If not, you probably don’t need life insurance.
  2. If so, for how long will they be dependent upon you? Is it a fixed time period or is it relatively permanent?

Your answers to those questions will help you sort through the term versus whole life insurance debate with a clearer, more personal viewpoint.

The Basics of Term Life Insurance

Term life insurance is coverage that lasts for a set amount of time, typically 5-30 years. Once that period is up, the policy expires and your coverage ends.

That expiration may sound like a problem, but it’s actually similar to most other types of insurance. Things like auto insurance and homeowners insurance are typically annual policies that have to be renewed each year, and you would cancel your coverage if you no longer had a need. Similarly, term life insurance is meant to provide coverage only for as long as you actually need it.

Let’s look at the pros and cons.

The Benefits of Term Life Insurance

It’s Inexpensive

Term life insurance is typically the most cost-effective way to get the protection you need. In fact, it’s often 10 times less expensive than whole life insurance for the same amount of coverage, especially if you’re relatively young and healthy.

The main reason for the price difference is that term life insurance eventually expires, meaning it has a smaller chance of paying out. And again, that may look like a downside, but…

The Coverage Period Lines Up with Your Need

Most people only have a temporary need for life insurance. Your kids will eventually grow up and be self-sufficient. Your spouse can eventually rely on retirement savings and Social Security income. Your joint debt will eventually be paid off.

Term life insurance provides financial protection for the amount of time that you need it and no more. You should hope it doesn’t pay out, because that just means that you didn’t die early. Like your car insurance, it’s good to have in case of an emergency, but the best case scenario is never having to file a claim.

In addition, if for some reason your situation changes and you no longer need life insurance, you can simply cancel your term life insurance policy and be done with it. Again, it’s coverage for as long as you need it and no more.

It’s Easy to Shop Around

Term life insurance policies are fairly simple and therefore pretty generic. As long as you’re looking at insurance companies with a strong financial rating, you can largely shop on price alone.

My two favorite sites for comparison shopping for term life insurance policies are PolicyGenius and Term4Sale, both of which only list policies from reputable companies.

For example, using the Term4Sale quote engine, a 34-year-old nonsmoking male in New York City with “Preferred” health status could get a $1 million 30-year term life insurance policy for as little as $939.98 per year or as much as $1,255.30 per year. And again, because term life insurance is fairly generic, you can compare those premiums with the confidence that your policy would be just as good either way.

You Can Typically Convert to Whole Life

What happens if you end up needing life insurance coverage longer than you originally thought? Since term life insurance eventually runs out, wouldn’t that be a problem?

It is a risk, but most term life insurance policies allow you to convert your policy to whole life insurance without medical underwriting as long as you do it before the policy expires. Your premium would increase significantly upon such a conversion, reflecting the increased liability the insurance company is taking on by providing permanent coverage. And if for some reason your policy did require medical underwriting at the time of conversion, there would be the risk of an even bigger premium increase if your health has declined since you originally got the policy.

Not all policies have this conversion feature, but those that do remove the risk that you wouldn’t be able to get permanent coverage later on if you need it.

The Downsides of Term Life Insurance

It’s More Expensive as You Get Older

Term life insurance is typically inexpensive if you’re relatively young, but it gets more expensive as you get older, especially if you’re looking at policies with longer terms. And the reason is simply that your odds of dying increase as you age, which means the insurance company faces a bigger risk.

For example, a 54-year-old male looking for the same $1 million, 30-year term life insurance policy we mentioned above is looking at an annual premium of $5,894 to $6,780 per year.

If you’re in your 50s or above and looking for life insurance, a term policy may or may not end up being a cost-effective way to get it.

It May Not Last as Long as You Need

Life is hard to predict, and it’s certainly possible that you end up needing life insurance for longer than you originally expected. If that happens, your term life insurance policy likely won’t have a lot of flexibility that allows you to extend it, beyond converting it to whole life.

There are also some insurance needs for which permanent protection is simply better. Those are rare, but we’ll talk about them below.

The Basics of Whole Life Insurance

Whole life insurance has two primary features:

  1. It provides permanent coverage, meaning that it will never expire as long as you continue to pay the premiums.
  2. It includes a savings component that builds up over time and can eventually be used for a variety of purposes.

