Why Homeowners Should Hire a Financial Advisor

Owning a home is a mark of freedom, a milestone, and a centerpiece of the American Dream. Homeownership can also have a benefit in helping you begin to accumulate wealth and build your net worth over time. While this can be an exciting thought, it can also mean your finances can get more complex, signaling a time to consult the expertise of a financial advisor.

In this article, we’ll highlight why you may want to consider working with a financial professional if you own a house. This includes an overview of the common missteps new homeowners make and specific ways an advisor can help you manage your finances with a home in the fold.

Homeownership Can Be a Foundation of Wealth

A home is often one of the largest assets an individual or family owns. For instance, according to a 2023 report by Pew Research Center, owned equity in a home made up a median of 45% of American homeowners’ net worth. Therefore, it can be a valuable element of a household’s financial picture, especially as it lets you put savings into an appreciable asset over a potentially long period.

Owning a home “has significant benefits for building wealth” and “is an integral part of the idea of the American Dream,” says Stephen Kates, CFP^®, Principal Financial Analyst at RetireGuide.com. A reason, he says, is that a reasonable 30-year mortgage “takes homeowners out of the rental market, where they have less control over their housing costs,” which “is an oddity in other parts of the world and gives Americans the means to eventually own their home more easily than in many other countries.”

Homeownership also helps you increase your savings over time, as noted. When you pay a mortgage instead of rent, you gain equity in a home that you could ultimately sell for a higher price than you paid to get it.

Timothy Paradis, CFP^®, director and wealth manager at Crestwood Advisors, observes that “property values tend to appreciate, which builds equity—the difference between the home’s market value and the remaining mortgage balance.” He continues, “This equity can grow substantially over decades, serving as a form of forced savings.”

As you pay into your home and gain equity each year, your home becomes a more valuable investment in your portfolio. For example, one strategy is selling before retirement to bolster your nest egg, cashing in on the savings you’ve built through your mortgage payments. Equity tends to increase with age, as illustrated by the following chart showing average equity by age group from the U.S. Census Bureau’s 2021 Survey of Income and Program Participation:

While homeownership can be a helpful starting point for wealth building, it can be challenging to navigate its place in your portfolio. Therefore, it can be invaluable to consider talking to a financial advisor. They can help you understand its tangible and intangible value in your financial picture and, among other tasks, guide you on the future uses of your home as an investment.

Avoiding Common Mistakes

Though homeownership is a core part of many people’s lives, it can still come with unique financial challenges and nuances. Less experienced homeowners could be prone to making mistakes both during and after purchasing a house. Therefore, because a home can play a crucial role in someone’s net worth and financial plan, it can be important to consult an advisor to dodge avoidable missteps.

One of the largest mistakes that Kates sees is “overextending to buy ‘the dream home’” by committing too much of your savings to a down payment or taking on a sizable mortgage. Since a significant portion of your money would be tied up in your home rather than ready to spend in a bank account, you can find yourself in a compromising spot in the face of larger expenses, such as home repairs, a car payment, or even vacations.

Another frequent oversight, says Paradis, is “underestimating the true costs of homeownership,” pointing out that it’s “more than just a mortgage payment.” He explains, “Many first-time buyers fail to account for maintenance, property taxes, insurance, and potential repairs, which can stretch their budgets.” Like overextending, overspending can jeopardize your financial security when necessary or unexpected housing-related expenses arise.

Although mistakes like these can be typical, especially as you work to make the goal of owning a home happen, an advisor can help you mitigate them. Specifically, a professional can objectively help you plan out how much house you can afford and assist with mapping out its short- and long-term effects on your finances. “A financial advisor can offer a valuable outside perspective and help with cash flow planning so the housing budget remains within the safe zone,” says Kates.

Managing Cash Flow

When you buy a home, as noted, the cash flowing in and out of your bank account can change. In general, this can be because, aside from a mortgage, owning a home comes with various expenses to pay attention to and plan for each month. For example, if you live in a housing development you may need to pay homeowners association (HOA) dues. You’ll also, of course, need to pay for property taxes and likely a home insurance policy.

Here are some monthly expenses you may need to pay:

• Mortgage payment
• HOA dues
• Homeowners insurance
• Utilities (electricity, gas, and water)
• Internet
• Property taxes

While these may all be necessities, they can add up and affect your ability to feel secure with your finances if they reach a certain percentage of your income. “As housing costs rise beyond 40% of monthly income, households will feel more financially constrained,” Kates says. “Keeping payments below 30% of monthly income is ideal,” he continues.

Because owning and running an operational home can impact your bottom line, it’s critical to take an intentional approach to your cash flow plan and budget. A financial advisor can help you with this and put it into actionable steps with saving strategies and habits to adopt.

Protecting Your Home and Savings

Owning a home isn’t without its risks. As a homeowner, you could have to handle an array of potential perils, such as faulty appliances, natural disasters, theft, or even injuries on your property. In that way, it’s imperative to ensure you have safeguards to protect your savings and home via tools such as insurance and a strong emergency fund.

While not required by law or contract unless it’s part of your mortgage, having a home insurance policy is an effective way to prepare for the costly and unforeseen expenses you may incur as a homeowner. Depending on your policy type, you could get coverage for a wide range of threats to your house. “Insurance is an important requirement for homeowners because it can help cover the risks of small or catastrophic losses from unforeseen events such as weather events, fires, leaks, and more,” says Kates.

Another key element to protect yourself from high repair costs or expenses related to homeownership is establishing a sturdy emergency fund. This allows you maneuverability to take care of large purchases and situations, while still having savings left over for normal expenses. “Advisors help set realistic emergency fund targets based on home value and other financial commitments,” explains Paradis. In general, however, building one involves saving enough money to cover three to six months’ expenses.

A financial advisor can prove vital as you put these barriers in place to protect your savings and home from the unexpected. “An advisor can help consumers build and manage these financial assets to make sure they are not underinsured or undersaving,” Kates says.

Navigating Taxes and Deductions

Homeownership comes with a range of tax benefits and responsibilities. Property taxes might be the first to come to mind, as this is a recurring payment and a central aspect of being a homeowner. However, there are also deductions you could receive to save money on your taxes.

For instance, you could get a mortgage interest deduction. “Homeowners may deduct interest paid on their mortgage on the first $750,000 if married and $375,000 if single, which can lower taxable income,” Paradis describes.

After sitting down with a financial advisor, you’ll be able to gain more insight into methods of optimizing your taxes, such as using deductions. This includes reviewing your holistic circumstances, including your investments, work income, and expenses, to find any possible opportunity to cut down on taxes and plan for future years.

Bottom Line

When it comes to being a homeowner, having a financial advisor to work alongside you can be a game changer. Among a wide range of tasks, they can break down how your home fits into your portfolio, find further opportunities to grow your portfolio, and recommend strategies to manage cash flow and protect your home.

It’s important to note, however, that you should prioritize hiring a financial advisor who has holistic planning experience and upholds a fiduciary duty to put your needs first. Advisors who fit this bill may hold reputable credentials such as Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC).

If you’re unsure where to find an expert who fits your needs, we recommend using a free matching tool, such as this one. After answering a short list of questions about your situation and goals, it will connect you with a financial advisor tailored to you.