There are plenty of so-called experts and gurus out there with all types of advice on what you should do with your money, but perhaps the most celebrated is Warren Buffett, known affectionately as the “Oracle of Omaha.”
On Saturday, the 82-year old financial wizard held his annual shareholder meeting for Berkshire Hathaway in Nebraska’s largest city, which many refer to as “Woodstock for Capitalists.”
He talked about everything from politics to the economy to his personal life on Star Wars Day (May the fourth…), and every single word was taken as gospel by his loyal legion of followers.
Fox News also caught up with Buffett, who took the time to discuss the state of the economy with Liz Claman.
The most interesting tidbits (to me) were about housing and mortgages, something you may want to pay attention to if you’re thinking about buying a home or refinancing.
Buffett Says Get a Mortgage Today
One major takeaway from the interview was the line, “if you ever want to get a mortgage, today is the day to get a mortgage.”
If you’re wondering why he is so bullish on mortgages, it’s pretty simple. Mortgage rates are at or near all-time record lows, so you can borrow money on the cheap.
This low-rate environment explains why housing is so affordable at the moment, even though home price-to-income ratios are above historic norms.
Like anyone else with half a brain, he knows interest rates (including mortgage rates) will eventually rise, and so locking in a low fixed rate today is paramount.
He also said those who are borrowing money to finance a home should do so for a “long period of time,” meaning go with the 30-year fixed mortgage instead of the 15-year fixed.
Heck, one could even make an argument for a 40-year fixed mortgage if they’re comfortable investing elsewhere.
Why? Well, as I’ve discussed in other posts, most recently my mortgages vs. inflation post, the value of money erodes over time. And a fixed mortgage balance will be easier to pay off in the future with inflation-adjusted dollars.
For the record, Buffett expects inflation in the future thanks to the quantitative easing that has been keeping rates low for years now.
In other words, why pay off your mortgage as quickly as possible when rates have never been lower and money is expected to be worth less?
Why not take advantage of a low fixed mortgage rate for as long as you possibly can, seeing that we may never see them this low again.
Sure, this advice comes from a big-time investor who can easily beat the rate of return on a mortgage, but even amateurs can probably pull it off with rates so low.
[Pay off mortgage or invest?]
Good Time to Invest in Single-Family Homes
Speaking of investing, Buffett also noted that today is a good time to invest in a single-family home, though he did say, “It’s not quite as attractive as it was a year ago.”
Yes, home prices have increased from levels seen a year ago, but they’re expected to keep flying higher thanks to limited inventory, low rates, and other market factors.
However, Buffett believes that those who buy today should expect to stay put for a long period of time to do well in housing. Of course, Buffett isn’t a day trader, so his trades are never seen as short-term.
He’s not going to tell you to buy a home to flip a year from now, even if you could make a huge profit doing so.
Finally, Buffett spoke out about the mortgage interest deduction, which he doesn’t think is going anywhere.
Despite ongoing pressure from certain groups to eliminate the favorable tax break, he thinks it’s unlikely to be dropped, and if it is, it will be part of a larger piece of legislation.
So that’s that. Even Warren Buffett thinks it makes sense for you to buy a house and finance it with a mortgage, as if you needed another reason.
The California Association of Realtors released its “2014 California Housing Market Forecast” today, which revealed that home prices are on fire in the Golden State.
However, despite mind-blowing gains projected for 2013, next year is expected to be a bit of a different story.
The median home price in California is slated to rise to $408,600 this year, a whopping 28% gain from the $319,300 price tag seen in 2012.
You can partially thank the changing composition of home sales, with only one in five recent sales distressed, compared to one in three a year ago.
With higher prices come fewer short sales and foreclosures. Investors have also had quite the appetite for much of the year.
But it looks as if 2013 is an anomaly, with home prices only forecast to rise six percent in 2014, which historically still isn’t too shabby.
