Should I stop investing to save for a house?
Either save up to buy a home or invest,” says Kris Whipple, partner and financial advisor at Kristopher Curtis Financial in Nashville, Tennessee. “I say do both. If the house is more important to you, lean that way, but don't give up the opportunity of compounding growth.”
“It's critical to save for retirement even if you're saving for a house. If your employer matches your 401(k) contributions, then contribute up to the match,” says Joel Shaps, former vice president at Goldman Sachs Personal Financial Management.
A good number to shoot for when saving for a house is 25% of the sale price to cover your down payment, closing costs and moving expenses. (This amount is separate from saving up 3–6 months of your typical living expenses in a fully-funded emergency fund—which I recommend you do first, before saving up for a home.)
Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation. There can be tax advantages to property ownership. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $750,000 in mortgage debt.
From a financial perspective, it's usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster. Of course, life isn't just about cold, hard numbers. There are many reasons why you might choose either to pay your mortgage early or invest more.
Key takeaways. It can be tempting to switch off retirement contributions while saving for a home. However, always try to continue saving enough to capture the full amount of any employer match. Scaling back retirement savings may be detrimental if you're stretching to buy a house beyond your means.
If you're on a tight investment budget, you might be assessing whether investing in real estate or a Roth individual retirement account (IRA) is better. Real estate offers tax advantages and high potential returns, while Roth IRAs deliver tax-free growth and tax-free withdrawals.
Assuming a 20 percent down payment on a 30-year fixed-rate loan at an interest rate of 7 percent, you can afford the payments on a $240,000 home, according to Bankrate's mortgage calculator.
The down payment needed for a $300,000 house can range from 3% to 20% of the purchase price, which means you'd need to save between $9,000 and $60,000.
That's right—a 100% down payment. But if you do get a mortgage, Dave Ramsey recommends following the 25% rule—remember, that means never buying a house with a monthly payment that's more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional mortgage.
Is it better to have property or money in the bank?
Property usually provides better long-term returns, but cash is liquid and flexible.
Real estate investments provide monthly cash flow and passive income. When you invest your money in a 401(k), it's completely tied up until you reach retirement age. With real estate investments like rental properties, however, you can enjoy positive cash flow month after month, year after year.
Risk vs reward (volatility vs returns)
In general, the greater risks you are prepared to take, the greater returns you should expect, on average, over time. Shares investments are more volatile, and generally returns more over time, than property investments.
- Setting a Target Date. ...
- Making a Higher Down Payment. ...
- Choosing a Shorter Home Loan Term. ...
- Making Larger or More Frequent Payments. ...
- Spending Less on Other Things. ...
- Increasing Income.
If you are under 45, it's difficult to argue that your dollars would be better served paying off your mortgage unless you are on Step 9, pre-pay low-interest debt. You should aim to be completely debt-free by retirement, and after age 45 you can begin thinking more seriously about pre-paying your mortgage.
Millionaires usually avoid the following: High-interest debt: Millionaires typically steer clear of high-interest consumer debt, like credit card debt, that offers no return or tax benefits. Neglect diversification: They don't put all their eggs in one basket but diversify investments to mitigate risks.
For those planning to purchase a home within the next 3 years, Fidelity suggests holding down payment cash in checking, regular savings, or high-yield savings accounts—or in cash-like investments such as money market funds or certificates of deposit (CDs) that will mature before you anticipate needing the money.
Taking money out of your 401(k) to buy a house robs you of compound growth and is never a good idea. There are two ways to buy a house using money from a 401(k): early withdrawal or a loan.
A common rule is to budget for at least 70% of your pre-retirement income during retirement. This assumes some of your expenses will disappear in retirement and 70% will be enough to cover essentials.
There Are Income Limits
One disadvantage of the Roth IRA is that you can't contribute to one if you make too much money. The limits are based on your modified adjusted gross income (MAGI) and tax filing status.
At what point is a Roth IRA not worth it?
The tax argument for contributing to a Roth can easily turn upside down if you happen to be in your peak earning years. If you're now in one of the higher tax brackets, your tax rate in retirement may have nowhere to go but down.
Your income plays a significant role in determining how much mortgage you can afford, but it's not the only factor. Lenders like your housing costs to be about 28-36% of your income, including mortgage, taxes, and insurance. A higher income can qualify you for a larger loan amount.
An individual earning $60,000 a year may buy a home worth ranging from $180,000 to over $300,000. That's because your wage isn't the only factor that affects your house purchase budget. Your credit score, existing debts, mortgage rates, and a variety of other considerations must all be taken into account.
So, to estimate the salary you'll need to comfortably afford a $300,000 home purchase, multiply the annual total of $24,000 by three. That leaves us with a recommended income of $72,000. (Keep in mind that this does not include a down payment or closing costs.)
So, by tripling the $15,600 annual total, you'll find that you'd need to earn at least $46,800 a year to afford the monthly payments on a $200,000 home. This estimate however, does not include the 20 percent down payment you would need: On a $200K home, that's $40,000 that needs to be paid in full, upfront.