There are several types of whole life insurance that have slightly different features and serve different purposes, like universal life insurance, variable life insurance, and equity-indexed life insurance. For the purposes of this article we’ll focus on the basic whole life insurance that most people will come across, and for the most part, all of the following pros and cons would apply no matter which type you’re talking about.

The Benefits of Whole Life Insurance

It Can Handle a Permanent Need

If you have a permanent or indefinite need for life insurance, whole life insurance is the way to get it.

For example, if you have a child with special needs who will likely be dependent upon others for his or her entire life, whole life insurance may make sense. Or if you will have multiple millions of dollars to pass on to your heirs, whole life insurance can help with estate taxes and preserve your family’s wealth.

Most people don’t have these kinds of permanent needs, but if you do, then whole life insurance can be valuable.

It Can Be a Form of Forced Savings

For people who struggle to consistently save money, whole life insurance can be a way to force yourself to build long-term savings while also providing financial protection.

It may not be the most efficient savings account, as we’ll talk about below, but having some savings is better than having none, and the savings you do accumulate can be withdrawn for any reason. Taxes are also deferred while the money is inside the account, which can be a benefit for high-income earners who have already maxed out their other tax-advantaged savings accounts.

It’s Can Be Structured to Meet Your Goals

If you work with a life insurance professional who really knows what they’re doing, you can specially structure a whole life insurance policy to serve specific purposes.

For example, if your main goal is permanent life insurance protection, you can structure it to minimize the savings component and make that protection as cheap as possible. If your main goal is to build savings, you can structure it to minimize other costs and front-load your contributions to grow your savings as quickly as possible.

If you can find a life insurance agent who’s willing to work with you in a fiduciary capacity, meaning they put your interests ahead of their own, you can get fairly creative and structure your whole life insurance policy to meet your specific needs.

The Downsides of Whole Life Insurance

It’s Expensive

Whole life insurance is an expensive way to get the financial protection you need. For example, remember the 34-year-old male who would pay $939.98 per year for a $1 million 30-year term life insurance policy? According to LLIS, a team of independent insurance advisers, a $1 million whole life insurance policy for the same individual would be $11,240 per year. That’s 12 times more expensive for the same amount of coverage. (Though, to be fair, for a longer coverage period.)

There are also a lot of hidden fees that add to the cost, from the sizable commission paid to the agent who sells you the policy to the management fees associated with the policy’s savings account.

Unless you truly have a permanent need for coverage, whole life insurance is probably not the most cost-effective way to get it.

Most People Don’t Have a Permanent Need

The simple fact is that most people don’t have a need for permanent life insurance coverage. As your children age and your savings grow, the financial impact of your death decreases until there’s little to no risk.

It might be nice to know that whole life insurance will eventually pay out, but is that something you need? And if not, is it worth paying those big premiums over all those years instead of putting that money elsewhere?

Don’t be fooled into thinking that your insurance has to pay out for it to be valuable. If you don’t have the need for permanent coverage, you shouldn’t pay for it.

It’s Not an Efficient Savings Vehicle

The savings component of whole life insurance might sound attractive, but the truth is that it’s not an especially efficient way to save money.

It takes a long time for the cash value to build up. It’s often 7-10 years just to break even, and even over long periods of time in the best of circumstances the return is likely to be low.

Not only that, but withdrawals from your account are actually loans, meaning you’re typically charged interest for the right to use your own money. Can you imagine if your savings account at the bank charged you interest each time you took money out?

Finally, unlike other savings accounts where you can simply decide to pause or decrease your contributions for a while if you hit a rough patch, your whole life insurance premiums are due like clockwork no matter what. Your policy can lapse if you fail to pay your premiums, losing you both the protection you need and the savings you’ve built up.

The truth is that unless you’ve already maxed out all your other tax-advantaged savings accounts — like your 401(k), IRAs, health savings accounts, and 529 accounts — the tax benefits of saving within a life insurance policy likely aren’t worth it. And even then you may be better off using a taxable brokerage account, depending on your specific goals and circumstances.

Which Type of Life Insurance Is Right for You?

If you’re purely looking for the financial protection that life insurance provides, and if your need is temporary, then term life insurance is likely the best option for you. It’s the cheapest way to get the protection you need, leaving more room in your budget for your other goals and obligations.

