Welcome to Day Four of the 30-Day Financial Transition Challenge. Today’s article focuses on the concept of owning the right-sized home, which is the fourth of the Five Fundamentals of Fiscal Fitness.
Bottom Line Up Front (BLUF)
Owning your residence, vice renting it, is one of the greatest enablers for average-income Americans to build long-term wealth. However, as you transition, it’s important to recognize all of the factors that go into your home decision. Today, you’re going to decide on your near-term housing plan. If you decide to rent after you transition, you’ll also want to determine when you’ll have an opportunity to look at buying a home.
If done responsibly, using leverage to establish home ownership can help you:
- Hedge against rising housing costs. In the long run, housing costs generally rise. Buying a house with a 30-year mortgage locks in your principal & interest payments at the same level, even as rents around you rise over time.
- Own an extremely valuable capital asset over the course of your life. Imagine your last mortgage payment. After that last payment, you now own the most valuable single asset most Americans can hope to have. It’s definitely worth more than what you would have after 360 rent payments.
- Use tax-advantaged incentives to help reduce the cost of that asset. People think that buying a house equals tax benefit. Let’s simply state that the U.S. Government helps us to defray the cost of home ownership by allowing us several tax incentives. After all, paying $1.00 to receive 20 cents back during tax season isn’t a great way to build wealth. However, if you’re able to get 20 cents off the purchase of that $1.00 item because you know that in 30 years it might be worth $5.00, that’s an incentive. Having a home offers the following tax advantages:
- Deduction of mortgage interest and other costs
- Special tax treatment on the sale of a home
However, if not done properly, buying a home can put you at risk of:
- Losing a lot of money due to market timing. If you buy a home, you’ve tied up a lot of money in it, even if you get a VA mortgage. Ideally, you’d like to sell on your terms. However, if you’re in a position where you have to sell quickly, you might have to pay money to get out from under the house.
- Creating another job should you become an accidental landlord. If you buy a house and stay there until you feel like selling it at the right price, that’s great! What happens if you get a post-military job that requires you to move? If you can’t sell it, you might become a landlord.
- Increasing your stress if you’re not prepared for home ownership. Home ownership is the American dream, right? What happens if you buy a house, then discover that $5,000 worth of repairs needs to be done immediately? If you’re not prepared to own a home, you might have a rough time at it, particularly if you’re a first-time home owner.
Your goal should be to figure out whether you’re in a good position to purchase a house as you transition. If so, we’ll outline steps you will want to cover as you prepare for your home purchase. If not, we’ll outline some guidelines so you’ll know when you should revisit this decision.
- Five Fundamentals of Fiscal Fitness #4: Own the Right-Sized Home (and Mortgage)
- 5 Things to Consider About Buying a Home During Your Military Transition
What you need
For this exercise, you need: Nothing. This is purely an exercise to help determine the way-forward. Some of these questions will frame upcoming actions, particularly as you start thinking about your five year plan. We’ll go into more depth about your five year plan in a couple of days. However, your post-military housing decision plays a major role in that plan, so it’s important to take some time just for that.
- Do you currently own a home? This is pretty straightforward.
- Does home ownership make sense for your transition? Here are some questions to ponder:
- Will you move prior to your transition?
- Where will you be 5 years after your transition?
- Is it better to rent now, then buy once you have more stability in your post-military plans?
- If you don’t own a home, but are planning to buy one:
- Have you budgeted properly? Purchase, mortgage payments, maintenance & repairs?
- If you have to move out prematurely (before 5 years), what is your escape plan?
- Are you pre-qualified for a mortgage?
- Do you have a real estate agent actively looking for properties? If not, do you know who you’ll use or how to find an agent?
- If you own a home:
- Is your current home part of your five-year plan? If not, what does your plan look like?
- Do you know the tax consequences of selling it?
- Have you shopped around for a new mortgage or homeowner’s insurance, in case you choose to keep the house?
- If you don’t sell, what is your escape plan if you need to relocate unexpectedly?
- If you think you’re in a position to refinance, how can you tell?
- General rule of thumb is that you should refinance if:
- You can reduce your interest rate by 1 point or more
- You plan to be in the home for 5 or more years
- Although it makes financial sense to have (and keep) a 30 year mortgage, you may decide to refinance into a 15 year mortgage. Keep in mind that the longer you have a low-interest mortgage, the longer you’re able to have compounding interest work in your favor.
- General rule of thumb is that you should refinance if:
To wrap up, today you’re going to:
- Consider whether buying a home makes sense for your particular situation at this point
- If you have a home, determine whether:
- You plan to sell it, live in it, or rent it out
- You need to refinance it
- If you don’t have a home but are planning to buy one as part of your transition, develop a checklist of ‘to-do’ items to prepare for the home purchase.
Tomorrow, we’ll discuss the importance of investing in your career. This should help you develop an overview of how that should complement your transition efforts. You won’t solve all of those problems, but you should have a big picture, which your near-term efforts will ultimately support.