Buying A Home (Podcast)

Eric Meermann
Hi, Amy. Glad to be back.

Amy Laburda
So Eric, my gut sense is that owning a home is one of the more common sort of big financial goals. In your experience as a financial planner, does that hold up?

Eric Meermann
Absolutely. Homeownership is a way people

00:36
define their success. Referring to a podcast from earlier this season: How do you define wealth? A lot of people will look at home ownership, starting a family, as one of the major life goals. It's something we often talk about with our clients. A lot of our clients that are older or more successful already own homes, but certainly on the younger end of the spectrum, that's one of the conversations we have most often with people that are

01:03
in their 20s and 30s. Along with education financing for kids or having kids, buying a home is right up there with the top topics that affect people's financial life.

Amy Laburda
I think it makes sense. There's an emotional component of having your own space, having independence. I think for some people there's a sense of, “Oh, I'm really an adult now if I've bought a home.” There's a lot of baggage that might come with it, but — for good and ill — but

01:31
on a more practical level, just stepping back, looking at numbers. If you're in a position where you could afford to buy a home, is that always the smarter choice than renting?

Eric Meermann
No, it's not. It's not a requirement. You don't have to buy a home. There's a lot of factors that go into homeownership. One of them is financial considerations, but also lifestyle considerations. If you're planning to set down roots in a community, you have children or maybe not,

02:01
but you plan to stay there for a long period of time, then a house could make sense. But if your life is still in flux, maybe you're going to go back to school, maybe grad school, maybe you're thinking of moving to a different part of the country. There's a lot of different life events that can happen that would cause you to have to up and move. And when life isn't totally settled,

02:21
I don't think a long-term investment in a home is necessarily something you want to do. You can, and then you're subject to the risks of the housing market in which you purchased your home. If the market goes down, you could get stuck there for a while.

02:36
If the market goes up, well, you can sell it and flip it. And if you don't mind doing a lot of paperwork,and working with a lot of lawyers and mortgage brokers, it's not that big a deal. But most people don't enjoy the mortgage process and the closing process. So I would say, you know, it's a big undertaking. So you want to be sure that you are ready to spend a significant amount of energy in the homebuying process.

Amy Laburda
And speaking of

03:01
being ready: We've talked, again on earlier episodes of the show, about the importance of setting a savings goal for a big project like a down payment for a home. How do you know what the number is? Like, when have you saved enough that you're ready? Obviously it'll depend somewhat, but are there any things to look for?

Eric Meermann
Well, I think looking at budgeting for what you can afford on a monthly basis is part of the equation. The other main part that you often hear, especially from young, first-time buyers is, “I can afford the monthly mortgage.

03:30
I just don't have the down payment.” Saving up that 20% of the fair market value, or the value of the house, I use that. It's sort of a rule of thumb, but it also has financial implications, which we'll talk about later as far as getting a mortgage for your home. Until you get to a place where you can put down 20%, for most people, I would say that's a good goal to feel like you're ready. I would also say you want to have a little money left over for things like

03:59
maintenance, buying your furniture. Obviously, closing costs are part of the initial purchase. If you had $100,000 and you were buying a $500,000 house, you're not going to have enough to buy a couch, or even close on the property. You probably want to have a little bit more saved up than just the 20%.

Amy Laburda
Right. So it’s not even the 20% and the monthly mortgage, but you’ll need a bigger cushion than that, it sounds like.

Eric Meermann 04:28
Yeah, absolutely. Because once you own the home, you know, most people end up using a mortgage to purchase their home. If you don't pay your mortgage, eventually the bank will foreclose on you and take your home back. So if you have no cushion, you know, if you bought a home, and you're living check to check after you buy the home, and then you lose your job for eight months, you will also potentially lose your home. So you want to have more cushion than just the 20% equity in your home.

Amy Laburda
So on the subject of mortgages,

04:57
I'm someone who has not gone through the homebuying process myself. So I know it sort of took me a while to internalize the difference between prequalification and preapproval when you're talking about a mortgage. If we have listeners in the same boat, can you

05:10
clarify a little bit for them what the difference between those two things is?

