Is Your House Part of Your Financial Plan?
If it isn’t, it probably should be. Properly managed, a home can be a shelter and part of a long term financial plan. For many people, the purchase of a house is their largest and earliest significant foray into the world of finance.
Finding the right home, obtaining a mortgage and then managing the monthly payments are big steps, but that’s only the beginning.
Over time, if you are diligent in making your monthly payments, you will build equity in your home which has the potential to become a material capital asset, as well as a place to live. Of course, housing values tend to fluctuate, and you may go through periods of greater or lesser equity. You might even be under water at times, but if you continue to make your payments, in the end you will own your home.
It may also be appropriate, as your needs change, to buy a bigger home, but if you make the payments, in the end, you are very likely to be able to go into retirement with a significant asset and a place to live. In effect, a portion of your monthly mortgage payment represents a forced savings plan that can be a meaningful supplement to a savings and investment program.
The foregoing is all well and good and reflects a textbook plan. Unfortunately, plans are only valid until they have to face real life. There are a wide range of reasons why it may be impossible to meet every monthly mortgage obligation. Families are often faced with expected and unexpected financial pressures, including, job loss, health, education expense and many others, too numerous and diverse to enumerate. It may also be appropriate, under certain circumstances, to realize accumulated equity through a refinancing.
However, there is also the risk of self inflicted wounds. Your home is not an ATM machine. It is not financially prudent to refinance at every opportunity and use the proceeds for nonessential purchases.
Investors should consider a holistic approach to long term financial planning. A financially successful retirement requires a carefully considered long term strategy that recognizes that there a lot of moving parts.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®