Five Home Buying Mistakes That Can Impact Your Retirement
#1) Buying a House Outside Your Price Range
A home is the biggest expense for most people, so if you purchase something over your budget, you will become “house poor.” In order to make your mortgage payment, you will forfeit the ability to save for retirement. Even if retirement is a long way off, it is important to make the right home-buying decisions now to prevent getting yourself in a bind later. Though your current income may be enough to afford the house today, it is also important to consider future scenarios that may impact income level such as having children, going from a two income to a one income household, etc. The goal being to maintain the balancing act between having the home you want without reducing how much money you can save for retirement.
#2) Draining Retirement Account for a Down Payment
It may not seem like a big deal to take some money out of your retirement account for a down payment, but the long term affect is so impactful to the average buyer that it should only be considered as a last resort. If you borrow from your 401K or IRA before retirement age, there is a 10% penalty on the amount borrowed plus the regular income tax due. But you are also losing all of the interest that you would have accrued on that amount over time and that is particularly adverse for younger people.
#3) Paying Off Your Mortgage Too Quickly
This is a decision between good debt (a new mortgage) and bad debt (credit cards) and it depends on where you are in life. If you are a younger homeowner you will have a higher tax write off for interest if you do not pay down your mortgage debt. It would be advantageous to your financial big picture if you paid off credit card debt or put extra cash into your retirement savings than to increase your mortgage payment. If you are closer to retirement, then it makes sense to pay off your mortgage sooner in order to retire debt free.
#4) Not Saving For a Rainy Day
An alarming 29% of Americans have no savings. Without an emergency fund, people turn to credit cards, home equity loans, or retirement savings when life throws them curve balls such as job lay-offs or big ticket emergency home repairs. Work toward amassing six months of living expenses just in case and budget 2% of your home’s value annually for maintenance.
#5) Waiting Too Long To Downsize
If your children have left the nest and you are approaching retirement it is probably time to downsize. The cost of mortgage and maintenance on a large home drains resources that could be boosting your retirement. If you downsize to a smaller home and wipe out your larger mortgage, the cash flow increases by that difference in cost and benefits you now and as you move into retirement. Another option is to meet with a financial planner to determine if a reverse mortgage might be beneficial for you.