Just because homeownership is further away doesn't mean you aren't curious. There are a variety of reasons to commit to such a large financial and life decision.
Even if you don't buy a home, you still need to pay something for lodging. For most people, this is in the form of monthly rent. When you buy a home and pay a mortgage, you're actually saving into a permanent asset. Plus, you get the automatic protection against rising rent costs. See how to value a home as an asset
There are a few concrete financial benefits to owning a home, namely a potentially significant tax break. Renters don't get a tax deduction from the rent they pay. But as a homeowner, you can deduct up to $10,000 paid in property taxes and interest paid on mortgages with balances of up to $750,000 from their federal taxes. When it comes time to sell your home, you may even exclude the capital gain, up to a certain limit.
The most significant benefits to owning a home are likely not financial. You want to buy a home because you want a place to call your own, a place that gives you freedom to live the life you want. Your reasons are often justifiably emotional, which is why the case for buying a home can't simply be rationalized by a financial model.
In fact, in a recent National Housing Survey by Fannie Mae, when survey respondents were asked to choose their top reasons for buying a home, the top four were non-financial.
A home needs to meet your requirements, but it shouldn’t impede you from reaching your other financial priorities like providing for your family or living a comfortable retirement.
The right home is one that still allows you to meet your other financial priorities with confidence. This means understanding how much home you can afford, and also having a clear sense of your other goals — both short and long term.
After you pay down debt and put money towards your 401(k), it's time to understand what your financial priorities are. Do you want to cover your children's college education costs in full? What about having a comfortable lifestyle in retirement? Do you need to buy a home sooner than later? Once you've decided the relative importance and timing of these priorities, you can then determine how much of your savings to allot to each goal.
The reality is you only have so much money to work with, so prioritizing one goal will have an impact on the others. To demonstrate how to consider trade-offs, let's walk through an example. Let's say you're deciding between buying a larger home that costs $800,000 or a more modest home that costs $500,000
It's important to have a comprehensive plan that accounts for all your financial goals. But arriving at that plan takes careful research, calculations, and projections. That's why we built Path, our comprehensive planning solution that does it for you. Get started with Path.
A house is likely one of the largest purchases you'll make. Understand what you can do today to put yourself in the position to make that leap one day.
If a home purchase isn't in your immediate future, there are a few things you can do to better prepare far in advance.
When you pay down your debt, you decrease your debt-to-income ratio. This is a key input in determining the terms and interest rate for your mortgage. The rule of thumb is that your total monthly debt payments should be less than 33% of your monthly pre-tax income. See more details about mortgage.
Lenders use your credit score to assess the risk they take on when giving you a loan. They use it to determine whether you qualify for a mortgage and what interest rate you'll pay. A healthy credit score is 740 or higher. To increase your score, monitor it via credit reports, set up bill payment reminders and pay down any debt. Source: My FICO
This might seem like a no-brainer, but everyday expenses can get in the way of proactively saving for larger goals. By defining a monthly amount to put towards a home and depositing it in an appropriate savings or investment account, your future won't become an afterthought. Learn more about how to invest home savings.
Time can be your friend. A longer time horizon means more time to save for your down payment and build up your credit score. However, just because you're buying more time to save for a home purchase doesn't mean you don't have living expenses. Be sure to factor in rent and other household expenses into your savings plan.
There are several ways to invest in the funds you've set aside for a future home purchase. The right option for you, depends on your time horizon.
Markets can be volatile from year to year. In fact, our analysis shows that there could be a 22% probability of loss for investments with a time horizon of less than five years. For near term purchases, it's more prudent to stay out of the markets to avoid a potential downturn.
If your home purchase is in the next five years, we recommend investing funds for a down payment in a low-risk option, such as a high-yield savings account, certificates of deposit (CDs), or a money market account.
If your time horizon is longer, your savings can afford to take on more risk. For home purchases that are over 5 years away, we recommend investing your money in a long-term diversified investment portfolio, which can deliver higher returns than short-term savings options.
As you get closer to purchasing a home, we suggest moving that money from your investment account to a safer, low-risk option, as mentioned above. Consider investing your long-term savings with Wealthfront.
If a home is further in the future, time is on your side. Start early by getting your finances in shape and saving intentionally for that purchase.
Wealthfront uses your financial data to determine what you can afford and helps you plan for a home that fits with your other financial goals.