Is buying a house more about getting a great place to live, or more about buying a major asset over the long haul? Think about your 'end game' for homeownership and shape your buying criteria accordingly. The case for homeownership as an expense. Home equity does not always rise, but the costs of owning a house do. Property taxes, maintenance, insurance and other expenses rarely decline - and if they do, it's not for long. With a mortgage, you freeze one of the monthly costs of living, but the others will rise. Unexpected changes in life situations can prompt you to move sooner than you expected. Selling before you have accumulated much equity can actually cost you money. If you are prone to extravagance, home ownership might prompt you to spend too much on furniture, parties, and accessorizing your home and yard. These types of purchases rarely deliver a return. The case for home ownership as an investment. If you pay off your house in time, you will minimize your housing expenses during retirement. In an era of erratic return for retirement savings, paying off the house in full seems like a sure thing. Not only will your housing expenses drop to property taxes, maintenance, insurance and utilities, but if you must, you can withdraw your home equity through a reverse mortgage. Reverse mortgages are heavily regulated, and you should check with your financial advisor before taking one, but in some cases they can offer an income stream to cash-strapped seniors. However, a reverse mortgage drains equity from the house, so that leaves less for heirs. Substantial home equity can provide a financial cushion. Borrowing against home equity for college expenses, medical emergencies or for home improvements can be a way to make your equity work for you while you live in the house. However, equity does not always increase: between 2006 and 2011, American home equity fell by about 30%. Many homeowners who borrowed too much against their homes found themselves owing more than the house was worth, a situation called 'being underwater'. The more you borrow against your house, the more vulnerable you are to being overextended if the value of the home falls. Many people hope to pay off their houses by the time they retire so they can minimize living expenses; others hope to use their houses as collateral if they expect to apply for small business loans. The house can be used as collateral for small business loans or for another real estate loan. Small Business Administration programs guarantee loans made by traditional lenders. The SBA's own fallback is your house. Equity can anchor a loan, but you are putting your house at risk if your business fails. Always talk through such loans with your financial advisor. If you hope to pay off your home and leave it to your heirs, be sure to consult with a financial planner to explore the advantages of living trusts and other tax-sheltered forms of ownership. You will also want to add the property and your intentions for it in your will.
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