Median Home Price Will Rise to $432,800 in 2014
Assuming property values rise according to forecast, the median home price for 2014 will be $432,800.
That’s more than 57% above the bottom seen during the latest housing crisis, when prices hit $275,000 back in 2009.
At the same time, home prices are roughly 23% off their bubble highs of $560,300 seen in 2007.
So if prices do eventually get back to those levels, there’s still quite a bit of upside left, even for those who buy next year. And for those unfortunate souls who purchased during the bubble years.
But C.A.R. Vice President and Chief Economist Leslie Appleton-Young expects many previously underwater homeowners to list their properties next year, which will ease inventory constraints, while also keeping price gains in check.
It’s pretty much been a seller’s market all year, with most properties receiving multiple bids in a matter of days, often accompanied by all-cash offers over list price.
However, that will change thanks to higher home prices, higher mortgage rates, less investor participation, and more inventory.
I don’t know if we’ll be able to call it a buyer’s market just yet, but it will certainly begin to shift that way over time.
30-Year Fixed Rates Seen Rising Above Five Percent
Speaking of rates, C.A.R. expects the 30-year fixed mortgage to rise to 5.3% in 2014, up from 4.1% this year and 3.7% in 2012.
For the record, it averaged 6.3% when home prices peaked in 2006, meaning affordability will remain much better than it once was, even if prices climb back to those previous bubble highs.
The out-of-favor 1-year ARM is expected to rise to 3.1% from 2.7% this year.
All said, the future is looking pretty bright for existing homeowners and those still looking for a home, assuming nothing unexpected gets in the way.
Unfortunately, there are quite a few unknowns at the moment, including the ongoing government shutdown, which is already slowing down the mortgage market, along with the looming debt ceiling.
Next year, new lending standards will go live, such as the Qualified Mortgage definition.
Additionally, housing policy changes related to the mortgage interest deduction and the conforming loan limit could be a factor as well. There’s also the uncertainty related to the Fed unwinding its mortgage purchases.
So still plenty to worry about, but perhaps we haven’t seen the last of the home price gains just yet.
Of all the details that come across your plate when you’re buying a home, one of the questions you might be asking is, “How does buying a house affect taxes?” The short answer? Buying a home could reduce your overall tax liability if you itemize deductions and pay a large amount of mortgage interest.
There are other conditions that need to be met, and it is possible that the amount of taxes you owe will stay the same. Of course, it’s always best to consult with a tax advisor for your individual situation.
To give you a general idea about how buying a home in 2023 affects taxes, we’ve compiled everything you need to know about how tax breaks work, what you can deduct, what you can’t deduct and whether or not it will make sense to itemize deductions.
Does Buying a House Help With Taxes?
It’s possible that buying a house can help with taxes — but only for tax filers who itemize their deductions. In 2020, the most recent year with data available, more than 87% of Americans took the standard deduction rather than itemizing. This signals that it may be unlikely you’ll have enough deductions for itemizing to make sense. Of course, if it can reduce your taxes, it’s worth looking into.
You might also be wondering, “How does buying a house in cash affect taxes?” If you don’t have a mortgage, you’re not paying interest, so you’re not able to take the home mortgage interest deduction. But you’re still able to deduct property taxes if you itemize. Remember to consider this even if your property taxes are part of your mortgage payments.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
How Do Homeowner Tax Breaks Work?
Tax breaks start as programs passed into law and funded by the U.S. Congress. However, it is up to individual homeowners to find and file the correct paperwork to take advantage of these tax breaks.
Tax breaks come to homeowners as either tax credits or tax deductions.
Recommended: First-Time Homebuyer Programs
The Difference Between Tax Deductions and Tax Credits
The difference between a tax deduction and a tax credit is where it lies on IRS form 1040 and how much it reduces your final tax bill or refund. This will make more sense after we explain each.
