Housing prices are slowly becoming a bright spot in the economy with historically low interest rates continuing across the nation. No one knows, however, where real estate prices will head in the future. For many individuals, their homes will continue to be their largest asset and a major contributor to building net worth. Like all investments, you should develop strategies to manage your home prudently. Here are some “Do’s and Don’ts” to consider:
Don’t stretch to purchase the largest home you can. The reason homes have contributed significantly to the net worth of many people is that owners retain any price appreciation on their entire properties, even though they only put down ten or twenty per cent of the purchase price. This fact has caused many people to strain their budgets and purchase the largest home they can afford, hoping the increase in the value will more than offset the sacrifices made along the way.
Before embarking on such a strategy, be aware of all the risks. If home prices start to fall, you could end up owing more than the house is worth. If your budget is strained to the limit, you might not have money left over to contribute to a retirement account or college savings plan. It may be better to purchase a home you can comfortably afford.
Do take into account all of your monthly home payments, not just the mortgage. Include homeowner’s insurance, flood insurance, mortgage insurance, utilities, garbage collection, cable television, unexpected repairs, taxes and any other obligations.
Don’t take equity out of your home in the form of a home-equity loan or a higher mortgage balance without careful consideration. While lower interest rates have allowed many homeowners to reduce their monthly mortgage payments, many have also opted to take equity out of their homes and stretch mortgage payments over longer periods. One of the main advantages of home ownership is that it is a forced savings plan, with part of every mortgage payment going toward equity. Resist the urge to take the equity and spend it on something else.
Do investigate refinancing when interest rates go down. If the rate on your mortgage is more than one per cent higher than current interest rates, the cost of refinancing may be worth it.
Do make sure you have adequate insurance. Your homeowners insurance policy should be sufficient to completely rebuild and refurnish your home in the event of a disaster. Check with local contractors for the cost-per-square-foot to rebuild in your area. Check the limits of your policy every year and increase them if needed. You will probably want a guaranteed replacement clause, which pays for the entire cost of rebuilding your home.
Do inventory everything in your home. Include everything in your home, systematically working your way around each room Keep receipts for larger items with the inventory. This will help substantiate a claim if your home and its contents are every destroyed.
Bottom line: On a long-term basis, a home is a good investment. By properly managing it, you can make it even better.
