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Purchasing a Home for Better or Worse
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By Heather Walsh, Vice President,
Wealth Management Advisor, Merrill Lynch
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You've chosen the perfect groom or bride and
you think you've chosen the perfect cake, but after the big day,
where are you going to live?
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Photo by
Artistic Expressions
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Planning a wedding is often an endless list of
questions that all affect one beautiful day of your life - your
wedding day. But what about the answers to questions that will
affect you for years to come? Deciding whether to rent or buy a
home is one of the most important questions you will answer as
you and your new spouse plan your future together. And while
continuing to rent might seem like the easiest choice, home
ownership can offer several financial advantages.
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One of the key benefits of owning a home is the potential
tax savings. These come by way of deducting mortgage interest
expense and real estate property taxes from your income tax
bill. Under the current federal income tax code, mortgage
interest payments on first and second homes are generally
deductible as long as these loans together total less than $1
million dollars.
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To deduct property taxes and the interest paid on your
mortgage, you must itemize deductions rather than take the
standard deduction. For many homeowners, the combined
deductions for mortgage interest payments and property taxes
exceed the standard deduction.
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As a homebuyer, you may also be able to deduct loan
origination fees charged by the lender. Work with a
professional tax advisor to see if you qualify for these
deductions.
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Fix it Up to Raise the Value
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In addition, while no real estate agent can
promise you that a property will increase in value, if you
choose a highly valued location and make improvements to the
home, you are likely to see an increase in its value over the
years. As homeowners, you may be able to reap the benefits of
that increase and grow your personal net worth when you sell
your home.
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If you're worried about how owning a home will affect
your cash flow, consider the following mortgage myths. With
a closer look at your financial situation, you may find that
you can handle making mortgage payments while maintaining
your current spending and investment habits.
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Most traditional mortgage payments consist of part interest
and part repayment of principal. Many homeowners believe that
the mortgage payment should be as high as reasonably affordable
to obtain the shortest time period for a mortgage. The recent
popularity of 15-year mortgages is evidence of this. However,
with a longer-term mortgage, the difference between the higher
15-year mortgage payment and the 30-year mortgage payment can be
used to accumulate funds to meet other needs.
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Many first time borrowers opt for a 30-year fixed-rate
mortgage because they are nervous about a mortgage where
interest rates may increase. However, if you aren't planning on
staying in your first home for 30 years -- and most first time
homebuyers don't -- then you should consider a
fixed-to-adjustable-rate mortgage. A fixed-to-adjustable-rate
mortgage is a 30-year mortgage that has an introductory fixed
interest rate that lasts three, five, seven or 10 years that is
oftentimes lower than rates on fixed-rate mortgages. So if you
see yourself moving to a new place within ten years, looking
into a fixed-to-adjustable-rate mortgage could decrease the
amount of money you spend on interest.
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Rather than seeking a traditional mortgage to buy your home,
you might want to consider borrowing against your combined
securities instead. There are various securities-based financing
options available today that enable you to leverage your
eligible securities, such as stocks and bonds. Such financing
options often times enable the borrower to benefit from a lower
interest rate than they would receive through unsecured forms of
debt. Securities-based lending won't put a dent in your cash
flow, nor will it disrupt your investment strategy.
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You could also combine this feature with a traditional
mortgage in lieu of liquidating assets to fund a down-payment.
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For example, there are loan accounts available that enable
you to pledge a broad range of eligible assets as collateral,
such as your managed assets accounts, exchange funds or even
third-party assets. Pledging assets as collateral is
advantageous because you borrow against rather than sell your
assets, enabling you to keep your investment strategy on track,
while allowing them to grow and earn dividend and bond income.
Additionally, the credit you receive is based on the combined
value of all your eligible assets in the
account(s) pledged,
offering greater borrowing power.
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It's important to understand that securities-based lending
involves some risk. If the market value of the pledged
securities decreases, you may be required to deposit additional
funds or to liquidate some or all of your assets without notice,
leading to possible adverse tax consequences. Be sure to
carefully review all risks and consult your advisors to better
understand the tax implications associated with pledging
securities as collateral.
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How do you avoid potential costly mistakes? By preparing
yourself as best you can before purchasing real estate. It is
important to carefully research the types of mortgages available
in your area or alternative financing options you may qualify
for and spend as much time as you need to evaluate different
choices in light of your budget, income and future plans.
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As you tailor your decision based on these factors, work
with your financial advisor to create a plan that takes your
short- and long-term goals into consideration. Rather than
someone who is simply trying to get you into a house or sell you
a mortgage, your financial advisor has your best interest and
long-term financial needs in mind, and will help you make the
decision that is right for you.
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We all know that real estate in Massachusetts can come with
a high price tag, so if your mortgage payment will put a strain
on your lifestyle or saving habits, it might be wise to rent and
focus on saving and building credit while meeting other
relationship and financial milestones along the way for now.
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You looked long and hard for the perfect person to marry, so
be just as specific when you are purchasing a home and choosing
a financial advisor. Just like marriage, there are several
things to consider, but in the end, if it is the right house and
the right time, it can be the smartest decision you've ever
made.
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About the Author: Heather Walsh
is a Vice President and
Wealth Management Advisor for Merrill Lynch in Burlington.
Heather assists clients in developing long-term financial
plans and helps them develop strategies to manage their
personal and business finances. She can be reached at hwalsh@pclient.ml.com.
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Any information presented about tax considerations
affecting client financial transactions or arrangements is
not intended as tax advice and should not be relied upon for
the purpose of avoiding any tax penalties. Neither Merrill
Lynch nor its Private Wealth Advisors provide tax,
accounting or legal advice. Clients should review any
planned financial transactions or arrangements that may have
tax, accounting or legal implications with their personal
professional advisors.
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