Deductions On IRS Form 1040, deductions are compiled before being subtracted from your income. This is done before tax is calculated, so having deductions can reduce the overall amount of tax you owe. But because a deduction comes before tax is calculated, the reduction in tax liability is generally less than if the amount of tax owed was directly reduced by a credit (though this depends on the amount of each).
Credits Credits are subtracted from the amount of tax you owe. If you don’t owe tax but are instead receiving a tax refund, credits can increase the amount of money coming your way from the IRS. Generally speaking, credits put more money back in your pocket. You may have heard about a first-time homebuyer tax credit. A bill was introduced in 2021 that would have provided for this benefit, but as of June 2023 it had not passed into law.
Deductions are more common; however, with the revamp of the tax code in 2017 with the Tax Cuts and Jobs Act, the standard deduction was increased substantially and fewer people find the need to itemize. Nevertheless, it’s probably a good idea to add “keep track of possible tax deductions” to your list of New Year’s financial resolutions.
What Are the Standard Deduction Amounts for 2023?
It’s important to know the standard deduction amounts so you know if taking the home mortgage loan interest deduction will make financial sense for you.
• For single filers: $13,850
• For head of household: $20,800
• For married people filing jointly: $27,700
If the amount of mortgage interest you pay is far below the threshold for choosing the standard deduction, you may not be able to find enough deductions for itemizing to make sense. The increased standard deduction in 2017 made this especially true, but there are certain scenarios where you should still itemize deductions.
Recommended: What Is a Gift Tax Return and When Is It Due?
Who Should Itemize Deductions
You should itemize deductions if the amount of your deductions is more than the standard deduction. If you have any of the following situations, you may have enough qualified deductions for itemizing to make sense.
• If you have large medical or dental expenses that are not paid for by an insurance company
• If you paid a large amount of interest on your mortgage
• If you donated large sums to charity
• If you can claim a disaster or theft loss
• If you cannot take the standard deduction
• If you can qualify for large amounts of the “other itemized deductions” found on the IRS forms
It’s hard to say if your individual situation will make sense for itemizing deductions. It may be worth it to consult with a tax professional.
Which Home Expenses Are Tax Deductible?
When you’re looking for home expenses that are tax-deductible, the IRS defines it very narrowly. The costs that are deductible include:
• State and local real estate property taxes up to $10,000
• Home equity loan interest if you used the funds from a home equity loan on your property
• Mortgage interest deduction up to defined limits:
◦ For loans taken out after December 15, 2017: You can deduct home mortgage interest on the first $750,000 of debt (for married couples filing jointly) or the first $375,000 of debt for a married person filing separately.
◦ For loans taken out prior to December 15, 2017: You can deduct home mortgage interest on the first $1,000,000 of debt (for married couples filing jointly) or the first $500,000 for separate filers.
Which Home Expenses Are Not Tax Deductible?
Most home expenses, unfortunately, are not tax deductible. These include things to budget for after buying a home. The IRS specifically outlines these living expenses that cannot be claimed as a deduction:
• Utility expenses, like gas, water, electricity, garbage, sewer, internet, etc.
• Home repairs
• Insurance
• Homeowners association or condo fees
• Cost of domestic help
• Down payment and earnest money
• Closing costs
• Depreciation
Potential tax deductions are one thing to factor into your financial considerations as you think about whether you are ready to buy a home, but they certainly aren’t what should be driving your decision to make a purchase.
The Takeaway
It is possible for the amount of tax you owe to be lower after you become a homeowner — but only with certain conditions met. You’ll want to do the math and compare what your taxes will look like when you itemize deductions vs. when you take the standard deduction. That will be the best way to tell how buying a house will affect your taxes.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
What is the tax break for buying a house in 2023?
If you itemize deductions on your federal return, you can claim a deduction for your mortgage interest paid on a home bought in 2023, along with state and local taxes paid in 2023.
Will my tax return be higher if I bought a house?
