How Your Home Effects Your Short and Long Term Financial Health

If you’re like most people, purchasing a home is one of the biggest financial investments your going to make in your entire lifetime. You don’t enter into such a transaction lightly, especially if you already have a family or a baby on the way. You need to consider the neighborhood, the age of the house, how many bedrooms and baths it contains, does it need renovations and repairs and if so, to what extent? But according to financial expert, Geoffrey Sadek, CFP, the purchase of a primary residence might not only be your largest financial contract, but it is also one that can have serious financial consequences for your entire family for years to come.  

A Home Can Build Wealth

Owning your own home can be a great way to create financial security for your future. The rewards in the built-up equity can be like a giant savings account. Your recent home purchase will allow you to enjoy the benefits of a rising real estate market. If your home is a stater home, you can use your accumulated equity to purchase your “forever home.” 

If you live in your forever home until your retirement years, you can tap into years of accumulated equity to take out a reverse mortgage loan which will allow you to stay in your home until you either die or decide to move out. 

The beauty of a reverse mortgage loan? You never have to make your monthly mortgage payment again while at the same time, receiving a big chunk of cash that you can use to pay off debts or even take that long anticipated trip around the world. If you are currently 62 or older, and considering this lucrative loan option, reverse mortgage rates have never been more competitive. All you have to do is go online and do some research.    

Home Finance Matters

Says Sadek, how you end up financing your home can have a direct impact on your future wealth. Your mortgage can be used as financial leverage. In other words, the real estate market has a direct impact on your personal wealth. If the real estate market goes up, so does your personal wealth. But if it goes down, you will realize losses, perhaps even big losses.  

Over the course of the last century, the majority of homeowners increased their wealth by hanging onto their homes for decades. But during the Great Recession, on the average, home prices went into decline. When that happens, you might end up owing more on your home than it’s worth. 

Owning a Home Can Place Great Strain on Your Income

When home prices rise it’s because people are competing with real dollars for a nice home in a nice community to live and raise their family. Rising home prices might seem like a good thing for a seller, but it can also be dangerous for the hungry buyer. Purchasing an expensive home can place considerable strain on a family’s financial resources. You don’t want to live in a bad neighborhood that’s crime ridden. Nor do you want to raise your family in a cramped apartment. You naturally want to live in a nice, safe neighborhood with access to good schools. 

But these real estate markets are competitive by nature and they can lead to buyers using more of their income than they can reasonably afford on a house. The term for this is being “married” to your home. Families will usually resort to committing two incomes to pay for their home. But therein lies the danger. If it takes two incomes to pay the monthly mortgage, you risk going into default if just one of the incomes becomes disrupted due to job loss or disability.   

Keeping Up with the Joneses

When you get your sights set on a specific house inside a specific community, are you thinking in terms of real dollars and cents and what you can legitimately afford? Or do you find yourself trapped in an emotional case of keeping up with the Joneses? Like Sadek attests, trying to keep up with the Jones might be seen as a cliché, but it’s an all too real scenario that can destroy a family’s finances. 

The community you choose to live in can influence you in ways you might not have anticipated. In other words, you don’t want to find yourself living in a big house, in an exclusive community that you can’t afford, while parking a beat up, twenty year old Dodge minivan out front. You’ll want to park a brand new Tesla or BMW out front. You’ll want to go on extravagant vacations, just like the Jones’s did a few months back. You’ll want to send the kids to the best private schools and perhaps even join the nearby country club. You won’t make your own coffee anymore. Every morning you’ll see the Jones’s picking up their lattes at the Starbucks. 

It’s situations like these that can bring you to the brink of bankruptcy no matter how many jobs you and your spouse are working. So how do you avoid it? You must take a good realistic look at what you can afford and not afford, prior to buying a new home. 

Being a responsible homeowner can be a terrific opportunity for you to build equity and eventually, reap the rewards from it. But if you overspend on home you can’t afford, you will find yourself in a financial hole from which you cannot climb out of. 

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