For those of you who hope to buy a home soon in today’s high-priced market, probably the most daunting hurdle is amassing the down payment. With the median home price currently hovering around $400,000, a 20% down would amount to a whopping $80,000. Now, who has that much laying around? Anyone?
Further complicating matters is that you’re saving up for more than a house. You might be simultaneously socking away money for retirement, paying down credit card debt or college loans, or setting aside something for the day your kid heads off to college, too.
With all this in the mix, the challenge of saving enough for a down payment can sometimes seem insurmountable. Can you just stop everything and save for the house? Well, in a word, no. But you can learn to prioritize, juggle, and adopt some clever strategies to help you reach your goals.
Should I save up for a house or pay off credit cards first?
Debt is something of a national pastime. On average, Americans carry $6,194 in credit card debt, according to the 2019 Experian Consumer Credit Review. And the average credit card interest rate is 18.26% for new offers and 14.54% for existing accounts, according to WalletHub’s Credit Card Landscape Report. And as you probably know, the more your spend, the more your balance and payments go up.
Ideally, you’d eliminate this kind of debt before you start hitting the open houses.
“If you are buried in debt, when you buy a house you might just not be able to make ends meet,” says Jay Zigmont, certified financial planner and founder of Childfree Wealth. “Paying off your debt before buying a house will set a sound foundation.”
But paying down credit cards is not an easy thing to pull off. If you can’t quickly knock off your credit card debt, or if you have multiple cards with debt, zero in on the highest-interest debt first since that’s the kind that threatens to escalate quickly. You can consult your credit card company about reducing your rate, or find the lowest interest rate and debt-consolidation offers online, and consider doing a balance transfer.
“With the amount you have available every month, contribute 50% to saving for your home and 50% toward debt,” says Satinder Dhinsa, a certified financial planner at Freedom 55 Financial.
As you lose or lower the debt, you can take the money you had been sending to creditors and put it toward saving for your down payment.
“Not only does paying down high-interest debt reduce the stress on your bank account, but it will also improve your eligibility for a larger mortgage at a more favorable rate,” says Dhinsa. “If you have too much consumer debt, it will impact how much mortgage you qualify for.”
Look at paying down credit card debt as part of the homebuying process. It will benefit your bank account and boost your peace of mind. Plus, when you find your dream home, your mortgage application will be that much better for it.
Can I buy a home with college loans?
The toughest hurdle to saving for a home if you’re 40 or younger is student loan debt, according to a survey of recent homebuyers by the National Association of Realtors®. But student loan debt is in some ways more forgiving than credit card debt. It’s not as bad for your credit rating because these loans typically have longer repayment timelines and lower interest rates.
Of course, you want to keep current on your student loans, but don’t sweat trying to pay them off fast. Just plug along with minimum payments, and don’t forget the silver lining: You can claim a tax deduction for the interest paid on student loans.
“If you have student loans, this is OK, as these are low-interest rates,” says Dhinsa. “Having a student loan does not prevent you from getting a mortgage, though it affects affordability and the amount of mortgage you may be approved for.”
Sometimes, it might seem as if student debt is standing in the way of your saving for a down payment. Perhaps your loan is privately financed and you worry that your interest rate will rise or the monthly amount due on this kind of debt is oppressive. In situations like these, investigate your options to lower that debt.
“If you’re holding on to student debt, now is the time to refinance your private student loans. Since private loans don’t qualify for the same payment pause that public loans do, you’ll want to finance your loan now at a fixed rate before interest rises,” says Michael Jeffcoat, founder of The Jeffcoat Firm, a legal firm.
Should I save for a house or retirement first?
Saving for retirement should always be a priority—especially if you’re young. Consider the magic of compounding interest: If you invest $1,000 at age 20 and contribute $83 a month (around $1,000 a year) until retirement, by age 70 you’d have $465,000. If you did the same but waited to start until age 30, you’d end up with about $225,000. If you left it until age 40, you’d have about $105,000.
But reality check time: How the heck can you sock away enough for a down payment if you’re funneling money into an individual retirement account or 401(k)? You might even wonder, is it ever OK to stop contributing to your retirement for a while, so that you can put all your money into paying off debt and saving up for a house? The superheated housing market we’re in might have you wondering where you can cut bait.
“Some people pause their retirement savings to save for a house,” says Zigmont. But on a 401(k), “you want to at least contribute enough to get the employer match if you have one.”
Plow anything else available beyond that into a house fund. So, yes, you do have permission to take this priority off the front burner for a bit.
One last bit of advice: Do your best to avoid pulling money out of retirement savings vehicles for your down payment. Penalties and loss of tax-deferred status on these funds can put you behind the eight ball in the long run.
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