Eric Meermann
Yeah. So I'll just back up a minute to talk a little bit more about the budgeting, where you're looking at your savings to say, “OK, do I have enough for a down payment?” And then you're looking at your monthly expenses and you're trying to figure out, “OK, after I put down 20%” — so in this $500,000 example, your mortgage would be $400,000 at a rate of… the prevailing rates. Rates have been a lot higher but are expected to come down. We had our recent first cut. So

05:40
you would take that interest rate and term and expected mortgage and come up with a monthly payment for that $400,000 of mortgage. And you would look at your budget and say, “You know what, we can go bigger than this. We can go $650,000. We can put $130,000 down and then the rest on a mortgage.” So you kind of want to go through that yourself. You don't want to rely on the mortgage company, which is to your question about prequalification and preapproval.

06:06
Don't let them do the calculations for you. Either do them yourself or use online calculators. There's a lot of stuff out there that can help with this or, preferably, talk to a financial adviser like Palisades Hudson. With that said, to answer your question, the prequalification is just getting an idea from the lender that you're going to borrow from, how much they're willing to give you. You give them a minimal amount of data: income, assets. But you're not doing the full uploading

06:36
many years of tax returns and W-2s and pay stubs, you're not at that part yet. That's where the preapproval and application process starts. Prequalification is like, just give me a ballpark idea, Mr. Lender, about how much I can get from you so that I can buy a house. Preapproval is a much more formal process, where you're having an offer to lend for a certain period of time, something like 90 days, that says, “We have approved this, we've done all that

07:03
due diligence on your income, your expenses. We've looked through your tax returns and we're willing to give you this amount of money.” But it doesn't have an infinite life. They put a time limit on it, because your circumstances could change.

Amy Laburda
So it sounds like it's important to sort of separate the budgeting exercise you were talking about, thinking about what you can actually afford, what you can maintain, from the exercise of what a lender is willing to give to you, because those two numbers may not in fact be connected.

Eric Meermann 07:32
Yeah, absolutely. Like if you have really good credit, they might be willing to give you much more than you actually would want to borrow or can actually afford. You know, when I was going — I bought a condo in 2015. And at the time, I was unsure exactly what type of property I wanted, whether I wanted a single-family home, or maybe a multi-level townhouse, or an apartment-style condo. I was sort of very flexible. So when I went through the prequalification process, you know,

08:00
the number that they gave me, because I had really good credit, was way more than I would have wanted to spend on a house, looking at my monthly budget. And so I would caution people that that prequalification or preapproval number is not the amount that you have to spend, or that you even should spend. It's just what they're willing to give you. So I would go back and look at your budget and say, “Do I really want to look,

08:23
live like that? Do I want to have every dime going to my house, and not have a lot of free cash flow to go on vacation or buy cars or clothes or dinners or whatever?”

Amy Laburda
Before we get too knee-deep in the mortgage process — we’ll come back — but I wanted to talk a little about home equity, since as a renter, that's one of the things that’s on my mind as renting versus home buying. I assume most listeners have

08:50
heard the term “home equity,” and some of them might have a good idea what it means. But just as a baseline, can you give us a definition of what we're talking about here?

Eric Meermann
Sure. The simple answer is: It's the difference between the value of your home, what we call “fair market value” — that's what someone would buy it from you for — and the mortgage balance. So in that example before, let's say our homeowner had lived there for a number of years. They bought it for $500,000.

09:19
They had $100,000 down and they had a $400,000 mortgage. So their home equity at the start is the $100,000. But let's say, you know, a number of years have gone by and they've paid down the mortgage, and it's now, the mortgage balance is $350,000. So now their equity is $150,000. And then you could say, well, the property has appreciated 10% over those number of years. So now it's $550,000.

09:44
So in that example, now you have $200,000. So you've basically doubled your home equity over that example, from $100,000 to $200,000. And that's the effect of leverage, because with only putting 20% down, you're leveraging your equity by using debt, which sort of amplifies the returns potential.

