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Financial Planning Advice for Buying a Home

| June 26, 2019
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Buying a home is one of the biggest financial decisions you will ever make.  Shouldn't it be part of a balanced and well considered financial plan?   

Many people consider financial planning to be all about investing.  That stops many young people (who may not be at that accumulation and investing phase of life yet) from consulting with a financial planner.  But hey - isn't buying your home just about the single biggest investment you will ever make?   Isn't it worth a small investment in unbiased financial planning advice to protect such a huge investment? 

Buying a home is synonymous with The American Dream.  And when done prudently, homeownership can be a strong foundation on which to build your financial plan.  Consider some of the many advantages of owning your owh home:  

Stable housing cost.  Rent goes up every year - but your mortgage will not.   OK, property taxes, insurance costs, and the cost of maintenance may increase over time, but your basic housing payment, the mortgage, is fixed.  And one day, if you play your cards right, will go away altogether!  Rent, on the other hand, is destined to go up year after year.  

Building Equity.  Part of every mortgage payment goes to pay off your loan balance, which increases your net worth.  Financial security is ultimately all about building net worth and owning your home is a powerful contributor over the course of your life.  The longer you own your home, the greater the percent of each payment goes toward the ultimate goal of owning your home outright.   

Beware the Pitfalls!  

While buying a home can be a smart financial move, for many Americans it is a disaster.  Here are some important things to consider before you buy a home.  

Affordability.  The real estate and mortgage industries make it possible to buy much more home than you can REALLY afford.  It is up to YOU to draw the line.  A common rule of thumb is not to spend more than 25% of your gross pay on your mortgage payment.  And maybe that is ok for many people.  But what about your OTHER financial priorities?  This decision does not live in a vaccuum.  Is it important to you to take a vacation every year?  Will you still be able to save for retirement and college for the kids?  

Understand the True Cost of Ownership.  Think about all the costs of owning a home, and make sure you will be able to afford to maintain it without having to borrow against the home to do so.  We advise homeowner clients to set aside money every month into a reserve fund for major repairs and home improvements.  The amount that is needed is substantial.  Consider the cost of replacing your roof ($12-18,000) or to replace a deck ($10-15,000) or HVAC system ($6-10,000).  Someday you may want to remodel a kitchen ($30-60,000) or bathroom ($20-30,000).  The nearer in time all of these items are, the more you will need to set aside, but for most homeowners the amount needed is likely between $500 and 750 PER MONTH!  Every month. Owners of brand new homes may find they can get buy with less, owners of older homes may need more.  For as long as you own the home. If you can't swing it - your house may soon start to feel more like a money pit than a place of refuge.  

Your Home Demands Time or Money - Which Will It Be?  The lawn needs to be cut, the gardens kept, the house cleaned, the deck washed and stained.  Either you do it yourself, or you pay someone to do it.   If its the latter, go back to the paragraph on Affordability and recompute.  Will you still have the money to buy your leisure time by paying for the services you don't have the time (or inclination) to do yourself?  

Avoid House Poverty.  Don't buy a home if it will require your last dollar to make the downpayment.   Be sure you have AT LEAST 3 months of expenses set aside in an emergency fund and cash reserve(which you will keep contributing to - see above).  

Save up that Downpayment.  Being "upside down" on a mortgage is no fun.  Many people who purchased homes in the early 2000's with little or no money down found themselves (and may still find themselves) in a position where they owed the bank more than the home was worth.  You never want to be in that position, so we still believe the best strategy is to take your time, rent, and save up the 20% downpayment.  Not only does it provide a nice equity cushion should you need to sell and move in the future, but it saves you money by eliminating the need for (very expensive) Private Mortgage Insurance. 

Eliminate Debt Before Buying a Home. Your financial life should have a strong foundation before taking on the big commitment of a mortgage.  Focus on getting out of debt before you start to consider buying a home.   

Consult a Fee-Only Certified Financial Planner(tm)  Financial planners are trained to look at your financial life holistically.  In other words, rather than looking at just the purchase of a home as a standalone decision, we look at how the purchase will impact all other aspects of your financial life - not just now but in the distant future as well.  Spending a few hours reviewing your housing plan with a financial planner can help make sure your home will be a blessing, and not a curse.    .   

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