THE ECONOMIC BLUEPRINT: Movin' on up

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A home is more than a roof and four walls. It is where we spend time with family, laugh and learn, retreat during hard times, and host the good times.

When your client is buying a house, they want a place they can make into a home. They want a place that makes them feel warm and fuzzy, a place they can envision raising a family and inviting friends.

Buying a house is possibly the largest single financial decision someone will ever make. So, when your client is focusing on their emotions, help them consider the legal and financial aspects as well.

Determining a budget

Is it more important to buy a house or live comfortably in a home? Housing and associated costs are typically the largest category of one's expenses, which is why it should fit within a budget.

When budgeting for a new house, we often work backwards. Your clients should fit the house and its associated expenses within the framework of (1) saving 15-20% of their income toward wealth building, (2) having ample liquidity, and (3) protecting their assets. In addition, there are other "lifestyle" categories such as food, clothing, travel, entertainment, and more.

Help your client avoid being "house poor." Instead, encourage them to budget for their house in the context of maintaining their lifestyle while also growing and protecting wealth.

Calculating costs

We hope the home itself will exceed expectations, but we know the expenses absolutely will! Upfront costs include the down payment, moving expenses, furniture, and possibly home improvements. In general, it's ideal to make a down payment of 20% to avoid private mortgage insurance (PMI), which increases the monthly mortgage until the 20% equity threshold is surpassed. Exceptions apply to physicians and veterans, for example, who can make a lower down payment without PMI.

As any homeowner will attest, there are ongoing costs as well. Before moving in, it's best to estimate monthly costs for the mortgage, home insurance, property taxes, utilities, and applicable neighborhood or association fees. We generally advise a 30-year fixed mortgage, the reasoning of which will be the subject of the next column. And don't forget about maintaining the house, which may average 1% of the home's value per year.

Protecting your home

The home is a place of security, and it should be secure. When obtaining home insurance, don't choose the cheapest option. Your client will want suitable liability limits and may consider an umbrella policy.

Ownership format also presents questions. In Michigan, married couples or other joint ownership arrangements don't necessitate a trust. The default for Michigan home ownership is tenancy by the entirety, meaning a plaintiff can't sue one owner and receive the property belonging to both. On the other hand, if the homeowner will be an individual it is usually best to own the home in a trust.

Homeownership for now and later

Buying a home is a thrilling life cycle event. Counsel your client through this process by helping them fit it into the framework of maintaining their lifestyle while protecting and growing their wealth.

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Kyle Zwiren, JD, works with Financial Architects Inc., an independently-owned company located in Farmington Hills. Kyle and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. Kyle practiced law prior to becoming a Financial Architect and left the practice to follow his passion. To talk to Zwiren about other topics featured in The Economic Blueprint, email him at kzwiren@financialarch.com or call him at 248-482-3622.

Published: Fri, May 10, 2019