And for most people, quite honestly, that’s the end of the discussion. Most people don’t have a need for permanent coverage and will be better off putting their savings elsewhere, like regular savings accounts for short-term needs and dedicated retirement accounts for long-term investments.

But there are a few situations in which some kind of whole life insurance can make sense.

If you have a truly permanent need for life insurance, such as a child with long-term special needs, then a whole life insurance policy specially designed to provide the protection you need at the lowest cost possible may be well worth it.

And if your income is very high and you’re already maxing out all other tax-advantaged investment accounts, a whole life insurance policy can be a way to get some additional tax-deferred savings. Again, you’d ideally want it to be specially designed to minimize fees and maximize the amount that goes toward savings.

In any case, remember to focus on the reason why you’re getting life insurance in the first place and to make decisions around that need. The right type of life insurance will likely be pretty clear as long as you keep your personal goals at the forefront.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Life Events, Mortgage

The Risks and Rewards of an Out-of-State Investment Property

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Mortgage

They say real estate is all about “location, location, location.” That’s especially true when it comes to buying a rental. Where you choose to buy an out-of-state investment property can have a significant impact on your return on investment.

For example, in a state like New York, where the median mortgage exceeds the median rent by nearly $250, buying a property to rent out doesn’t make much financial sense. If you consider buying rental property in a different state, such as North Carolina where rents in the city of Charlotte top mortgages by $84 per month, you’ll net a profit instead of a loss every month your tenant pays rent.

Before you start the interstate home search process, you should know the risks and rewards of out-of-state investment properties.

Potential rewards of buying an out-of-state investment property

Very often, the primary reason to buy an out-of-state investment property is rental properties where you live are too expensive. In some cases, you may decide to hold onto an existing home when moving to another state. There are some other more strategic reasons that we’ll cover next.

Diversify your real estate assets

Real estate markets rise and fall. During the housing boom of 2003 to 2007, many of the “sand” states, such as California, Arizona, Florida and Nevada, experienced home price appreciation at rates well above historic levels.

Investors learned a painful lesson in the danger of not diversifying when the housing markets in those states crashed during the housing crisis. Investors who had investment real estate concentrated only in these states lost big, while those who spread their portfolios out to other states fared better.

Purchase future vacation or retirement residences

If prices and rents are competitive in a state you’ve always wanted to vacation in, you may want to purchase the property first as a rental and allow tenants to build some equity for you while you generate income. After a few years, you may decide you want to spend a few months a year vacationing in the home and rent it out seasonally with a rental plan from a service such as Airbnb or VRBO.

Alternatively, you may live in a cold-weather state, such as Massachusetts, and want to retire to the warm winters of Arizona. You could put the wheels in motion on your retirement plans by buying a rental property there first that has the amenities you would want in a home for retirement.

Once you’ve pocketed some rental income and equity from renters, you can pack up for the cross-country move into the rental, throw out the snow shovel and enjoy wearing shorts instead of parkas during the holiday season.

Buy where the laws suit your rental strategy

Short-term rentals have become very popular for real estate investors, but they face legal challenges in some places. For example, New York City subways are covered with signs warning riders to avoid short-term rentals.

If you are interested in renting out your investment property through a service like Airbnb, buying in a state that has more flexible laws about short-term tenants is your best bet.

Net more income monthly with lower property taxes

According to a recent LendingTree study, homeowners in San Jose, California, paid on average $9,626 in property taxes each year. In Salt Lake City, homeowners pay only $2,765 per year — which means you’d have to get an additional $567 per month in rent in California just to cover the property tax expense before you could make any profit.

Risks of buying an out-of-state investment property

Like any investment, there are risks associated with buying out-of-state rental properties. We’ll discuss those next.

Long-distance property management problems

If you have a rental in the city you live in, you can deal with an unexpected tenant move-out or a late-night plumbing problem by driving over to the property and taking care of the issue yourself. But you’ll need to make some decisions about how to manage an out-of-state rental.

If you hire a property management company, they’ll take 8% to 12% of your monthly rent as a fee, eating into your monthly rent profit. If you self-manage, you’ll need to make sure you build relationships with local handymen, roofers, plumbers and pest control professionals so you have their numbers handy if a tenant emergency comes up.