While there are a lot of factors that go into a tax return, generally speaking, if the deductions that come from homeownership reduce your tax liability compared to previous years while all other factors remain the same, then you should owe less (or even get money back).
What are the major tax changes for 2023?
For tax years 2022 and beyond, you can no longer claim mortgage insurance premiums as a deduction. Beyond the tax deductions that come with homeownership, major changes to taxes for 2023 include reduced amounts to the child tax credit, earned income tax credit, and the child and dependent care credit.
Photo credit: iStock/marchmeena29
*SoFi requires PMI for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Minimum down payment varies by loan type.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family rentals in transitional areas of the city) to catch a bid while single-family rentals in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.
This story was originally featured on Fortune.com
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In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family homes in transitional areas of the city) to catch a bid while single-family homes in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.
Home to fabulous live music, acres of outdoor recreation, and an unmistakably eclectic vibe, Austin is an amazing place to live. If you’re considering moving to Austin, then you may be wondering whether to rent versus buy a home in the area. With Austin’s real estate market conditions, there are pros and cons to both sides of the debate, making it that much harder to decide between renting or buying a home.
If you’re looking to buy a home in Austin, the current median sale price for a home is $468,000 as of July. According to a new Redfin study, the average rent price in Austin is $2,951, while the estimated median monthly mortgage cost is $3,801. For many, this means that renting a home costs less than buying a home in today’s market. However, there are still plenty of reasons why buying a home may be the right choice for you this year.
At the end of the day, making the decision between buying a house or renting an apartment in Austin depends on a variety of factors. From financial benefits and long-term plans to flexibility and what Austin neighborhood you want to live in, there are plenty of factors to consider. We’ll help guide you through the debate of renting vs buying in Austin so you can make the best decision for your goals.
Advantages of buying a home in Austin
Decreased competition
One of the main advantages of buying a home in Austin today versus possibly next year, is that competition is down. As interest rates have increased, investors and those without a real need to buy a home have left the housing market, easing the competition for other homebuyers. Less competition gives potential homebuyers more of an opportunity to find a home they love rather than just finding somewhere to live and having to compromise on location or size.
Rising home values
Homes in Austin have gone up in value every year since 2010 and currently show no signs of stopping. If you rent for a year, and wait to buy, you’ll most likely be dealing with more competition and higher home costs. Buying gives you the opportunity to create equity you can use later, to move up, to make updates, or just to create wealth.
Stable monthly payments
Buying a home with a fixed-rate mortgage means that your monthly mortgage payments stay the same over the duration of your mortgage. While other monthly expenses may fluctuate, you’ll have peace of mind that your mortgage payments will stay stable.
Tax benefits
As a homeowner, you can receive tax benefits under the US tax code. This means that if you file an itemized tax return (rather than taking the standard deduction) you may be eligible for certain tax deductions. You may also be eligible for exclusions as a homeowner. Here are a few of the tax benefits of homeownership.
Mortgage interest deduction: If you’re a homeowner with a mortgage, you can typically deduct the interest you’ve paid on a mortgage on your tax return – subject to limitations.
Capital gains exclusion: When you buy a home, chances are the time will come when you decide to sell your house. If you sell your home, you may be eligible for a capital gains exclusion. A capital gains tax exemption means that a portion of the profit you make from selling your home may be exempt from federal income tax. This is often up to $250,000 if you’re single or $500,000 if you’re married filing jointly.
Keep in mind that tax laws can change over time and tax benefits accessible to homeowners depend on your individual circumstances. It’s important to consult with your tax professional to understand what tax benefits may apply to you.
Disadvantages of buying a home in Austin
Home maintenance
While it isn’t specific to Austin, one of the most common disadvantages of owning a home is maintenance. For example, you’ll have to spend your free time managing lawn care and other small items in your home, or pay to have someone maintain them for you.
Competition for move-in ready homes
Another disadvantage is competition, specifically for move-in-ready homes. If you want a home that’s 100% move-in-ready and updated with the latest features and trends, you’ll most likely have a multiple offer situation where you may have to give away some of your contingencies or pay more than the market price.
