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Save for Home or Retirement?

After digging themselves out of mountains of student loan debt, Millennials are being faced with the next big financial decision: buying a home and saving for retirement. Many think this is an either/or proposition, and that you can’t have both.

So not true.

It is possible to have both. As a matter of fact, jeopardizing one for the other may actually put your future wealth at risk, and it could all be due to a misconception.

The  20% Down Payment Myth

It can be a daunting prospect to think about saving 20% of your future home purchase, while also juggling rent, car payments, and student loan payments. It’s no wonder many Millennials feel they can’t simultaneously save for a home and put money away for retirement. It can seem overwhelming, especially considering the higher home prices in the DC area.

However, you may be closer to being able to buy a home than you think. Many first-time buyer programs do not require 20% down. In fact, FHA mortgages only require 3% down, and many VA loans have a very low or zero-down payment option (if you are a qualified veteran). As a matter of fact, if you have great credit, you may even be able to get a conventional loan with 10% down or less.

Of course, if you have the ability to save 20% down, there are certain advantages. Making a larger down payment will help you avoid Private Mortgage Insurance (PMI), which can raise your monthly payment considerable. You’ll also save on interest over the long haul, because your loan amount will be smaller. However, the opportunity costs of delaying the purchase of your home until you can save up 20% could be considerable. Prices will only rise. Wouldn’t you rather own now and add that increasing value to your equity than to delay and pay more in the future?

Don’t Stretch Too Far

If your goal is to be able to comfortably make your house payments and put money away for retirement, you also need to think about what your expenses will be after you move into your new home. It can be extremely compelling to buy the biggest house you can qualify for, but your mortgage approval will not take into consideration your savings goals or other expenses such as maintenance and upkeep, childcare, utilities, etc. You may find yourself stretched so thin by just living your life, that there is little left over to save for retirement, put away in other investments, or to save for unexpected expenses. So choose a home that leaves you with a comfortable cushion, so you don’t feel like you have to choose between making your house payment and saving for retirement.

Your Home is Part of Your Investment Portfolio

Owning a home is the foundation of growing family wealth. It is an appreciating asset with a built-in savings plan. As your equity grows, so does your financial stability. Many people don’t necessarily see their home as a part of their portfolio, but it really is. It’s more than just a roof over your head or your port in the storm. The value of your home, and your equity in it, will be just as important to your retirement years as the funds in your retirement account.

Don’t Sacrifice Savings to Pay off Your Mortgage Early

If you talk to any Baby Boomer or Gen Xer, you will probably get the same advice. Pay extra on your mortgage every month. Double payments if you can, add an extra payment at the end of the year, or whatever you can afford. The ultimate goal is to pay that mortgage off as quickly as possible, so you can be debt-free. However, if you can’t afford to pay your mortgage off early AND save for retirement, what should you do?

You have to understand that the situation was very different for previous generations. Interest rates were often 8-15% or even more, and home values grew at a slower rate. Investing in the stock market was also not as common, because at the time it was a tool of the wealthy. So paying off that house early and getting out from under a high-interest mortgage opened up an avenue for the middle class to build wealth.

However, these days the cost to borrow for a home is very low. Often, investing in mutual funds or stocks through a retirement account can yield more than what you may pay in interest on your mortgage. Mutual funds marked to the S&P 500 have, on average, returned somewhere around 10-12% (although some years have been less, and some more). Also, with the rate of growth in home values in the DC area, your home is likely to grow in value at a faster rate than your mortgage interest.

Most financial advisors will tell you to “not put all your eggs in one basket”. Spreading your investment dollars across multiple investments will help protect you from losing all your gains during downswings. So if you are thinking about putting every dime of extra cash you have toward paying down your mortgage, and sacrifice savings, then you may want to consult a financial advisor to see what the best options are for you. Every financial situation is different, so it may pay to get some advice.

If you are thinking about buying your first home, we are here to help! Call the Realtors® who love where they live and understand the local real estate market. ADMC Realty Group happily serves the communities in and around the Washington DC, Maryland, and Northern Virginia areas. From start to finish, we’re here to help with all your Real estate needs. Give us a call at (202)596-8101 or email us at [email protected].

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