home buying

How to Buy A Home and Stay on Track for Retirement

6 Minute Read

Have you ever considered 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!

I 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 impact your retirement outlook—and what to do instead.

Robbing Retirement to Make the House Payment

Shawn and Melissa are in the market for a new home. Melissa is a stay-at-home mom, and Shawn makes $60,000 a year. They invest 15% of their income for retirement, and they should not commit any more than 25% of their monthly take-home pay for a mortgage payment.

 

 

 

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Thanks to the hot housing market in their area, Shawn and Melissa expect to make $30,000 on the sale of their current home. Based on their income, they should look at homes that cost up to $165,000. 

But a hot housing market works both ways. When it’s time to buy, Shawn and Melissa will face a lot of competition with other buyers looking for homes in their price range. It will be tempting for them to pay more for their dream home.

To make a larger mortgage payment fit into their budget, they could simply cut the amount they set aside for retirement each month. At first glance, it’s a move that makes sense. A home is an asset after all, right? Wrong!

Cutting just $100 from their investing budget in order to afford a $180,000 home could reduce the amount they could have for retirement from $1.63 million to $1.4 million—a $230,000 difference!

Could their new home grow enough in value to make up the difference once Shawn and Melissa are ready to retire? Sure, it’s possible. But even if it did, 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 they stick to their original plan and buy a home they can afford while still investing 15% of their income for retirement, Shawn and Melissa will have a paid-for home plus an additional $230,000 in their investment account when they’re ready to live out their retirement dreams!

Stretching Out the Mortgage Means Short-Changing Retirement

Another option homeowners often turn to when they want to buy a home they can’t really afford is the 30-year mortgage. If Shawn and Melissa get a 30-year mortgage instead of a 15-year mortgage on a $180,000 home, they would have a lower payment every month. But a 30-year mortgage means an additional 15 years in debt and paying $55,000 more in interest. That’s definitely not okay!

 

 

The couple has 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. Over time, that could mean a whopping difference of around $350,000 when they hit retirement. That’s a plan I can get behind!

To keep their retirement plan on track, Shawn and Melissa need to stick to their budget and look for a house that costs no more than $165,000. 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 a buyer’s agent. Having a buyer’s agent by your side brings two big benefits:

  • Save 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.

  • Save time. Without a buyer’s agent, you’ll have piles of paperwork to wade through. 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 in the market for a home but you don’t know where to start, we can connect you with an agent in your area who’s earned my 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 will show you how to buy a house and stay on budget. 

Buy Your Next Home With Retirement in Mind

Shopping for a home while keeping your retirement dream in mind can be challenging at any time. But in a fast-moving housing market like most of the country is experiencing right now, it’s even more important to keep your eye on the retirement prize and  work with a real estate professional!

For more motivation, information and resources to help you plan for your dream retirement, check out the Retire Inspired Podcast.

About Chris Hogan

Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age; It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.

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