Amy Laburda
So when you hear people talk about homeownership as a sort of form of forced savings, is home equity usually what people are talking about there?

Eric Meermann 10:11
Yeah, absolutely. They're talking about it through the monthly mortgage payment. When you pay rent every month, the rent is just gone. You're paying for the usage of your apartment for that one month. Assuming you have a year lease, you have a commitment to do that every month for a year. But then, at the end of the term of the lease, at the end of the year, you own nothing, you have nothing, and it's just zero. Whereas, a similar mortgage payment,

10:39
in the example before, a big piece of that is going to principal pay-down. A mortgage is composed of generally two components: the principal and the interest. The principal is like paying yourself back. The interest is obviously interest.

Amy Laburda
Sure. So if people are talking about home equity loans or line of credit, that means that they're then using that equity as collateral for

11:06
an additional loan, or drawing additional money basically against the equity they have in their property. Is that right?

Eric Meermann
Yeah, that's right. So, you know, in our example where you've lived in the house for a while, you've built up equity, and you've paid down some of your mortgage, sometimes life events will happen or you want to do something, you know, different with your life. Buy a second home, a vacation home or something, or you face financial hardship and you need to access your home equity. You know, there's a number of ways to do it. You know, the first being just sell your house, go back to renting

11:35
or buy a smaller house. But then you also have other debt options besides the mortgage to take some of that home equity and be able to use it. And so that would be the home equity line of credit and a home equity loan that you mentioned.

Amy Laburda
So, backing up a little bit, you mentioned earlier most people who are buying a home will have a mortgage. I think that feels true on a gut level, but also in your chapter in The High Achiever’s Guide to Wealth, our book,

12:03
you cited The National Association of Realtors in observing that about 78% of American home buyers finance their purchase. So that is a hefty chunk of people buying homes. Obviously, if you're in a position to buy a home outright with cash, there are advantages to that, but that's just not realistic for most people. So let's go back to mortgages and sort of the nitty gritty a little bit. What are the main types of mortgages that home buyers might see if they're on the market?

Eric Meermann
To keep is simple to first one is fixed rate

12:33
and the second one is variable rate. A fixed-rate mortgage is exactly what it sounds like. The interest rate that you lock in is fixed for the entire term of the mortgage. Typically, your 30-year fixed rate or 15-year fixed rate are the typicals. Although, if you're already a homeowner and you're refinancing because rates have gone down, a lot of times you can pick whatever number between 1 and 30 that you want.

13:03
When I refinanced in 2020, during the whole COVID thing, the interest rates went way, way down. So a lot of people refinanced. And I chose a 20-year term, because at that point I had paid down a little bit of my home equity and I was able to keep my mortgage payment exactly the same. And I calculated the term that would have my mortgage payment be the same, but basically took, like, five years off the term so it would be paid off sooner. The other type is variable-rate, or

13:32
adjustable-rate mortgages. These can be quite complicated and structured in many different ways. There'll be a period in which the mortgage is at a fixed rate, and then there'll be a period where the rate resets, is variable. So as rates go up, your mortgage payment will go up. As rates go down, your mortgage payment will go down. A very typical one is what's called a 10/1 ARM. So that's 10 years/one year

14:01
adjustable rate mortgage. And what that means is the 10, the first number, is the fixed period. So, you know, if rates are really low, you might lock in a 10 year really low rate, but then during that 10-year period, after that, the one in the 10/1, is that every year after that, it adjusts annually. So we saw this a lot in 2000 and 2001, after the dot-com bubble burst. A lot of people

14:26
did 10/1 ARMs with extremely low 10-year fixed rates, or maybe five years, and then that contributed in part (with a myriad [of] other factors) to the Great Recession, in that people then had their mortgages adjusted upwards in the adjustment period after the fixed term was over. And that ended up causing a lot of people that couldn't afford their mortgages anymore, because rates were so much higher in 2006, 2007, 2008, leading up to the Great Recession.