Large upfront costs
If you’re looking at your finances, it’s important to remember that buying a home costs more than just the down payment. You’ll need to factor other costs into the equation such as closing costs, home inspection fees, and appraisals, when determining how much house you can afford.
Reach out to a few mortgage lenders to get a pre-approval so you can gain insight into your financing options and other costs you may need to consider. With the right planning, exploring downpayment and closing cost assistance programs, and the support of your real estate agent, you may find out now is the right time to buy your first home.
Additional monthly payments
While your mortgage payment remains the same from month-to-month, there are other recurring payments you may need to factor into your budget as a new homeowner. Let’s look at some of these expenses:
Utility costs: While many renters are used to paying utility bills such as water, heating and air conditioning, sewer, garbage, and internet, among others, sometimes these costs were included in your monthly rental payments. As a homeowner, you’re responsible for these costs each month, so it’s important to budget these additional expenses into your monthly budget. In Austin, the average monthly energy bill costs around $156. A cost of living calculator can also help you get an idea of how much to set aside each month.
Insurance and property taxes: At closing, you’ll pay a portion of your property taxes as well as homeowners insurance. However, these are recurring costs that you’ll pay as long as you own the home. Keep in mind that property taxes can change due to your home’s location, value, and additional changes in the tax code.
Homeowners association fees: While this cost may not apply to everyone, if you purchase a property that belongs to a homeowners association (HOA), you’ll likely pay monthly dues. These costs can vary widely, from $100 to over $1,000, and typically cover the cost of neighborhood maintenance.
Determining if you are ready to buy a house in Austin
Deciding if buying a house in Austin is right for your goals can be a complex decision. It often requires careful consideration of many factors. Here are some of the key factors to consider when determining if now is the right time to buy a home:
Financial stability: Before starting your homebuying journey, it’s important to have a stable income and a good credit score. You’ll also need to have some additional funds saved for a down payment, closing costs, home insurance, and other expenses that go into buying a home. It’s also a good idea to build an emergency fund in case you have any unexpected expenses.
Long term commitment: Compared to renting, buying a home is a significant investment – both financially and over time. If you’re not planning to stay in Austin for a longer period of time, it may be a better idea to continue renting until you’re ready to stay in the area long term.
Housing market conditions: Austin’s housing market is somewhat competitive, so it’s important to know today’s market conditions – and what you can afford.
Personal goals: Lastly, you’ll want to consider your own personal goals and evaluate your priorities before making a decision to buy a home. Are you looking for more space or a big backyard? Do you want a new construction home or an older property with character? Decide what’s important to you in the home search and if buying a home in Austin aligns with your goals.
If you’re unsure whether you’re ready to buy, consider consulting with your real estate or financial advisor to fully understand your options.
Is it competitive to buy a home in Austin?
In Austin, the market is somewhat competitive, but this competition is mainly for updated homes. New construction properties in areas with higher rated schools are almost non-existent these days. As a result, you’ll find more competition on remodeled and updated homes, as well as homes in areas with high school ratings. In more competitive areas, that means you’ll likely need to pay market price or go up to 10% over market price or value.
On the other hand, you’ll find less competition on new construction homes that are farther outside of town. There is also less competition on homes that need cosmetic updates, without any true repairs needed.
Advantages of renting a home in Austin
No maintenance costs
An advantage of renting in Austin is no maintenance costs. Your landlord will most likely take care of routine maintenance and yard work, so you don’t have to take the time to do it. If you’re relocating to Austin, it’s also important to know that home maintenance can be vastly different, especially if you’re moving from an area with a more mild climate, like Seattle or Los Angeles.
Lower monthly payments
When renting, you can typically find a place closer to the city or a larger home, with a lower monthly payment than a new mortgage, especially with current mortgage rates. Rentals typically lag behind home values when it comes to monthly rent, meaning you may be able to find a rental home that fits your budget better.
