Financial considerations for home buyers
by Tracy J. Haraksin, Financial Advisor
Purchasing a home is often the largest financial decision of one’s life. This is particularly true in California. For city living, San Francisco is listed as the most expensive by Rocket Mortgage, and California tops the list with four of the top 10. Many young buyers today worry about this high cost and wonder if it‘s worth the expense—not to mention how to manage the costs.
There are many financial concerns to consider when purchasing a home. I consider the following to be the top three.
1. What can I afford?
A mortgage lender, when pre-qualifying a prospect, typically establishes the maximum loan amount. People often mistake that figure for how much they can afford. Affordability can be addressed in two ways: home price/loan or monthly payment. It is important to discuss with the lender how that total loan translates into a monthly payment. Ideally, before talking to a lender, determine the maximum monthly payment that fits into your budget.
When examining your budget, be sure to include every expense, including any new expenses you will incur after purchasing a home. One budget item people typically leave out is saving for the future. If the monthly payment you qualify for allows you to live, but not save, this is a huge problem. This often results in people being house rich and cash poor. This means you may not be able to purchase your dream home as your first home. But this enables you to “pay yourself first,” an investor mentality popular in personal finance and retirement-planning that means automatically designating a specified savings contribution from each paycheck at the time it is received. In other words, paying yourself before you begin paying your monthly living expenses, making discretionary purchases and buying a house.
2. Should I/we consider a 15-year or a 30-year mortgage?
The conventional argument goes something like this: the 15-year option may be better because you will pay less interest to the bank than you will with a 30-year mortgage. And this is often true.
However, there are many other considerations that can be just as important, if not more so, than the interest paid to the bank.
Payment Differences: A 15-year mortgage nearly always results in a higher monthly payment, while the lower payment of 30-year mortgage allows you to save more. Saving more can often be better than paying more on your mortgage. The total annual cost of your home should not exceed 15 percent of your income.
Interest is Deductible: In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Check with your CPA to confirm your eligibility. This deduction allows you to pay less in taxes over the 30 years of the mortgage, which are often people’s highest earning years, therefore, also their highest taxable years. The taxes you save can be saved for your future.
Increased Access to Cash: While the equity in your home is real, you may not realize it is not easily accessible. If you need immediate cash due to an unexpected emergency, getting cash out of your home—if you have enough equity—can be cumbersome and take months to finalize. Therefore, spending more on your monthly payment can cause you to save less, which can be detrimental and can lead to defaulting on the loan. It also prevents you from taking advantage of other financial opportunities/investments that may come your way.
3. Should I pay off my house before retirement?
While it’s important at some point to own your house free and clear, that goal must be approached in a way that if the unforeseen happens, you’re also protected from the hardships that come along with it.
While many people don’t choose a 15-year mortgage, they often choose to pay extra toward their principle. This isn’t necessarily a bad decision unless it prevents you from doing other things that should be a priority. It’s important to consider these “ifs” before paying more toward your mortgage:
• What will happen if you die?
• What will happen if you could never work again due to a permanent disability?
• What would happen if you downsized, and lost your job for a year?
Given the unrest of 2020 due to the pandemic and various policies, these “ifs” became reality for many people. Those who weren’t prepared were hit hard. Having an ample amount of short-term cash and being properly protected are simply more important financial priorities than the paying off your house.
Before any major purchase, it is important to first organize financial priorities and understand the proper order for addressing your specific situation. Take care of today, establish a good foundation to respond to life events, and then build on that solid framework to prepare for the time ahead. The decision about your home mortgage is one of many aspects to consider for your financial future.
Whatever dreams you have, it takes the right strategy to make them happen. You need a proven process that respects your current life and lifestyle—and one that puts you on a path to achieving all that is important to you.
• This article is for informational purposes only. Tracy J. Haraksin, CA Insurance License #0I13563, Registered Representative and Financial Advisor of Park Avenue Securities LLC Securities products and advisory services offered through PAS, member FINRA, SIPC. 2021-119958 Exp 04/23
To learn more about Tracy visit https://www.pacificadvisors.com/tracy_haraksin