Amy Laburda 14:55
Makes sense. And not to get too deep in the weeds, but it's just a thing that I always remind myself: With adjustable rate mortgages, you'll often see two numbers, but those two numbers don't always necessarily refer to the same things in different ARMs. Is that right?

Eric Meermann
Yeah. Yeah, that's right. So a 3/27 ARM is a three-year fixed — it's a 30-year loan — 27 of it would be floating. So yeah, there's lots of different ways. And you should talk to

15:24
a financial professional to help you understand it or do your own research.

Amy Laburda
Make sense. So we've talked a little bit about the importance of budgeting and understanding what you can afford. And now we sort of talked about the types of mortgages. Say you're a prospective home buyer and you're like, “OK, I have a budget and I know which kind of loan I want.” We talked a little bit about preapproval and prequalification. If you're starting to shop for a mortgage, do you just go straight to your local bank, or should you take a little bit of a wider view?

Eric Meermann 15:54
Yeah, there's a lot of options for lending these days. There's online-only banks that are willing to lend. You have local banks, credit unions. You have major national lenders like the big banks. In this situation, you really want to look at not only the interest rate, but also the other costs associated with setting up the mortgage, including fees or closing costs and things like that.

16:19
And that's where you would look at the APR, which is the annual percentage rate. That number helps you judge between different lenders what the total cost on an annual basis is. It looks sort of like an interest rate. And I would say you consider both, because you want to lock in a good interest rate, but the APR helps you figure out how much of the costs look like an interest rate, you know, because someone might be lowballing you with a low interest rate, but then there's a ton of fees.

Amy Laburda 16:47
Sure, so it sort of helps you compare apples to apples between different lenders.

Eric Meermann
Yeah, that's right.

Amy Laburda
Makes sense. So I think when you're shopping for a mortgage, people who have owned a home before are aware that property taxes are bundled into the mortgage. If you're coming from renting, you're buying your first home, what do you need to know about property taxes? Is that a thing that just the lender will take care of, or do you need to have more of an awareness of what's going on there?

Eric Meermann
You definitely need an awareness of it, because property taxes across

17:14
even cities within the same county can vary very dramatically. So for example, here in the Northeast, I live in Westchester County [New York], some of the river towns, which are on the west side on the Hudson River, their property taxes are known to be extremely expensive compared to other towns that might have more revenue from, say, businesses or sales tax that helps them offset their budget.

17:43
Other towns might not have that, for one reason or another, or they have excellent schools or amazing roads. So when you're looking at a $500,000 or a million-dollar house in one neighborhood, and then you look in another neighborhood, you think you have the same budget, but oh, property taxes are $24,000 a year in this town, and they're $12,000 a year three towns over.

18:05
So you need to account for that in the budgeting process. And also know what you're getting, obviously, because obviously a lot of people that are looking at homes, especially younger folks, are very concerned about the school district and may be willing to pay for their children to have access to the best schools, compared to that town over with half the property tax might have terrible schools. And so you might be willing to pay that.

Amy Laburda
So you can sort of decide in your budget

18:32
how much you want to be paying for the location, essentially, with property taxes.

Eric Meermann
Yeah. You've got to look at the overall picture. To answer your question about the lender, they're going to require escrow. What escrow is, is where a third party, in this case a mortgage lender, they receive the money from you with your mortgage payment, and then they disperse it to the township or the county or the city on your behalf. The reason they do this is because, until you pay off your mortgage,

19:00
the bank has an interest in your home. And they want to make sure that you are funding all of your liabilities around that home so that if they end up taking it from you, that they don't get stuck with it. That escrow payment is part of your mortgage payment, you’ll typically, which we'll also talk about later, include insurance. When you go through the budgeting process, you're going to add all those things together. The mortgage, which includes the principal and interest, plus the homeowners insurance,

19:28
plus the property tax component, and that'll be what you pay to the bank. And then in addition to that, there's other things that can come up, like HOA fees or maintenance or repairs and things like that.