Flexibility
Renting an apartment or home offers you more flexibility – especially if you’re not sure about living in Austin for an extended period of time. Whether you sign a year-long lease or a month-to-month lease, renting gives you additional flexibility that owning a home doesn’t. Renting gives you the opportunity to test out different Austin neighborhoods or move to another city at the end of your lease. In contrast, homeownership means you’re more committed to living in your home for at least a few years.
Disadvantages of renting a home in Austin
Risk of rent increasing
Depending on the type of lease or rental agreement you have, your rent could go up, increasing significantly. If you’ve signed a year-long lease, your rent won’t increase until it comes time to renew. At that point, you may face minimal to substantial rent increases. Or if you have a month-to-month lease, your landlord may increase your rent each month, leaving you with a higher rent price.
Inability to build equity
As a renter, you’re paying into someone else’s equity and, unfortunately, not receiving anything in return. Since someone else owns the property, you aren’t eligible to receive any tax benefits or build any equity over the duration of your lease.
Limited control over design
Regardless of whether you’re renting a home or apartment, you can’t personalize the space much. If you don’t like the paint color, you’ll have to look for alternatives. Or, if your landlord allows, you may be able to paint, but when your lease ends you’ll have to repaint the space to the original color. Similarly, if you want to make any permanent changes to the layout, you’re out of luck. As a homeowner, you’ll have the freedom to make any minor or major changes to the space.
Renting vs buying in Austin: A real estate agent’s final thoughts
In my opinion, now is a great time to buy. This is the least amount of “no multiple offer situations” I’ve seen in years. You can truly get an amazing deal right now, since rates seem to have scared a lot of people off. Austin, like a lot of cities, is in a major housing crisis, and until the builders can catch up to the number of people moving here, we’ll stay in a more competitive seller’s market.
At the end of the day, whether you rent or buy in Austin, the area is a wonderful place to call home. If you’re just beginning to think about buying a home, make sure to lay out all your finances and understand what you can afford now and in the years to come.
Both the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB) launched efforts to save the at-risk mortgage interest deduction, which is at risk of being cut or eliminated.
In a press release, NAR claimed that any changes to the mortgage interest deduction “could critically erode home prices and the value of homes by as much as 15 percent.”
The group also cited a recent survey, which found that of about 3,000 homeowners and renters polled, nearly three-quarters of homeowners and two-thirds of renters said the mortgage interest deduction was “extremely” or “very important” to them.
The NAHB went a step further in creating a website dedicated to the cause, called SaveMyMortgageInterestDeduction.com.
It includes information about the mortgage interest deduction, the threat to do away with it, and a twitter feed to keep track of related news.
“Home owners who itemize their taxes can deduct 100 percent of their mortgage interest payments on a first or second home for up to $1 million of mortgage debt and $100,000 of home equity loans,” the NAHB said on its new website.
“For most home owners, this means they can deduct ALL of their mortgage interest on their home. This particularly makes the cost of owning a home much more affordable for first-time home buyers and those who have been in their home for just a few years, since the bulk of their monthly house payments go toward interest, which is fully deductible.”
However, the mortgage interest deduction is estimated to cost the government roughly $100 billion this year (mortgage interest deduction by state).
The homebuyer tax credits have come with a price tag of about $22 billion, which many have argued simply pushed would-be buyers into the fold a little earlier.
It’s that time of the year again, when presidential hopefuls lay out their plans to save America and get the nation back on its feet.
While a lot of it is just noise, I do enjoy reading about the candidates’ housing policies to see what they think about real estate, mortgages, and so on.
It was especially important in the previous election, but has barely been mentioned this time around thanks to a resurgent housing market.
This week, Bernie Sanders weighed in with a piece titled, “Fighting for Affordable Housing.”
