Buying a house is the largest purchase most of us will make in our lives. But not everyone considers their overall financial plan when buying a house. There are plenty of rules of thumb about buying a home, but most center around affordability and making sure to buy at a certain price. There is less guidance on understanding how a home fits within a long-term financial plan. With that in mind, here are three topics to consider part of your financial plan when purchasing a home:
Buying vs. Renting a House
If you are wondering whether you should buy or rent, your time frame is important to consider. If you are planning on staying in the house (or the neighborhood) for years, consider purchasing if you can safely afford to do so. (For more, see: Are You Ready to Buy a House?)
When comparing rental cost and cost of home ownership, compare the rent you pay to the interest portion of the mortgage payment, plus the cost of property tax and home maintenance. Lastly, deduct the amount you save in taxes through the deductions for property tax and mortgage interest.
Even if the cost of ownership is a bit higher than the cost to rent, remember that if your mortgage is fixed, the cost will remain constant while rents rise over time.
Your House is More Than a Financial Asset
Within the context of financial planning, view a primary residence as an asset that you use and enjoy as opposed to strictly a financial asset.
Based on this, demanding the same rate of return you would expect from your investment portfolio may be unrealistic and unnecessary. If, on the other hand, you’re considering purchasing an investment property, you should expect the property to meet a minimum level of return and you’ll want to analyze it accordingly.
A Long-Term Purchase
As I mentioned above, there are no shortage of rules to determine whether you can afford a house in the short term, but how do you answer the question surrounding long-term affordability? Focus on whether you will still be able to fund your long-term goals at the required level post-home purchase.
So, for example, if you need to save $20,000 for retirement but buying the home means you’ll only be able to save $14,000 each year, it’s doubtful that you can afford the house long term. If you have your heart set on a house that crimps your savings, you might be tempted to assume you can just sell the house at some point down the line to meet your savings goals. Be careful, as this approach can be a slippery slope.
When it comes to purchasing a home, you should make the decision within the context of your overall financial planning. Beyond assessing affordability, understanding how it impacts your long-term financial plan and recognizing that it isn’t purely a financial asset are keys to making a good decision. (For more from this author, see: Investing in Rental Property: What to Consider.)