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Finances and Intentionality in a Home Purchase: An Interview with Michael Palazzolo

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Published on Jan 19, 2017

I sat down to talk with Michael about some of the insights he has gained, particularly in his work helping people just before the housing crash. Many of these people found that they were having difficulty making their mortgage payments because of purchasing a home that was too much of a stretch for them. Prices dropped abruptly, leaving many homeowners underwater. They had to decide to either “tough it out” or short-sell. Those who “toughed it out” had to do so for a very long time. Housing prices are just barely starting to return to 2006 levels ten years later.
In discussing this chain of events, Michael referenced a book called Guide to Money Happiness, stating that “debts are hard, assets are soft.” Once you get into debt, it is extremely hard to get help navigating your way out of it.
I asked Michael what advice he would give to families and couples to avoid this situation. How much should they spend on a house?
He advises that anyone purchasing a home needs to consider what their situation is going to be 3-5 years from now. Factor in any future changes in income because of the birth of children or one person leaving the workforce. Then he suggests a common-sense step-by-step process for creating a workable budget, beginning with the things you have to pay. He advises including about 10% of your income in these expenses as retirement savings. “Whatever is left,” he says, “accommodates the mortgage, and everything else.” Once you know what you want to pay for a house, you can give agents the price range you’re seeking, instead of the amount the bank says you can borrow.
The traditional home buying process is problematic because most home buyers assume that the amount of money authorized by the bank is a reasonable amount for them to borrow. But this amount depends solely on the bank’s expectation of being repaid. It has nothing to do with lifestyle choices and does not take any other expenses into account. This problem is exacerbated when agents show home buyers properties that are not within a reasonable price range. It’s hard to be content with a home that costs $1000 a month after seeing a home that costs more. Accepting less can be very disappointing.
Michael admits that this is difficult; however, if home buyers can’t afford the house they want, it’s better to find out sooner than later. He encourages them to look at the big picture of their entire life; a big house isn’t everything. There are many key components to a smart home purchase that are often overlooked. Some of these components are community, amenities, and travel time.
Neighborhoods can play a crucial role in the life of a family. Proximity to children, schools, and other couples are important to consider. The ability to easily access downtown amenities, as well as the amount of travel time to work, school, family, and friends all should factor into the decision. Now that there more options for schooling, commuting time to school has become just as important as the commute to work. The creation of opportunities for your children is a significant commitment that needs to be considered.
Michael remarked that incompatible priorities in relationships can often have a profound and long-term impact when it comes to home choice. An older spouse in a second marriage may take on a huge mortgage to keep a younger spouse happy. Parents may help their adult children with a home purchase, a decision which has long-term implications for their own future and retirement. Candid conversation is key to ironing out these differing priorities. Without such conversations, homebuyers can find themselves making a lifestyle choice “by default” as these choices end up being made for them by circumstance.
I asked Michael about the common perception of a house as an “investment.” In his opinion, a house should be considered an asset rather than an investment. The equity will not really benefit you unless you sell it. Thus, a house cannot be considered an investment if you are living in it.
We also talked about changing attitudes to home buying. People do not stay in their homes for as long as they used to, and often equity is used as a “Band-Aid” for budgeting problems. Equity should be used cautiously and intentionally; it shouldn’t be your only asset, because this is not diversified enough to protect you in the event of downturn. If you are not able to nurture any other investments, it’s best to downsize your ambition in terms of a home purchase and save the money to invest in a 401k or financial portfolio.
In closing, Michael tells prospective home buyers to “enjoy the process.” Buying a home is an exciting and happy event. Take a step back from the pressures and the expectations, and keep your emotions in check so you can make the best choices for your life as a whole.

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