Purchasing a home can be a major milestone in your life. It is one of the largest financial decisions you will ever make. While it is exciting to think about buying a home, be sure you put some thought into the future before taking the plunge. Before you sign on the dotted line, be sure to avoid the following in order to secure your future financial freedom:
Pulling Money From Your Retirement Accounts
When you are planning a home purchase, avoid using your retirement accounts as a source of funds for a down payment. Even if you are years away from retirement, using money from a 401(k) or other retirement account can have a very negative impact on your future finances. You will be taxed on any money you draw before a certain age. In addition, pulling money from your retirement accounts lessens the amount of interest that is accruing on your future income, which prevents its growth. If you find that you need to use your retirement for a home purchase, proceed with caution and only do so as a last resort.
Buying Too Much House
It's the American dream—driving up to your gorgeous, large house with the white picket fence out front. This is a lovely thought, but it is not always realistic. The truth is if you are too overzealous with your home purchase, you are risking losing out on your retirement savings. By placing the bulk of your income into mortgage payments, you are not saving as much income for retirement. If you are a new homebuyer and plan to have a family, you also need to think about your future income. Is one of you going to stay home and raise children? If so, the bulk of your take-home pay will be going toward house payments without the ability to save as much for other purposes.
Paying Your Mortgage Off Quickly
While it can be a major milestone to pay off your mortgage early, it is not always the best idea in terms of planning for retirement. The only time it is ideal to pay your mortgage off early is when you are clear of all other debt, have fully funded emergency funds in place, and have the highest contributions available going into your retirement accounts. If you focus solely on paying off your house, you are going to miss out on some key opportunities to get your "bad" debt paid off. Bad debt would include unsecured debt, such as medical debt, credit cards, and personal loans. Having too much bad debt can be harmful to your financial future, so it is important to focus on clearing it before paying off your home. Contact a business that specializes in real estate transactions to learn how to get into better financial shape before investing in a new home.
If you are still concerned or have questions about your finances after buying a home, it would be ideal to speak to a financial planner or advisor to provide you with their expertise.