Providing clients with advice on their homes

A house may be a client’s biggest asset, yet many financial advisers ignore this asset when it comes to providing advice.

An adviser can help a client calculate how much to spend on a house, what type of mortgage to take out and, later, how to refinance the home. A timetable for paying off a mortgage should figure in a client’s retirement plan, as well as whether to use the home as a source of retirement income.

“Financial planners know more about options than mortgages,” said Susan McHan, co-founder and chief executive of Opes Advisors Inc. a registered investment adviser in Palo Alto, Calif.

Opes Advisors has a mortgage-banking division to help clients choose the right mortgage, she said.

The goal is to fill a gap found in many advisory firms: real estate know-how.

Although many advisers can refer their clients to a top-notch mortgage broker outside their firm, experts in the industry say that too often, advisers don’t pay much attention to how clients manage mortgage financing. If they did, they might help prevent some of the most common mistakes homeowners make — those that can put a crimp in their retirement income or expose them to excessive market risk.

“Advisers don’t deal with [mortgages] because they don’t make any money off it,” said Jack M. Guttentag, professor emeritus of finance at The Wharton School of the University of Pennsylvania.

Some advisers, because their profit is linked to investment management, don’t advise clients to pay down a mortgage, even when it makes sense, said Mr. Guttentag, who runs a website called The Mortgage Professor.

Opes’ investment advisers work on a fee basis for financial planning, and the mortgage brokers are paid by the lender when a mortgage is written, Ms. McHan said.

Tracie Southerland, a financial and mortgage adviser at Opes, said that one common problem she sees, especially for first-time homebuyers, is that they use their lender’s estimate of how much they can borrow to decide how much to spend. Many end up borrowing too much, which forces them to make painful and unplanned cuts elsewhere.

Ms. Southerland thinks that many pre-retirees wait too long to begin making retirement housing decisions, and said that they should begin at least five or 10 years before they are ready to retire.

It helps if an adviser runs the numbers on a series of housing scenarios well in advance, she said.

For homeowners whose income will drop once they retire, it usually makes sense to have the mortgage paid off by then, Mr. Guttentag said.

The best way to do that is to plan for it when buying the house, he said.

Unless the loan will be paid off well before retirement, homeowners should calculate what monthly payment will pay off the loan by the year they retire, and consistently make that payment, Mr. Guttentag said.

A decade ago, some investment experts advised homeowners to keep a big mortgage, and invest the money, which would theoretically earn them more than the cost of the mortgage.

“That didn’t turn out too well” when the housing crisis forced many to walk away from underwater mortgages, Mr. Guttentag said.

Paying off a mortgage is like making an investment that pays the same interest rate as the mortgage and carries no risk, Mr. Guttentag said, adding, however, that many people have trouble looking at it that way.

Refinancing could be a smart move.

Peter J. D’Arruda, president of Capital Financial Advisory Group, used to tell his clients that it didn’t make sense to refinance their mortgage until interest rates dropped a fair amount, but these days, he suggests it for a rate cut of even one-quarter of a percentage point.

The difference is the arrival of no-closing-cost refinances, he said.

In these loans, the homeowner typically has to pay for the required property appraisal, but banks refund the cost after the loan closes.

Mr. D’Arruda doesn’t like to see homeowners take out home equity loans unless it is for home improvements that will increase the value of the home in an eventual sale — and the borrower can pay it back.

“People think of their house as a magic fountain of money, and it isn’t,” he said.

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