Our neighborhood, probably like yours, has seen a lot of houses up for sale and then quickly under contract the past several months. It’s an exciting time to be a seller, pretty stressful if you are a buyer and want your contract to stand out among the crowd. Multiple offers across different price spectrums seem to be the norm. Inventory of available homes of all sizes continue to be at historical lows as demand drives costs up. The choice on where to call home is likely one of the largest decisions you will make. Integrating your housing choices into your financial plan may be valuable in determining if a move makes sense now or if waiting may be the smarter decision. Housing decisions in a financial plan, how does that work?
What comes to mind when you think of a financial plan? Charts, graphs, perhaps some green if you are on track with your savings and investments or red if you are coming up short. Beyond colors, how much of your financial plan integrates around your home? I’m guessing here, but perhaps not as much as it should, why is that?
Purchasing a home is an emotional decision. Often when emotions are in charge or driving a process we may react (or overreact) to what is available. This is not a bad thing, just something to be aware of when preparing to make a very large financial decision such as purchasing a home. Selecting where you will spend your time, proximity to work, friends, family, community, and where the kids will go to school, all these choices do not show up as transparently as you may think in a financial plan. Perhaps that’s why most financial plans ignore housing decisions. Emotions can’t be illustrated on a spreadsheet or on the pages of a plan, but they are certainly present in the decision-making process. Our actions and priorities around where we choose to live and what that ideal lifestyle may look like are a great influencer to move or stay put. A comprehensive planner may ask questions to clarify your choices, costs, and tie in other relevant goals. All of this may increase your probability of making a good decision.
It’s common for a financial plan to focus on education funding and the ability to repurpose your time one day and retire. Education and retirement goals may change overtime, but they have one thing in common, a need for capital. Monies accumulated in 529 plan for college, prepaid tuition plans, stock purchase plans, after tax investments, and retirement accounts all make college funding and/or retirement possible. What’s different when purchasing a home is that it may not require as much capital when compared to retirement planning.
Most homes purchased today are done so by borrowing via a mortgage to close the transaction. Each lender has their own guidelines and may allow financing up to 90 percent (maybe more) of the purchase price. Of course, it helps to have equity in a current home or cash set aside to cover the down payment on the purchase. It’s not necessary though as this sharply contrasts with the required capital for making a college education or retirement happen. Add in historically low interest rates which translate to lower borrowing costs, and you may be able to purchase more than you think. The amount that you borrow, terms, and duration will have an impact on your other financial choices. It’s difficult to keep this in perspective when looking at homes online or taking in an open house. Emotions are present and always involved in purchasing a home.
Here are some questions to ask to determine if a move makes sense now:
- How do you feel about debt, specifically mortgage debt? Do you desire to carry a mortgage to and through retirement or is paying it off early part of your plan?
- How many incomes are necessary to carry the current or proposed mortgage? What would removing or reducing an income do to other financial goals and your timeline?
- How does mortgage duration influence your ability to repurpose your time, change careers, or relocate out of the area?
Overtime, the home you purchased fifteen years ago may not meet your current or future needs. Kids get older, jobs change, and employers are becoming more flexible with work and in office participation. All of this may impact the size and location of where you call home. It may be that downsizing to a smaller home may make financial sense and still meet the necessary emotional decisions that accompany the purchase. It may also be best to stay with what you have, adding renovations or improvements to better utilize your space. This decision is not straight forward and rarely are the answers obvious. Allowing yourself and significant other time to process and think through all possibilities is a good start in determining where to go next or simply to stay put.
Ultimately cash flow drives a lot of home decisions. The ease of financing and refinancing overtime may make a new residence possible. Integrating a move or renovations impacts your financial plan on many levels. If you’d like to learn more and hear other questions to consider, please reach out and we’d be happy to chat with you.