If you’re in the market for a new home, you face a dizzying array of important decisions—decisions that will profoundly impact your life for years to come. With so much at stake, maybe you’re wondering whether now might be a good time to get some advice from a personal finance pro.
True, you’re probably already getting some related advice from your real estate agent and mortgage broker. But they’re not focused on the big picture. Many buyers end up jeopardizing their children's education or their own retirement by following the standard advice of mortgage brokers and real estate agents, who will tell you the maximum you can afford without taking your other life circumstances into account. In contrast, a good financial adviser will take a more comprehensive look at your situation before offering advice.
A good financial adviser will help you ask the right questions before buying a home. For example, even though you might be most interested in the mortgage you qualify for, a good adviser will prompt you to ask, “How much home should I buy, given all of my short and long-term goals and objectives?”
This is the beginning of a discussion that puts your home purchase in proper perspective alongside every other financial goal competing for your limited resources.
The discussion should address questions including:
There are no perfect answers to any financial question, including home-buying questions. Instead, there’s just an ever-changing continuum of potential risk and reward that must be navigated as thoughtfully as possible. The adviser’s job is to help you properly manage both risk and return to arrive at the right answers for you within the context of your overall financial picture.
To find where a home purchase fits into your overall financial plan, advisers often use a framework that attempts to tie everything together in a cohesive and comprehensive way. An ingenious example of this is an approach developed by Charles Farrell, J.D, LL.M. and detailed in his book Your Money Ratios. His unifying theory of personal finance is framed as the journey from being a supplier of labor to a supplier of capital.
Under this paradigm, mortgage debt, for example, is viewed in terms of how it can facilitate (or inhibit) the transition from laborer to capitalist. Thus, mortgage debt is acceptable (you need a place to live after all), but only to the extent it doesn’t get in the way of achieving a target savings level—specifically, the amount you need to save to stay on track toward becoming a supplier of capital.
For example, at age 40, Farrell recommends keeping mortgage debt at less than 1.8 times annual gross income. That may seem a tad frugal; but, based on his calculations, this will generally preserve your ability to save a recommended 12% of gross income. He nudges these figures to 1.7 and 15%, respectively, at age 45.
A financial adviser can help you balance what you want most with what you want at the moment, helping you understand how buying a home might impact other priorities later on. For example, taking on too much mortgage debt can make reaching eventual financial independence more difficult—particularly if things go wrong.
That’s because debt means leverage and leverage means risk. Remember, leverage amplifies mistakes, so you need to approach it with caution and with your eyes wide open.
Considering that jobs can move out of state, divorces happen, and houses don’t always go up in value, it might be worth your time and money to have a discussion with a financial adviser about what buying a home might mean for you both now and in the years ahead.
Currently, there’s no restriction on who can use the title “financial adviser,” which is why so many do. Personal bankers, stock brokers, insurance agents, mortgage brokers, and many other sales professionals often (questionably) market themselves as financial advisers. Most lack any graduate level training in finance and instead carry sales licenses arming them to distribute financial products on commission throughout their distribution channel (that’s you). This arrangement is less than useless when you need advice from an actual financial professional rather than a product.
Unfortunately, the vast majority of people calling themselves “financial adviser” are anything but. Even among traditional financial advisers there’s strong disagreement about what it means to be an adviser. For example, as a fee-only financial adviser, I’m leery of the term “fee-based adviser.” That term sounds less salesy than “registered representative,” however, it’s essentially another term for sales professional as they accept fees and commissions.
As a fee-only adviser, I’m among an admittedly small minority (at least small in this country) who believe advisers should never be allowed to personally profit from their own advice through product sales. The idea is, as legal fiduciaries, it’s best for advisers to invoice clients directly for advice. This maximizes transparency and dramatically reduces (but does not completely eliminate) conflicts of interest. For more information, The National Association of Personal Financial Advisors (NAPFA) is a good place to start.
Keep in mind that even though all fee-only advisers offer transparent pricing —importantly, quoted in dollar terms—fees for ongoing service might be based on account size. That means the adviser will lose revenue if, for example, the client makes a large withdrawal for a down payment on a home. For this reason, when you have a specific issue to address, it’s often best to find an adviser who offers advice on an hourly or project fee basis.