As home prices edge ever higher, and as Millennials are getting well established in their careers and having families, it may seem like you have to choose between saving for your future or owning a home.
Which is more important?
Well, the answer is, both. Sacrificing your retirement savings puts your future ability to retire and ensure that you are able to enjoy those later years in jeopardy.
For Millennials, faced with the burdens of student loan debts and stagnated wages, this may seem like a tall order. However, there is a common misconception that may leave Millennials believing they can’t do both.
The Myth of the 20% Down Payment
Saving 20% of the purchase price of a home seems daunting. Doing so while also saving for retirement, seems impossible.
While it’s true that making a 20% down payment has certain advantages, it’s a fallacy that it’s required to get a mortgage. FHA mortgages only require 3% down in many cases, and VA loans (if you are a qualified veteran) offer zero down options. Even conventional loans are possible with 10% or less down, if you have great credit and solid income. This makes the prospect of saving for a down payment much easier.
Of course, 20% down will save you money in the long run. You’ll avoid Private Mortgage Insurance (PMI), and a smaller loan amount will save you in interest over the long haul and will lower your monthly payment. But the cost of delaying purchasing a home, and the wealth-building affects of owning an asset that increases in value, will cost you more in the long run.
Avoid Being House Poor
You also need to think about your life after you move into your new home. If you purchase a home that is a stretch financially, you’ll find yourself with less to put toward retirement and other investments. You may also find it difficult to save for unexpected home or car repairs, illness, or periods of unemployment. So opt for a home that leaves you with a comfortable cushion that will allow you build your savings and your retirement fund, and still afford all your other expenses.
Your Home IS an Investment
It may also help to remember that your home IS an investment. Just like your 401(k) or stock portfolio, your home is an asset. It’s like a forced savings account, as each monthly payment you make builds equity, while the price appreciation over time adds to your wealth. So saving for a home down payment and contributing to your retirement fund is not an “either/or” proposition. You can and should do both, if at all possible.
Mortgage Pre-Payment Isn’t Always the Answer
For decades, there has been an assumption on the part of homeowners that paying off your mortgage early should be the ultimate goal. But is it?
While it is generally a good idea to have as little debt as possible, the conventional wisdom of paying off a mortgage early was contrived at at time when mortgage interest rates were 8-15% or even higher, and home values grew more slowly. It’s unlikely that investing in the market at that time would earned a high enough return to offset the losses to mortgage interest.
We are currently no longer plagued with high interest rates. With borrowing costs so low, your home value will likely grow faster than the interest you are paying. Paying your home off early by making a huge downnpayment and accelerating amortization with massive extra payments is not as urgent as it was 30 years ago. You may miss opportunities to earn a greater return by investing any excess cash you have. in other investments. Consider:
- Putting all your eggs in one basket – any financial advisor will tell you that diversification is key to weathering periodic market fluctuations and is the best way grow your portfolio. Should your home be your only investment?
- Lost opportunities – if all your assets are in your home, then you bear the opportunity costs of missing out on stock market growth (and buying opportunities when the market is down). Consider the upside potential you might be missing. A moderately aggressive portfolio of mutual funds or stocks could earn returns of 10-20%, depending on market conditions. Making minimum mortgage payments so that you invest excess cash may make sense for some homeowners, especially those with a longer time horizon until retirement.
Of course, it may be helpful to consult a financial advisor and a mortgage officer to determine the best course of action for your specific financial situation. But if you are part of the younger generation, and think that investments in a home or your retirement are mutually exclusive, don’t let this misconception keep you from actively achieving both dreams.
We are here to help! We can also help refer you to local mortgage lenders who work with veterans. Susan Pellegrini and Karen DeGeorge are ready to put their care and expertise to work for you. Buying or selling, our first-class service comes with a wealth of experience and eye for detail, ready to focus on you. Visit our website to learn more and contact us or give us a call at (480)- 315-1575, we’re here for you.