State laws that restrict how you rent your property

Short-term rentals, such as Airbnb, may be a great way to generate a higher monthly income than you would get with a 12-month lease, but some cities and neighborhoods aren’t too keen on having a lot of different people coming and going through a nearby house. If the laws prohibit short-term rentals in an area you’re interested in, you’ll have to crunch the numbers to see if market rents for long-term leases provide you with a good return on your rental investment.

What to look for when considering an out-of-state investment property

When you’re buying in another state, take extra precautions to make sure you understand everything about the local housing market, building standards and how the local economy is doing before you start making offers. The last thing you want to do is end up with an out-of-state money pit.

Get a thorough home inspection

No matter how nice the home may look in pictures or at an open house, there can always be problems beyond the smell of new paint and carpet. Building standards and practices may vary from state to state and city to city, and you don’t want to be caught by surprise because you didn’t know polybutylene pipes behind the walls of homes built in Tucson, Arizona, have been known to burst without warning.

A good local home inspector will also help you understand whether a property has been built and maintained according to local building standards and identify any issues, such as an unpermitted room addition, that could cause you trouble with local housing inspectors down the road.

Interview several property management companies

Depending on the town, you may find very high-tech, organized property management shops with decades of experience or small mom-and-pop shops that offer real estate property management services. Either way, you want to know what they do for their fee. The graphic below provides a list of questions you should ask to make sure the property manager is a good fit for your out-of-state rental.

  • How many rental units do you manage? Ideally, you want a manager who has between 200 and 600 rental units. This indicates that the management company has a solid enough client base to understand the local market but not so extensive that they won’t be able to handle managing yours.
  • What experience does your company owner have managing rentals? When the long-distance plumbing hits the fan you don’t want to be dealing with a company that’s never managed rentals. There is no college of rental property management, and you don’t want to have your rental managed by someone who’s still learning the ropes.
  • Are you actively investing in real estate in your market? If you are buying in a housing market you’ve never purchased in, you may want to have a property manager who understands the nuances of the local rental market. This is especially important intel when you’re dealing with an out-of-state investment property in a neighborhood that may be going through changes that only an experienced local investor would know about.
  • How do you collect rent? In order to track cash-flow of a rental property, you should be able to easily track payments. The best method is through an online payment system that gives you real-time information about any late payments. If you took out a mortgage to purchase the rental property, you want to know as early as possible if a tenant is going to miss rent, so you can move money to cover the mortgage payment.
  • What is your average vacancy time on rentals? The correct answer should be two to four weeks. An experienced property management company should have the marketing and rental pricing know-how to make sure your property is not vacant for more than a month. It’s bad enough having a rental vacant, but when it’s out-of-state, you want to know the company managing the property has a track record of getting renters quickly to minimize the expenses you incur when a rental is without a renter.On the other hand, a property manager that rents out your place in less than two weeks may be pricing it too low.
  • How do you handle maintenance and repairs? It’s not uncommon for a property manager to have “preferred” vendors to help with the inevitable issues that come up with maintaining and repairing a rental. You’ll want to get a list of these preferred providers and keep track of their expenses.Also be sure to put a cap on the cost of repairs that can be done without your authorization. You should trust the company to handle a $100 fee, but you may want to cap them on anything more than $200 so you can have a chance to see if you need a second opinion with a different vendor.

Track property tax trends in the neighborhood

Property taxes are a fixed expense you can’t get around paying, so be sure to track the last five years of property taxes to see what the average increase has been. If you’re seeing an acceleration in the tax rate, figure that into your return-on-investment analysis, so you don’t end up in a situation where your monthly expenses are more than the rent you’re taking in.

Make sure you understand the rental market in the area

Rental markets ebb and flow as new homes are built, new employers set up shop nearby or new schools are built in the area. A good property manager or experienced real estate agent should be able to give you a good idea of where the market is headed with a comparable rental analysis.

When you bought your first home, you may have gotten a comparable market analysis (CMA), which analyzes what homes are selling for in the area you’re thinking of buying. A comparable rental analysis looks at rentals nearby to give you an idea of what your monthly income is going to be.

