Real Estate As a Tool - Article 2.

Uses for Your Home

In our previous discussion, I suggested that many of us middle-class folk, if we want to take full advantage of ALL of our economic opportunities, must at least consider using our house as more than "just" living accommodations, that we should use our home for other purposes than as but our castle.

Some possibilities:

	Tax shelter = I have probably beaten this drum so as to have become monotonous, but I cannot say it too many times (apparently): Our home is the very best tax shelter available to us, for mortgage interest is deductible and property taxes are deductible, and the 'profit" upon sale (up to $250,000 for an individual and $500,000 for a couple) is NOT subject to capital gains tax. Thus it behooves each of us to be buying the most house we can otherwise afford so as to be taking the maximum tax benefits available to us. Each year we take advantage of these benefits reduces our income tax, effectively enhancing our disposable income and - one hopes - increases our retirement savings.
	Hedge against inflation = Our house, if properly mortgaged, is a better hedge against inflation than is gold, for a long-term mortgage at a fixed interest rate locks the bank in much more than it locks us in. We can refinance whenever interest rates decline, but the bank cannot force us to pay higher interest rates just because rates creep upward - unless, that is, we have agreed to a variable rate, which is something one should do only in limited circumstances. If you financed your house purchase a couple of years ago on a 30-year mortgage at, say, the fixed 4.5%, your lender cannot demand that you pay the current higher rate. This is what I mean when I refer to our financing as a hedge against inflation.
	Education savings = If you have youngsters you want eventually to go to college, you are undoubtedly experiencing the onslaught of unsolicited advice recommending that you start pouring money into an Education IRA or similar investment scheme. I suggest a different approach: Buy a better, more valuable house with that money that might otherwise be earmarked for college - and I suggest this alternative for several reasons.
		What if little Jenny doesn't have the grades, or perhaps even the inclination, to go to college? There you are, holding onto this nice little Education IRA and no education to spend it on. If you'd put that same money into a better house, the worst thing that could've happened is that you have a better house. o When it comes time to apply for college loans, and the school is looking at family wherewithal, those Education IRA's are treated much more harshly than the equity you have in your house.
		Investment salespeople LOVE Education IRA's, which means that you should be concerned about them. They are often subject to high commissions and fees and limited flexibility. These salespeople are trained to play on your parental guilt, which is a technique that can overcome otherwise intelligent investing intentions.
		Borrowing against the equity in your home in order to help your child get an education can be tailored to specific needs after other sources of funding have been determined.

OK, I think you see the theme here - I think that you should spend as much on your house as you can afford to spend. For many reasons, this is the wisest financial move you can make (other than, perhaps, being born to financially-successful parents). In our next conversation, I will talk about a few other ways available to you to make financial "use" of your house.