It has a number of proposals along with six main areas of interest, including:
– Expand affordable housing – Promoting homeownership – Helping underwater homeowners – Preventing homelessness – Getting lead out of our homes – Addressing housing and environmental justice
First, Sanders wants to expand affordable housing by building more affordable rental housing units for extremely low-income households.
Along with that, he wants to raise the minimum wage to $15 an hour by the year 2020, while also reinvigorating federal housing programs, repairing public housing, and defending the Fair Housing Act.
When it comes to promoting homeownership, Sanders promises to fight to support first-time home buyer programs, including expanded HUD and USDA offerings, as well as pre-purchase housing counseling.
Credit Score Reform?
He also wants to enact some kind of “credit score reform,” which is confusing to say the least. The proposal points out that a “prime score” before the housing crisis was 640, and that it’s now 740.
I can’t really get behind this because 640 back then was still 640, just slightly above subprime. Today, it’s the same, but you can still get a mortgage with very little down and a score that low.
Additionally, he notes that those with low scores had their credit ruined by foreclosures. Unfortunately, your credit score takes a hit when you stop paying your mortgage, even if the mortgage was destined to fail.
The upside is that there are already programs in existence for those with a foreclosure in recent history that wasn’t really their fault, and even some if it was your fault. It’s also been long enough that many boomerang buyers are now eligible for mortgages again.
He also backs the CFPB and ostensibly the Qualified Mortgage rule, but warned that Republicans are attempting to undermine the agency’s efforts. There’s certainly a lot of controversy there with many lenders feeling the need to walk on eggshells.
But all in all, the new forms should be easier for consumers to read (and to compare to other offers they receive), and the QM rule should limit the number of toxic mortgages doled out in coming years.
Mortgage Interest Deduction for All
Perhaps most interestingly, Sanders wants to extend the mortgage interest deduction to all taxpayers, not just those who itemize their taxes.
Many have argued that the deduction only benefits wealthier taxpayers with larger amounts of mortgage interest paid, many whom tend to itemize. With mortgage rates low and the standard deduction already quite high, many homeowners actually see no tax benefit.
He claims they could close the second home and yacht interest deduction “loophole” and direct the money to some 19 million homeowners who would otherwise benefit if they itemized.
I’m not sure how it would work, but I’m guessing it would be a flat dollar amount that would level the playing field between rich and less rich.
Sanders may have a point because a lot of homeowners probably think they’ll save more money than they actually do once they file their taxes, despite being told beforehand that they’ll save lots of money on taxes. And this can affect the rent vs. buy decision.
Sanders also wants to reinvigorate the Home Affordable Refinance Program (HARP), which is odd seeing that it has been around for some seven years and is winding down at the end of this year. Loan volume is already super low because most who could benefit already took advantage.
Additionally, home prices have risen markedly, so it’s importance has diminished tremendously in recent years.
A more useful idea he’s also touting would expand foreclosure mitigation counseling, with studies showing better outcomes for underwater homeowners who receive counseling.
All in all, there are some hits and misses with Bernie’s housing plan, but expanding the mortgage interest deduction could certainly be a game changer. It just probably won’t happen.
Save more, spend smarter, and make your money go further
Want to pay off high-interest debt in one fell swoop? Searching for ways to pay for a basement renovation, a bathroom upgrade, or a new tile roof? Since you probably don’t have that kind of money stuffed under your mattress, a natural place to look for more funds is in your single biggest asset: your home.
But before you tap into those funds, you need to know exactly what you’re getting into. Putting your home at risk isn’t for the uninformed or undisciplined.
Home equity loan vs. home equity line of credit
The first step to tapping into your home equity involves understanding your options. There are two major ones: a home equity loan (HEL) or a home equity line of credit (HELOC). Here’s a handy guide to the basic differences between the two, including pros and cons.
