Get your finances in order and save intentionally.
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.
What are the benefits to owning a home?
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
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.
How does a home fit in with my other goals?
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.
Start on the right foot
Before you start saving for a home, you should put money towards paying down high interest loan. We define
this as loans with interest rates greater than 6%, such as credit card loans or student loans.
Next, you should contribute to your company-sponsored 401(k), but only if your employer offers a matching
contribution. An employer match is basically free money, making it much more attractive to participate.
Map out your priorities
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.
Understanding the trade-offs
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
What's your Path forward?
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.
What can I do today to be prepared?
If a home purchase isn't in your immediate future, there are a few things you can do to better prepare
far in advance.
Pay down any debt
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.
Improve your credit score
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:
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.
How should I invest my home savings?
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.
Within five years
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.
More than 5 years away
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.
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