Can you afford a home? As a financial planner, many clients request our help in determining the affordability of a home. When considering whether a home is affordable, we oftentimes are asked to consider how the initial down payment, monthly mortgage payment, and the annual maintenance of the home impact the financial future of the household. Besides considering the financial impact, we always ask the client to consider their motives. The most common theme of homeownership is the following: a. Tax Shelter -Deductions on personal income tax (if itemizing) include mortgage loan interest and property taxes, b. Inflation Edge – Real estate is can be an appreciating asset, usually at a rate equal to or greater than the economy as a whole; therefore, a home may provide can diversify your investment rate of return over a period of time, c. Psychological factors: pride of ownership, feeling of permanence, sense of stability.
However, these intangible motives should be balanced and analyzed from a financial planning standpoint. A potential homebuyer should review this decision carefully with their financial planner, mortgage lender, tax advisor, and a real estate professional to determine whether their decision to purchase a home is reasonable and helps improve their financial condition. We advocate for prospective home buyers to assess the impact of the true cost of home ownership on their balance sheet and the impact on their budget. As financial planners, we can assess based on a prospective range of market values, and determine whether the impact of the cost of owning a home is affordable and within your family’s budget.
This decision analysis should be considered within the framework of an affordability analysis and comparative cash flow analysis of the cost of renting vs. the cost of buying. Your mortgage banker can provide counseling and financial advice as to how increasing your family’s debt load could either help or hurt your family’s financial standing with either current outstanding creditors or future credit needs. Additionally, your tax advisor should help to quantify the tax impact of the decision to purchase or rent a property by providing you with a side-by-side comparison within a current year mock-tax return analysis. In general, the higher your families marginal tax bracket, the greater the tax advantage will be for ownership of a home.
Our firm believes in a team-based approach to help inform and advise your family in making this important investment decision. As your financial planner, we believe that it is our duty as fiduciaries to coordinate and quarterback this team of professionals, so that your family is making the best decision possible. We stand ready to help as your most trusted financial advisors!