If you finance the property with a mortgage, you’ll likely need a rental analysis form 1007, which is an additional report in a residential home appraisal that provides an opinion of the market rent for the home you’re buying. In some cases, the appraiser’s projected market rent can be used to help you qualify for the new mortgage, even if you don’t have a lease on the property you’re buying.

Special mortgage considerations for out-of-state investment properties

If you’ve been buying investment property in your hometown, you already know financing a rental property comes with higher down payments and interest rates. There are a few more factors to consider.

Are transfer taxes due and who pays them?

Depending on what state you are buying property, transfer taxes may be charged for you to take ownership of the property you are buying. Unlike property taxes, these are a set lump sum percentage of your sales price, added to your closing costs.

Transfer taxes are often paid by the seller, but in some cases they may be payable when buying a home, adding to your total closing costs. It’s also good to at least know how much they are so they don’t end up being one of those hidden costs of selling a home. In places like New York City, that could mean an extra 1% to 2.625% of your sales price subtracted from your profit, in addition to real estate fees that usually run between 5% and 6%.

Are you buying in an attorney or escrow state?

Depending on where you purchase your rental property, you may need an attorney to handle your contract negotiations. That means higher costs than you’ll find in an escrow state, where an escrow offer can handle the signing usually at a much lower cost.

Are you buying in a community property state?

If you’re currently married or have a domestic partner, the community property laws could affect what happens to the property in the event of a divorce. Community property states require a split of equity down the middle, whereas the equity can be split up in negotiable amounts in a non-community-property state.

Final considerations

A little due diligence and research will help you avoid unpleasant surprises if you’re considering buying an out-of-state investment property. While many real estate companies offer “virtual tours” of homes, there’s nothing like an in-person tour to soak up the light, views, smells and feel of a home before you buy it.

If you can, budget enough time to take a trip to the state you’re considering buying in to inspect the top contenders before you start making offers on an out-of-state investment property.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

Advertiser Disclosure

Life Events, Mortgage

The Hidden Costs of Selling A Home

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

When you decide to sell your home, you may dream of receiving an offer well above your asking price. But putting your home on the market requires you to open your wallet, which could cut into your potential profit.

While some line items probably won’t come as a surprise, you may find that there are a handful of hidden costs.

Below, we highlight those unexpected expenses and everything else you need to know about the cost of selling a house.

The hidden costs of selling a home

It’s easy to fixate on the money you expect to make as a home seller, but don’t forget the money you’ll need to cover the cost to sell your home.

A joint analysis by Thumbtack, a marketplace that connects consumers with local professional services, and real estate marketplace Zillow, found that homeowners spend nearly $21,000 on average for extra or hidden costs associated with a home sale.

Many of these expenses come before homeowners see any returns on their home sale. Money is spent in three main categories: location, home preparation and location.

Location

Your ZIP code can influence how much you pay to sell your home. Many extra costs are influenced by regional differences — like whether sellers are required to pay state or transfer taxes.

For example, if you’re in a major California metropolitan area like Los Angeles, you may pay more than double the national average in hidden costs when selling your home.

Below, we highlight 10 of the metros analyzed in the Thumbtack/Zillow study, their median home price and their average total hidden costs.

Metro Area

Median Home Price*

Average Total Hidden Costs of Selling

New York, NY

$438,900

$33,510

Los Angeles-Long Beach-Anaheim, CA

$652,700

$46,060

Chicago, IL

$224,800

$18,625

Dallas-Fort Worth, TX

$243,000

$19,350

Philadelphia, PA

$232,800

$21,496

Houston, TX

$205,700

$17,477

Washington, D.C.

$405,900

$34,640

Miami-Fort Lauderdale, FL

$283,900

$24,241

Atlanta, GA

$217,800

$18,056

Boston, MA

$ 466,000

$35,580

Source: Thumbtack and Zillow analysis, April 2019.


*As of February 2019.

Generally, selling costs correlate with the home price, so expect to pay a little more if you live in an area with a higher-than-average cost of living or one that has a lot of land to groom for sale.

Home preparation

Thumbtack’s analysis shows home sellers may spend $6,570 on average to prepare for their home sale. These costs can include staging, repairs and cleaning.

Buyers are generally expected to pay their own inspection costs; however, if you’ve lived in the home for a number of years and want to avoid any surprises, you might also consider paying for a home inspection before listing the property for sale. Inspection fees typically range from $300 to $500.

