Buying a house is a huge decision, but homebuyers often miss the impact it will make on the rest of their financial lives. Home-buying affects your retirement plans, college savings, credit score, insurance needs and more. Reassessing your financial future is essential when you are looking to make a move.
Have you or someone you know been thinking about buying a home? Before you shake up your finances, here are four financial factors to consider.
Houses are Illiquid Assets
Your home will be a huge investment known as an asset. Assets are divided into two categories: liquid and illiquid. Liquid assets are investments that can be easily withdrawn or transferred to cash. Think cryptocurrency, stocks or a life insurance policy with cash value options. All three of these are flexible places to put your money — you can access your money in case of an emergency.
Houses are considered illiquid assets because your cash is tied up in your home from purchase until its sale. It may take you several months after deciding to sell to find a buyer. Because your money is tied to your home, you will have to consider the future market.
You Will Have to Be Patient
The pandemic has shown us that the housing market can be volatile. As interest rates dipped to 3% in 2020, many showed up in droves to buy their first homes. But while buying a home is a smart move for some, there are some who made the decision too quickly. Take those who admitted their regret to Money Magazine after bidding wars caused them to buy houses that were too expensive or too small.
Making decisions too quickly or while under too much pressure can make regret more likely to occur. The future is unknowable — a market change could cause you to get hasty, or a dip could mean you are stuck with a home you cannot sell. Neighborhoods change and taxes fluctuate. With a house, everything is more uncertain. With patience and the right protections against risk, the volatile market can be offset with balance.
Housing Affects Your Mental Health
While it is important to carefully consider your home’s impact as an illiquid asset, keep in mind that there are other factors that can affect your life and, in turn, your finances. For example, your living space is one of the main contributors to your mental health and happiness. As working from home remains a norm, people are in their homes more than ever. Homebuyers should consider how this space will affect their brains.
How much natural light will the house get in the winter? Is the neighborhood safe? Can you afford it without stress? All sorts of factors, from a crowded kitchen to an absence of mold, must be considered. See all the ways your home affects your mental health before you buy.
Expect the Unexpected
When you own a home, your savings become more important than ever. Late fees on mortgages are no joke, and only three late payments can mean a foreclosure. An emergency fund is necessary, not only for your mortgage, but for repairs and maintenance.
The house will inevitably break in some way. Ask any homeowner — they have likely dealt with HVAC issues, flooding, plumbing problems, and all types of repairs that they were not anticipating. Experts at Forbes and HGTV suggest setting aside 1–3% of your home’s purchase price each year for repairs. Not only that, but you should keep in mind that accidents happen. If something were to keep you from going to work, be it illness or injury, would you have enough to maintain your lifestyle in your new home?
It is smart to have a back-up plan. A life insurance policy with flexible access to cash value is a good solution for unexpected repairs — you can leverage your policy for any necessary expenses, including if the A/C starts to leak. This, plus living benefits, should protect you and your home against an unseeable future.
Talk to Your Advisor
Buying a home requires a lot of planning, from saving for a down payment to navigating closing fees. Make sure you do not neglect the rest of your finances in the process. The ripples of home-buying will be felt throughout your investments and savings. Discuss your decision with a financial advisor to see what adjustments you may need before you make a move.