Finding Your Castle

If you have just completed the purchase of your new home or are close to doing so, you'll understand that a whole new sense of financial responsibilities are coming to bear on your financial life. That includes not just a monthly mortgage payment, but homeowner's insurance, possibly mortgage insurance (if your down payment is less than 20% of the home's assessed value), property taxes and all of the other expenses associated with maintaining a house.

That's just the start. With such an important financial commitment, you need to consider other factors as well.

Life insurance
Now that you and your spouse are taking responsibility for a long-term financial commitment, you need to make sure you can sustain that commitment. For instance, consider how difficult it would be to make house payments (and meet other family expenses like food, transportation, clothing and more) if one spouse unexpectedly died.

Life insurance provides important protection. You can consider owning a policy that is specifically designed to pay off the mortgage debt at the time of the insured individual's death. However, remember that expenses such as homeowner's insurance and property taxes will be an ongoing cost, as will all other family expenses. So be sure sufficient coverage is in place to meet those needs.

Investments
Your home is truly an important investment for you. But it shouldn't stop there. It is critical that you diversify into other types of investments. After all, real estate values and prices of investments such as stocks tend to perform differently in different kinds of environments. For instance, when inflation levels are higher, real estate prices tend to rise. When inflation is lower, stocks tend to perform well. So you need to be prepared to benefit from different economic environments.

Low inflation helps stocks, high inflation helps home values
Performance in different environments, 1970 through 2000
Average annual return when annual inflation rate exceeds 5%
Houses	8.55%
Stocks	4.11%
Average annual return when annual inflation rate is 5% or lower
Houses	3.93%
Stocks	19.65%
Houses based on the New One Family Home Price Index issued by the U.S. Department of Commerce, reflecting average annual increase in housing value. Stocks based on Standard & Poor's 500 stock index, an unmanaged index of stocks. Assumes no fees or expenses, and earnings are reinvested.

Also remember the money you invest in assets like stocks, bonds, mutual funds and annuities will be available for you when you need it (the exception being money in retirement plans, IRAs or annuities, which typically cannot be withdrawn without penalty until after age 59-1/2). A home, on the other hand, can be sold for a profit, but you still need a place to live. That may require buying another home or renting a property, which will result in an additional monthly expense.

Personal financial considerations
A home purchase (and monthly payments) represents a serious commitment. You need to be prepared in many ways:

• Manage your cash flow so all payments are made on time. A habit of late payments can reflect poorly on your personal credit record, adversely affecting your ability to obtain loans in the future.
• Make sure you have emergency funds available for unexpected problems that may arise. For instance, if a furnace gives out, a portion of your house sustains damage or your job situation changes, affecting your ability to make timely mortgage payments. As a rule of thumb, you should have emergency funds equal to 3 to 6 months of income in reserve. Keep it invested in liquid, safe vehicles, such as CDs or money market accounts.
• Make sure you are taking advantage of the lowest interest rate possible. If the mortgage interest rate you currently pay is 1% or more than the going market rate for mortgages, consider refinancing your mortgage. Take into account all costs and your own plans for how long you expect to stay in your current house before committing to a re-financing plan.

Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide financial, legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.