Staging is often another unavoidable expense for sellers and can cost about $1,000 on average, according to HomeAdvisor. Staging, which involves giving your home’s interior design a face-lift and removing clutter and personal items from the home, is often encouraged because it can help make the property more appealing to interested buyers.

It also helps to have great photos and vivid descriptions of the property online to help maximize exposure of the property to potential buyers. If your agent is handling the staging and online listing, keep an eye on the “wow” factors they include. Yes, a virtual tour of your house looks really cool, but it might place extra pressure on your budget.

You could potentially save hundreds on home preparation costs if you take the do-it-yourself route (DYI), but expect a bill if you outsource.

Closing costs

Closing costs are the single largest added expense of the home selling process, coming in at a median cost of $14,,281, according to Thumbtack. Closing costs include real estate agent commissions and local transfer taxes. There may be other closing costs, such as title insurance and attorney fees.

Real estate agent commissions range from 5-6% of the home price, according to Redfin. That amount is further broken down by 2.5-3% being paid to the seller’s agent and the other 2.5-3% being paid to the buyer’s agent.

The taxes you’ll pay to transfer ownership of your home to the buyer vary by state.

Other closing costs include title search and title insurance to verify that you currently own the home free and clear and there are no claims against it that can derail the sale. The cost of title insurance varies by loan amount, location and title company, but can go as high as $2,000.

If you live in a state that requires an attorney to be present at the mortgage closing, the fee for their services can range from $100 to $1,500.

There are also escrow fees to factor in if you’re in a state that doesn’t require an attorney. The cost varies and is usually split the homebuyer and seller.

If you have time to invest, you could try listing the home for sale by owner to eliminate commission fees. One caveat: Selling your home on your own is a more complicated approach to home selling and can be more difficult for those with little or no experience.

Other home selling costs to consider

Now that you have an understanding of the costs that may get overlooked, remember to budget for the below expenses as you prepare to sell your home.

Utilities

It’s important that you make room in your budget to keep the utilities — electricity and water — on until the property is sold. (This is in addition to budgeting for utilities in your new home.) Keeping these services active can help you sell your home since potential buyers won’t bother fumbling through a cold, dark property to look around. It may also prevent your home from facing other issues like mold during the humid summertime or trespassers.

Be sure to have all of your utilities running on the buyer’s final walk-through of the home, then turn everything off on closing day and pay any remaining account balances.

Homeowners insurance

Budget to pay for homeowners insurance on the home you’re selling as well as your new home. You’ll still need to ensure coverage of your old property until the sale is finalized. Check the terms first, as your homeowners insurance policy might not apply to a vacant home. If that’s the case, you can ask to pay for a rider — an add-on to your insurance policy — for the vacancy period.

Capital gains tax

If you could make more than $250,000 on the home’s sale (or $500,000 if you’re married and filing jointly), take a look at the rules on capital gains tax. If your proceeds are less than the applicable amount after subtracting selling costs, you’ll avoid the tax. However, if you don’t qualify for any of the exceptions, the gains above those thresholds could be subject to a 15% capital gains tax, or higher. Consult your tax professional for more information.

How to save money when selling your home

Keep the following tips in mind when you decide to put your home on the market:

  • Shop around and negotiate. Don’t settle on the first companies and professionals you come across. Comparison shop for your real estate agent, home inspector, closing attorney, photographer, etc. It could also work in your favor to try negotiating on the fees they charge to save even more.
  • Choose your selling time carefully. The best time to sell your home is during the spring and summer months. If you wait until the colder months to sell, there may not be as much competition for your home.
  • DIY as much as possible. Anything you can do on your own to spruce up your home — landscaping, painting, minor repairs, staging — can help you cut back on the money you’ll need to spend to get your home sold.

The bottom line

There are several upfront costs to consider when selling your home, but planning ahead can help you possibly reduce some of those costs and not feel as financially strained.

List each cost you’re expecting to pay and calculate how they might affect the profit you’d make on the home sale and your household’s overall financial picture. If you’re unsure of your costs, try using a sale proceeds calculator to get a ballpark estimate of your potential selling costs. Be sure to also consult a real estate agent.

If you’re starting from scratch on your next home, here’s what you need to know about the cost to build a house.

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Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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