How to Buy a Home and Stay on Track for Retirement

Buying your next home? We're excited for you! But have you ever thought about how buying your next house can affect your retirement? You may not think they’re connected, but choosing the wrong home could put your nest egg in trouble—and that’s not okay! We want you to set yourself up to live your dream retirement in your dream home. But to do that, you need to know what to do and what to avoid. So, let’s look at how buying the wrong home can wreck the retirement you want—and what to do instead.

Robbing Retirement to Make the House Payment

Let us introduce you to our two (imaginary) friends, Shawn and Angela. They’re in the market for a new home. Angela is a stay-at-home mom, and Shawn makes $60,000 a year. They want to retire 30 years from now. So, they follow what we teach and invest 15% of their income for retirement, and they don’t want to commit more than 25% of their monthly take-home pay on a 15-year fixed-rate mortgage payment.

But a hot housing market works both ways. When it’s time to buy, Shawn and Angela will face some heavy competition with other buyers looking for homes in their price range. Uh-oh. You know what that means. They’ll be tempted to pay more for their home!

Thanks to the hot housing market in their area, Shawn and Angela expect to walk away with $55,000 after the sale of their current home to use as a down payment for their next house. Based on their income and down payment amount, they should look at homes that cost no more than $160,000 (assuming a 4% interest rate). 

 

Retirement Savings	Annual Income = $60,000
Gross Income	$5,000/month
4% in 401(k) + 11% in Roth IRA	$200/month + $550/month
15% of $60,000	$750/month

 

Mortgage Payment	Annual Take-Home Pay = $48,000
Net Income	$4,000/month
25% of $4,000	$1,000/month

To make a larger mortgage payment fit into their budget, they could simply cut down on the $750 they set aside for retirement each month. Sure, that makes sense. Right? Wrong!

Cutting just $100 from their monthly investing budget in order to afford a $175,000 home could reduce the amount they could have for retirement in 30 years from $2.4 million to $2.1 million. At first glance, you might think those numbers aren’t all that different. But look closer. That’s more than a $300,000 difference!

Could Shawn and Angela’s new home grow enough in value to make up the difference once they’re ready to retire? Sure, it’s possible. But even if it does and if they plan to sell the home and downsize when they retire, they’ll have to use proceeds from the sale to buy their new, smaller place. That means less money in the nest egg for living expenses during retirement.

If Shawn and Angela stick to their original plan and buy a home they can afford while still investing 15% of their income for retirement, they’ll have a paid-for home plus an extra $300,000 in their investment account when they’re ready to live out their retirement dreams!

Stretching Out the Mortgage Means Short-Changing Retirement

Okay, you get it: Don’t steal from your retirement dreams just to pay for more house. But what if our imaginary friends, Shawn and Angela, say to us, “We can’t afford our dream home with this 15-year mortgage option! How about we do a 30-year mortgage?” A 30-year mortgage is just another option homeowners turn to when they want to buy a home they can’t really afford.

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Let us show you why. If Shawn and Angela get a 30-year mortgage on a $175,000 home instead of a 15-year one, they’d have a lower monthly mortgage payment. But a 30-year mortgage means an additional 15 years in debt and paying nearly $60,000 more in interest. That’s definitely not okay!

Okay, we'll stop picking on Shawn and Angela. Know why? Because they always planned to get a 15-year mortgage, pay it off, and add their house payment to the amount they invest for retirement each month. That means if their monthly mortgage was around $1,000, they could start investing $1,750 every month instead of $750. If we plug this example into our investment calculator to get a ballpark, that could mean a whopping difference of more than $500,000 when they hit retirement. That’s an incredible plan we can get behind!

To keep Shawn and Angela’s retirement plan on track, they need to stick to their budget and look for a house that costs no more than $160,000. If they can get a great deal on a home that’s under budget—that’s even better!

How to Stay on Budget

Remember, it’s best to keep your monthly mortgage payment to 25% or less of your take-home pay. That way you have plenty of income left each month to reach other money goals. It might mean you have to look for a less expensive home, but it’s worth it to know you’re not getting in over your head.

A great way to start your journey to homeownership is by using our mortgage calculator to figure out how much you can afford to pay.

Worried you won’t find a home you love in your price range? Work with an experienced buyer’s agent. Having a real estate agent on your side brings two big benefits:

• Saving money: In most cases, the home seller pays the commission for your agent—so you pay nothing to get expert help! Even better, a buyer’s agent can save you thousands of dollars on your dream home by fighting for your best interests at the negotiation table.

• Saving time: Without a buyer’s agent, you’ll be on your own when it comes to dealing with the piles of paperwork. Life’s too busy for that! Let an expert who knows all of the laws and regulations specific to your city take care of the red tape for you.

Good real estate agents can help you find a home that fits your budget, and they won’t pressure you into “creative financing” to make a bigger sale.

If you’re planning to buy a home but you don’t know where to start, we can connect you with an agent in your area who’s earned our recommendation for trustworthy advice and excellent service. Our real estate Endorsed Local Providers (ELPs) have tons of experience helping buyers like you find homes. They’ll show you how to buy a house and stay on budget. 

Buy Your Next Home With Retirement in Mind

Shopping for a home while staying focused on your retirement dream can be challenging at any time. But in a fast-moving housing market, it’s even more important to keep your eye on the retirement prize and work with a real estate professional!