If you recently bought a new house, congratulations! Or, if you've been a homeowner for a while now, this post is for you too.
From replacing the flooring to finding that perfect accent piece, your days have been filled with equal parts fun and exhausting as you work to make your new house a home.
Beyond the roof and four walls that you have purchased lies an investment (and potential money pit if you aren't careful!) that will likely have a significant impact on your ability to build wealth over time.
As financial planners, we have seen many financial successes and failures related to home ownership. Below we highlight some of our top tips for homeowners when it comes to building wealth:
1. Consider a 15 year mortgage (or if you have a 30 year, consider paying it like a 15 year). That 30 year mortgage payment sure looks nice compared to the 15 year equivalent, but when it comes to building equity, the 30 year mortgage is not your friend! Consider the following hypothetical example:
In the example above, you would be paying over $100,000 more when borrowing $300,000 over 30 years vs. 15 years! In addition, in the first 5 years of home ownership in the above example, approx. 68% of your payments on your 30 year mortgage will be going to interest (rather than principal pay down). On the 15 year mortgage, that percentage going to interest is 45%. If you already have a 30 year mortgage, you can simulate the equity build of a 15 year by simply paying extra towards your mortgage each month.
2. Proceed with caution on home remodeling/upgrading projects. If you jump into home remodel/upgrade projects with the justification that "we will get a return on all of these when we sell our house", you might think again. Although it sounds reasonable that any work you put into your house would result in a higher selling price, it's possible that when it does come time to sell that he upgrade you have made is already outdated, or that a buyer’s taste/opinion differs drastically from yours (i.e. you: I LOVE white cabinets, let’s invest in replacing our current ones vs. potential buyer: “I HATE white cabinets, we need to account for the cost of replacing these in our offer)
Our take on remodeling/upgrading projects? Do them if you will get enjoyment/use out of them, but don’t fall into the trap of considering every home improvement project as “a good investment.”
3. If/when you decide to move again, consider keeping your current home as an investment property rather than selling. It’s never too early to start planning your next move (literally, in this case). Start thinking about whether you like the idea of diversifying your net worth and investment portfolio with a rental property. Not sure if your current house would make a good investment property? We can help you run the numbers.
Overall, home ownership is a great opportunity for both enjoying life and building wealth. From a financial perspective, many factors need to be considered before a home purchase as well as during the years of home ownership.
For a customized analysis of your personal situation - when it comes to home ownership and all areas of financial planning – contact us at 512-649-2383 or email@example.com.
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