Amy Laburda
OK. So I know at Palisades Hudson, one of the things that you and our colleagues do is to help our clients sort of keep an eye on the big picture, financially speaking, overall, and for tax specifically. So briefly, before we move on,

19:54
besides the property tax, can first-time homeowners expect other effects on their tax planning from owning a home?

Eric Meermann
Yes. The big one would be the mortgage interest deduction. As we were talking before about the components of a mortgage payment, principal and interest, the interest part is deductible as an itemized deduction on your tax return. I found it very interesting when I was going through the homebuying purchase that the bigger house you bought, the

20:24
bigger mortgage you would apply for, the more interest you would pay, which would then, if you did a tax projection, as a deduction, you could then get a much bigger amount of that interest back as a refund. And then, what I recommend as a financial adviser, is not to then just have this huge, almost like bonus-like refund come in in April. What I did is then adjust my withholding, so that my biweekly paycheck

20:53
would end up with me being basically even, or a little bit of a refund, at the end of the year. So, weirdly, by buying a house and having the mortgage interest deduction, you're almost giving yourself a cash flow raise on a month-to-month basis, which can then allow you to buy a bigger home. Now, you've got to be careful with that, as a financial adviser, because you say, “Well, the bigger the home, the bigger the mortgage interest deduction, the more take-home pay I get. So, I'll just go bigger and bigger and bigger.” And then you get yourself into a situation where you bought way too big of a house and you can't afford it.

21:22
So I would be careful about that, but adjusting your withholding on your pay to account for the fact that you have a mortgage interest deduction now definitely is something that you should discuss with your tax preparer when you're doing the budgeting process. Or you could just keep it as cushion and not think about it, and then have that available for all the unexpected unknowns that pop up in home ownership.

Amy Laburda
Sure, I imagine having that extra in your pocket for maintenance or

21:49
unexpected problems that occur in your home is never really a bad thing. So I want to circle back briefly. You mentioned HOA fees earlier, and things that you might have to expect to build into your monthly payment. What should first-time homeowners know about HOAs, or potentially condo associations, if they're going for a condo?

Eric Meermann
Yeah. So in addition to all the types of payments we were talking about before — mortgage, insurance —

22:14
if you live in a place that has an HOA, which could be a single-family home in a developed community, it could be a co-op in New York City, it could be a condo like where I live in White Plains, you might be subject to an HOA, which is a homeowners association. They will charge dues every month, typically not deductible for tax purposes. And that covers upkeep of the common areas. So in a development that would include

22:43
like the roads and stuff like that, sidewalks. I have more experience in the condo world, where it would include a whole host of things. Just to use my personal life as an example, my HOA fees are very high, about $1,000 a month. But when I think about it financially, I say, “Well, I don't have to pay the gardener. I don't have to pay the pool guy.” We have a pool. “I don't have to do any of that myself. I don't have to shovel

23:11
the snow, I don't have to shovel the sidewalk. I don't have to hire a security guard,” because we have a 24-hour security guard. All these things that you get a benefit for that if I lived in a single-family home, I'd have to have someone to rake the leaves in the fall, shovel the snow in the winter, cut my grass in the summer. If I had a pool, I'd have a pool person. That can all get really, really expensive. It also includes things maintenance-wise, not just services, but

23:41
if the roof needs repair, the boiler blows up, a major leak in the pipes: all of that is included in the HOA fee that I pay. So it ends up being, from a budget standpoint, not all that much different. Even though it sounds, on its face, “Wait, you're paying this mortgage interest principle, all this, and you're paying $1,000 on top of that, and the property tax?” But then, when you think about all the stuff that you don't have to pay, it ends up,

24:06
for some people, working out pretty well. The downside of living in an HOA is that you're part of a community that then can sometimes get restrictive as to your behavior, or decorations, or when you have to bring the garbage cans in, and stuff like that. People that prioritize more personal freedom in their lives may be constricted. If I want to put up

24:35
multicolor Christmas lights: “Oh no, you can't do that. We only allow white lights.”

