Rhode Island Wedding Guide

Wedding Planning

Purchasing a Home for Better or Worse

Investing in real estate is one of the smartest decisions you can make as a couple.
By Heather Walsh, Vice President,
Wealth Management Advisor, Merrill Lynch

You've chosen the perfect groom or bride and you think you've chosen the perfect cake, but after the big day, where are you going to live?

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Planning a wedding is often an endless list of questions that all affect one beautiful day of your life - your wedding day. But what about the answers to questions that will affect you for years to come? Deciding whether to rent or buy a home is one of the most important questions you will answer as you and your new spouse plan your future together. And while continuing to rent might seem like the easiest choice, home ownership can offer several financial advantages.

Take Advantage of Tax Advantages
One of the key benefits of owning a home is the potential tax savings. These come by way of deducting mortgage interest expense and real estate property taxes from your income tax bill. Under the current federal income tax code, mortgage interest payments on first and second homes are generally deductible as long as these loans together total less than $1 million dollars.

To deduct property taxes and the interest paid on your mortgage, you must itemize deductions rather than take the standard deduction. For many homeowners, the combined deductions for mortgage interest payments and property taxes exceed the standard deduction.

As a homebuyer, you may also be able to deduct loan origination fees charged by the lender. Work with a professional tax advisor to see if you qualify for these deductions.

Fix it Up to Raise the Value
In addition, while no real estate agent can promise you that a property will increase in value, if you choose a highly valued location and make improvements to the home, you are likely to see an increase in its value over the years. As homeowners, you may be able to reap the benefits of that increase and grow your personal net worth when you sell your home.

Debunk the Mortgage Myths
If you're worried about how owning a home will affect your cash flow, consider the following mortgage myths. With a closer look at your financial situation, you may find that you can handle making mortgage payments while maintaining your current spending and investment habits.

Myth #1: The Duration of the Mortgage Should be as Short as Possible (Pay Off Principal Fast)
Most traditional mortgage payments consist of part interest and part repayment of principal. Many homeowners believe that the mortgage payment should be as high as reasonably affordable to obtain the shortest time period for a mortgage. The recent popularity of 15-year mortgages is evidence of this. However, with a longer-term mortgage, the difference between the higher 15-year mortgage payment and the 30-year mortgage payment can be used to accumulate funds to meet other needs.

Myth #2: A Long-Term Fixed-Rate Mortgage is Best
Many first time borrowers opt for a 30-year fixed-rate mortgage because they are nervous about a mortgage where interest rates may increase. However, if you aren't planning on staying in your first home for 30 years -- and most first time homebuyers don't -- then you should consider a fixed-to-adjustable-rate mortgage. A fixed-to-adjustable-rate mortgage is a 30-year mortgage that has an introductory fixed interest rate that lasts three, five, seven or 10 years that is oftentimes lower than rates on fixed-rate mortgages. So if you see yourself moving to a new place within ten years, looking into a fixed-to-adjustable-rate mortgage could decrease the amount of money you spend on interest.

Consider Alternative Financing Options
Rather than seeking a traditional mortgage to buy your home, you might want to consider borrowing against your combined securities instead. There are various securities-based financing options available today that enable you to leverage your eligible securities, such as stocks and bonds. Such financing options often times enable the borrower to benefit from a lower interest rate than they would receive through unsecured forms of debt. Securities-based lending won't put a dent in your cash flow, nor will it disrupt your investment strategy.

You could also combine this feature with a traditional mortgage in lieu of liquidating assets to fund a down-payment.

For example, there are loan accounts available that enable you to pledge a broad range of eligible assets as collateral, such as your managed assets accounts, exchange funds or even third-party assets. Pledging assets as collateral is advantageous because you borrow against rather than sell your assets, enabling you to keep your investment strategy on track, while allowing them to grow and earn dividend and bond income. Additionally, the credit you receive is based on the combined value of all your eligible assets in the account(s) pledged, offering greater borrowing power.

It's important to understand that securities-based lending involves some risk. If the market value of the pledged securities decreases, you may be required to deposit additional funds or to liquidate some or all of your assets without notice, leading to possible adverse tax consequences. Be sure to carefully review all risks and consult your advisors to better understand the tax implications associated with pledging securities as collateral.

Seek Advice from the Experts
How do you avoid potential costly mistakes? By preparing yourself as best you can before purchasing real estate. It is important to carefully research the types of mortgages available in your area or alternative financing options you may qualify for and spend as much time as you need to evaluate different choices in light of your budget, income and future plans.

As you tailor your decision based on these factors, work with your financial advisor to create a plan that takes your short- and long-term goals into consideration. Rather than someone who is simply trying to get you into a house or sell you a mortgage, your financial advisor has your best interest and long-term financial needs in mind, and will help you make the decision that is right for you.

We all know that real estate in Massachusetts can come with a high price tag, so if your mortgage payment will put a strain on your lifestyle or saving habits, it might be wise to rent and focus on saving and building credit while meeting other relationship and financial milestones along the way for now.

You looked long and hard for the perfect person to marry, so be just as specific when you are purchasing a home and choosing a financial advisor. Just like marriage, there are several things to consider, but in the end, if it is the right house and the right time, it can be the smartest decision you've ever made.

About the Author: Heather Walsh is a Vice President and Wealth Management Advisor for Merrill Lynch in Burlington. Heather assists clients in developing long-term financial plans and helps them develop strategies to manage their personal and business finances. She can be reached at hwalsh@pclient.ml.com.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Private Wealth Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.