Wednesday, June 04, 2008

How We Think About Our House Financially

We really like our house. We live in a middle class neighborhood with a good school district. We hope to live here until our daughter graduates from high school. As a result, we do not take any financial risks with our house. Here's our financial do's and don'ts for our house:

Our Do's:
  1. Think of a house only as our home. It's a place to live, enjoy and raise a family. Although it does have a value, we don't think of it as an investment, an appreciating asset or savings. We don't worry if our house is going up or down in value since we aren't planning to sell in the near future.

  2. Know a house is a big expense. If we were barely meeting our expenses while renting, we would not buy a house. To me, the cost of owning is much higher than renting. There is the mortgage, taxes and upkeep. Not to mention the additional time and effort one needs to spend on maintenance.

    We try to set aside 1-2% of our house value each year for eventual major repairs, e.g. new roof, new furnace, that do not occur every year. For example, this year we have replaced a furnace and a/c unit and will replace our roof, at a cost of 6% of our home value.

  3. Get a mortgage that is easy to pay now and in the future. When we bought our house, we could have easily qualified for a 15 year mortgage for 80% of the home value. We chose a 30 year fixed rate mortgage for 60% of the home value to keep our payments lower. When possible, we do send in extra principal payments and are on track to payoff the mortgage in 15 years.

    I have never seriously considered an adjustable rate mortgage. I prefer knowing that my monthly payment will be constant for the entire time that I have the mortgage.

Our Don'ts
  1. Think of house as savings or an investment. We don't count our home equity in our retirement savings analysis. That's because, unlike stocks, we do not expect to sell our house to raise cash for yearly living expenses.

  2. Borrow against the increased equity. We don't think of our house as a ATM to get cash. If our house increases in value, we don't borrow against that part. However, I consider OK to refinance the loan for the original amount and time, but at a lower interest rate. This reduces the monthly payment and allows some cash to be taken out.
We prefer to take minimum financial risk when it comes to our home. It's something that we definitely don't want to lose because of a short term financial set back.

For more on The Practice of Personal Finance , check back every Wednesday for a new segment.

This is not financial or real estate advice. Please consult a professional advisor.

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traineeinvestor said...

A well balanced view although I do tend to view our home as an investment in the sense that I would not buy if I thought that the property would depreciate in the short-medium teem. In that situation I would rather rent. Longer term, I like the feel good factor of owning my own home (and will like it even more when the mortgage is paid off).

I also take the view that a home can act as a form of insurance policy if things go wrong - it can be sold or you can take out a mortgage or reverse mortgage if you need money.

Super Saver said...

Trainee Investor,

Good point. I probably would not have bought a house if it were to depreciate.