Amy Laburda
Yeah, I have a friend who got into a bit of a fight with an HOA about a fence, and the type of fence, and how tall it was. So I think those kind of things are...

Eric Meermann
Oh yeah, fences are a big deal.

Amy Laburda
Yeah. A thing that HOAs sometimes have a reputation for. But as you say, it depends where you're living, the trade-offs of the services and the benefits, and the drawbacks. Although it does seem like, a lot of times, when you buy a house

25:05
it's a take it or leave it, If they're in an area governed by an HOA, that's it. It's not always an opt-in thing.

Eric Meermann
Yeah, that's right. If you want to live in that neighborhood, it has beautiful homes, great schools, and it has an HOA, then it could be a great thing. And like I said, it does provide a lot of services. It's just a personal perspective. From a personal standpoint, you have to think about it. And then from a financial standpoint, you have to build that into the housing budget.

Amy Laburda 25:34
Sure. So speaking of budget line items, let's circle back to insurance a little bit. I spoke in an earlier episode this season with our colleagues Brianna Aviles and Mamie Odom about renters insurance. I think usually there, more often you see a problem of awareness. People either don't know that they need it or think that it's way more expensive than it is, but it's usually a pretty good deal for most renters. On the flip side, homeownership in general, it's understood that you have to have insurance, not least because

26:03
most mortgage lenders require that you have it. But if you're a first-time homeowner, you may not actually know beyond, “Oh, I have to have it,” what the types are, what your options are. What are things about homeowners insurance — what are your options that you should know?

Eric Meermann
So there's generally eight different homeowners insurance policies. I don't think we need to go through all of them, but I'll describe the main ones that you'll encounter. So there's sort of a basic, which is “named peril,”

26:29
where it specifically says these are the causes that we'll pay for, and if something else happens outside of those named things, you get nothing. That's not good for most people, because you never know what could happen. HO3 — so there's numbers HO1, 2, 3, and so on — HO3 is the most common homeowners insurance for single-family homes. This covers everything that could happen except those things which are specifically excluded. Typically, one of the things that would

26:56
be excluded would be flood damage. With the major hurricanes now in Florida, we know that that is run through the National Flood Insurance Program. There's set rates for that, for flood. But the HO3, that's going to cover pretty much everything else that could happen except the named exclusions. HO4 is renters. HO5

27:19
is a more souped-up version of HO3, where it names even more perils and has broader liability coverage. But, of course, for that extra coverage, it would be more expensive. HO6 is basically HO3 for condo owners. That's your condo. [HO]7 is for mobile homes. And [HO]8 is for old homes, like historic or registered landmark-type homes. Those are the basic types.

27:49
And so if you own a mobile home or you own a condo, which one you have to get is obvious, because that's the type that you need. But generally, [a] comprehensive plan that doesn't have named perils, but rather the named exclusions is the way you would want to go. And as far as the premiums, like I said earlier, those are typically, if you have a mortgage, going to be included in the escrow portion of your monthly mortgage payment. If you own your home outright, you either you bought it all cash or you've

28:17
since paid your mortgage off, you will be responsible for paying that directly.

Amy Laburda
So I think we've talked about a lot of things you have to pay money for, which when you're buying a home is probably expected. But let's take a step to something a little cheerier than insurance. I think a lot of people, especially first-time homeowners who have previously rented, look forward to the ability to customize or upgrade their property. Now that they’re owners, they're able to do things that wouldn't have been practical or possible as renters. As a financial adviser,

28:47
do you have any tips for homeowners who are either first-time homebuyers or about to own their first home and are excited to sort of dive into these home improvement or home expansion projects?

