It’s tough to choose between saving for retirement or buying a home. Of course, you need a place to live, but you also need money for retirement.
How do you know when it’s the right time to buy a home?
Some people think owning a house is better. After all, it’s the American Dream, and you can use your home’s equity in retirement if necessary. Others don’t want the burden of a high mortgage payment and would rather focus on retirement.
Which is right for you?
Ask yourself these questions to decide.
Does your Employer offer an Employer Match?
If your employer has a 401K and will match a portion of your contributions, always prioritize the 401K first. Here’s why.
If your employer matches 3% of your salary and you make $100,000 a year, you’ll receive $3,000 a year for free. But, you must contribute $3,000 for them to match it. If you do this for several years, you’ll significantly increase your retirement funds with money from someone else.
At the very least, maximize your employer match and allocate any remaining funds for a down payment on a house.
How Long will you be in the House?
How long you plan to stay in the house makes a big difference in your decision to buy a house or invest in your 401K.
Buying a house costs money, not just the down payment or the home’s sales price. You’ll also pay closing costs of 3% – 5% of the loan amount. If you don’t stay in the house long-term, you might lose money paying the closing costs versus renting.
There’s a break-even point when the equity you earn in the home covers the closing costs. Anything from that point is profits. So if your projected break-even point is 10+ years away, but you only plan to stay a few years, it might not make sense to buy a home right now, and your money may be better in a 401K.
On the other hand, if you have long-term plans for the house, prioritizing a down payment on your house while balancing it with your employer match would be best.
Do You Have Liquid Assets?
Neither investment is liquid when considering investing in a house or 401K, so it’s important to look at your liquid assets.
Do you have a savings account or taxable investment account you could cash in if you need money?
Ideally, you should save three to six months of expenses somewhere liquid. This should cover your living expenses if you lost your job or couldn’t work for another reason you can easily access.
If you have all your capital in your home or retirement account, you could experience financial struggles since neither can be liquidated quickly.
If you don’t have an emergency fund, focus on saving enough money for emergencies while keeping a small percentage for retirement and buying a house.
How Close are you to Retirement?
Another big factor is how close you are to retirement. Typically, this means how close you are to 65 years old, but today people retire much sooner.
Thinking of your retirement plans, how many years do you have? If you’re closer to retirement than not, you should prioritize your retirement savings.
If, on the other hand, you have many years before you’ll retire, you can split your efforts, saving for retirement and a house at the same time.
Do you Qualify for a Low Down Payment Program?
You don’t a large down payment to get approved for a mortgage. Today, most lenders have other options, including down payments as low as 3.5%.
A larger down payment keeps your mortgage payment down, but if you can buy a home sooner and not give up your retirement goals, making a smaller down payment may make more sense.
To determine if a low down payment makes sense, talk to your loan officer and see if the mortgage payment fits your budget. Of course, the payment will be higher, but if you plan to live in the home long-term, it’s an investment in your future, and you can continue saving for retirement.
Keep in mind if you qualify for conventional financing, you’ll pay Private Mortgage Insurance until you owe less than 80% of the home’s value. But, this can provide you with the best of both worlds – you can buy a house and keep your retirement savings on track.
Are you Tired of Renting?
The largest issue might be that you’re tired of renting. Relying on a landlord to fix issues or update the home could be worse than watching paint dry.
If renting causes more stress than buying, you might want to find a way to prioritize buying a home by leveraging a low down payment program or taking a break on contributing to your 401K while you buy a home.
You can always return to your retirement savings after purchasing the house. If it means taking a short time off from your investment, but you have other money already invested, those funds will continue to grow while you work on buying a house.
Final Thoughts
Deciding whether to prioritize investing in your 401K or buying a house can feel overwhelming. But, typically, it’s a matter of figuring out where to maximize your money to reach your financial goals and take care of your family’s needs.
Both investments can eventually help you in retirement, but how you handle them determines the outcome. For example, investing in a home too soon and ignoring your 401K can be detrimental to your retirement savings, but not investing in a home and only investing in a 401K can create financial and other issues.
Find the middle-of-the-road where you feel prepared for retirement and can buy the house your family needs to live out your dreams.
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