While much homeownership “suitability” analysis focuses within the area of finances, there are also other “non-financial” questions with regard to suitability. For example..
- Is this house in the right location? Location may be important with regard to commuting to jobs and activities. With higher energy costs and increased traffic in urban areas, commuting takes on a higher level of significance.
- Is the home large enough for my present and future family and is this where I want to raise them? This issue requires not only the analysis of family size and school districts, but also the proximity to activities and other services.
- Is this the home I would like to retire in? For those whose children are older, the question of retirement comes into play. For example, does the house require major maintenance that you don’t have the ability to take on during retirement?
- Does this home have the amenities my family desires? For example, do I want a big yard for children to play in or for other enjoyment? Do I want a big kitchen and dining room in order to entertain?
- If I were to leave quickly, how marketable or rentable is this house? The best “buy” which is most affordable because it is in the middle of the country may not be the best choice for those who need to be mobile.
We could go on and on regarding the choice of the home and location. However, we can’t ignore the financial aspects of suitability. These include–assessing the house with regard to meeting your financial needs in the future.
For example the cost of the housing payment after taxes represents an important issue with regard to affordability. Part of the reason this home may be affordable is because of the tax deduction. However, if you are not paying taxes because of other deductions, you may not receive most of the benefit of the home purchase.
This may be especially true for those who are self-employed and may use their status to “write-off” much of their income. The future becomes an issue when the status of your income and deductions change. If income is to rise, then the home actually will become more affordable in the future, both because you have more income and because the tax deduction may become more important.
If you are employed and will get the benefit of a tax deduction, you can make the home more affordable on a monthly basis right now by increasing your withholding exemptions on your IRS Form W-4 which is filed with your employer. This will lower your tax withholding on a monthly basis and can make more income available each month to help you afford the payment.
Another financial issue with regard to suitability involves whether future changes may make the home more or less suitable. For example, the payments of adjustable rate mortgages may change in the future and this possibility must be taken into account when purchasing and financing a home. When short-term rates rise, so do the payments on adjustable rate mortgages, especially if the start rate is very low. This is called a “teaser rate.” Basically, if your payment were to rise by $200 to $1,000 per month, depending upon the size of the loan, could you afford the increase?
There are additional issues with regard to the future suitability of home ownership–
- Will the long-term appreciation of the home help you finance debts at a lower-monthly cost than you are paying now? Debt-consolidation loans using the equity in a home have been very popular in the past for a nation that seems to be very dependent upon the use of credit. Of course, the use of this equity means that it cannot be used for other purposes such as retirement. Today is more conservative with regard to the use of credit.
- Will the home require major maintenance in the near- or long-term? The purchase of “fixer-uppers” may be very suitable for those who are handy or have liquid assets for contractors. For others, having a home in need of maintenance can be a psychological and financial burden.
- Will my situation change in the future? Retirement, job changes, increases and decreases in income and family size. All of these are relevant to analyze.
Qualification, affordability and suitability. All relevant questions to answer before you purchase your next home.