Eric Meermann
Yeah, sure. I actually listened to Brianna and Mamie's podcast, and they did a good job of capturing the essence of what it's like to be in your own place for the first time. And so as a homeowner, it's pretty cool because you can look at it and say, “This is mine, this is my thing, and I can do what I want with it.” And that's a really

29:15
empowering feeling. And so as you do that, you know, looking at it from a financial perspective, you can add to the value of your home, you know, that home equity we talked about in the beginning, through capital improvements, and properly maintaining and caring for your home. If you were to allow it to fall into disrepair, the potential buyers that would make up that fair market value, you know, again remembering that something is

29:40
worth what someone else will pay for it. Even if you don't intend to sell it, your home is based on a hypothetical buyer coming in and buying your property. So if it falls into disrepair, people would pay a lot less for that. I had a friend that bought a house that had – it was a two-level, single-family house — and the upstairs had a space for a bathroom, but no actual bathroom. It was just sort of spaced out, but the old homeowner never put it in.

30:08
And so, most buyers looking at, you know, he paid a little less, most buyers looking at that would say, “No, I want the bathroom to be there.” And smartly, he went through the process of getting the plumbing installed to the second floor, which I think was what stopped the original owner, and completed the bathroom. And so, that would certainly increase the fair market value. And that would be a good example of a difference I want to highlight between capital improvements and maintenance.

30:33
In that example, you had a basically blank space room with empty walls and a hole in the ground. That was adapted to a new use, which is an IRS term for determining a capital improvement. A capital improvement is good for tax purposes, because it increases your basis in the home. My friend installing the toilet, and the tub, and the tile: the cost of all that gets added to what

31:03
his cost basis is, which — at some point in this series we'll be talking about capital gains, I would assume. When you go to sell your house, you're going to be subject to tax on the difference between your cost basis and what you sell it for, less some expenses. So the more cost basis you have in your house, the less tax gain you'll realize when you eventually sell it. I'd like to distinguish capital improvements from maintenance. So, painting the bathroom —

31:32
maybe it got scuzzy or something and it needed a repaint job — that's not a capital improvement. Mowing your lawn, not a capital improvement. Capital improvements tend to be big things that are adapting the space to new uses or creating new space in the house. So, for example, putting on an addition, or if you had an uncovered garage area, if you were to install a covered garage connected to the house, or something like that, those would be capital improvements.

Amy Laburda 32:02
All right, that all makes sense. So, as usual, I like to give the last word in an episode before we wrap up to my guest. So is there anything else you'd like to say about homeownership or how to include your home in your big financial picture before we wrap up here?

Eric Meermann
Sure. I think we've covered a lot of it, but it's stepping back and looking at the overall picture. A home is an investment because it does have value, and fair market value, but it's also where you live.

32:29
Right. And so a lot of people look at it and say, “Well, is it investment or is it personal use? Or how should I think about it? Is it part of my overall portfolio?” Certainly it's part of your net worth, but everybody needs a place to live. So I wouldn't go out and buy a home just for the purpose of trying to create value from an investment standpoint. If you don't actually want a home, you know, if you want to continue to just rent and save your discretionary cash flow in a diversified portfolio

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over the long term, you might end up with more money than the leveraged future appreciation in a home. Because a home is a big commitment. It's got a lot of effort and expense that goes into initially purchasing it, as we've spent a lot of time on, but also maintaining it, cleaning it, repairing it. It's a big responsibility. So it's not something people should take lightly. And, overall though, it can be a very rewarding experience to own something yourself, have

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control over what you do with it. And certainly it is part of the overall portfolio of wealth, as we define wealth as broader than just the number on a net worth statement. So overall, we've talked a lot about the difficulty and energy required to purchase a home, to get a mortgage, to refinance that mortgage, maintain the home. But overall,

33:50
homeownership can be a very rewarding experience for most people. The ability to control your own space, enjoy it the way you want, makes homeownership ultimately a really rewarding and satisfying thing.

Amy Laburda
I think that really explains, as we opened, why it's such a big goal for a lot of people. And I hope the episode today has helped some of our prospective buyers out there feel a little bit more prepared. Eric, thanks so much for joining me on the podcast today. It was great having you back.

Eric Meermann
Thanks, Amy. It's great to be here.

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“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. Our firm has written two books:

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Looking Ahead: Life, Family, Wealth and Business After 55 and The High Achiever's Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes and performers. Both books are available on Amazon, in paperback and as e-books.