Helpful tips on the HEL
A home equity loan is, at heart, a second mortgage. You receive a lump sum at a fixed rate of interest that’s locked in when you procure the loan. You’re expected to pay it back in fixed monthly payments for a fixed amount of time — typically 10 to 15 years.
Pros:
Your interest rate is fixed, which means no shocking increases later.
Because payments are due monthly, this can be a good option if you have a hard time exercising the discipline needed to pay off a loan a little at a time on your own.
The interest rate on a HEL, though higher than that on your primary mortgage, will still be lower than the rates available on credit cards.
If you’re using your HEL to pay off credit cards, in addition to lower interest rates, you’ll have the benefit of consolidating all your debts into one payment.
The interest on your home equity loan may be tax-deductible, but you’ll want to thoroughly read Publication No. 936, the IRS’s guidelines on the home mortgage interest deduction, to ensure the degree to which you’re eligible. If your loan is for home-improvement purposes, rather than, say, college tuition, you’re allowed even greater leeway in deducting the interest.
Cons:
You borrow (and owe interest on) the whole amount, rather than being able to simply borrow what you need.
If you’re using the equity to fund something that will involve multiple payments over time — say, for example, a phased home-improvement project or quarterly payments on college tuition — you’ll have to be sure not to spend the money on other things in the interim.
If you use your HEL to fund something that immediately depreciates, such as a car or new furniture, you may hurt your net worth in the long term. Boosting the value of your home has a better chance of enhancing your overall financial picture over the long haul.
You may be prohibited from renting out your home, according to your loan terms.
You risk losing your home if you can’t make the payments.
Hello, HELOC
A home equity line of credit, by contrast, functions more like a credit card — using your home as collateral. You ask for a line of credit, and the lender assigns a maximum amount you can borrow — a credit limit. Lenders typically determine this amount by taking a percentage of your home’s appraised value and subtracting the amount you still owe on the mortgage; then they factor in things such as your credit history, debt load, and income. The lender then gives you a set of blank checks or a credit card that you can use to withdraw funds.
Unlike a HEL, the line of credit allows you to borrow what you need, when you need it, up to the full amount approved. So why wouldn’t everyone want to apply for a HELOC in case an emergency strikes? Take a look at the pros and cons to see for yourself.
Pros:
You don’t have to borrow in a lump sum; you can withdraw the funds when you need them.
HELOCs can be used as emergency funds in the event of a crisis, like losing your job, since you can access funds on an ongoing basis as needed.
Some lenders may allow you to convert to a fixed rate of interest, or to a fixed-term installment loan, for part or all of your balance.
The rates of interest, though variable, may still be lower than other forms of consumer credit, since they are secured with collateral — your home.
The interest on your HELOC may be tax-deductible, just as it is for the HEL, but consult IRS Publication No. 936 for confirmation of what applies to your particular circumstance.
Cons:
HELOCs typically have variable interest rates tied to the prime rate, so you could end up owing a much higher balance than you had anticipated.
The terms of a HELOC may dictate that you must begin withdrawing funds within a certain time period, and that you withdraw a minimum each time.
The costs of securing a HELOC aren’t pocket change. Expect to pay for a current property appraisal, an application fee, closing costs, and other possible charges, including points on your loan. You may also be subject to transaction fees every time you withdraw money.
Though the HELOC offers flexibility in terms of when you withdraw funds, there is no flexibility in terms of the end date. When the term of your loan expires, the balance of the loan is due in full. If you procrastinate or have difficulty making regular payments over the long haul, you may be hit with an excessively large bill at the end.
Lenders make it very easy to access the funds; you have to be disciplined enough to resist unless there’s an emergency or a planned expenditure that’s worthy of risking your home.
You may be prohibited from renting out your home, according to your loan terms.
You can damage your credit and lose your home if you’re unable to repay on schedule.
Conclusion
Before you rush to apply for a home equity loan or line of credit, first give serious consideration to whether you really need the funds. The terms can sound enticing, and the money seems relatively easy to get, but it all may be too easy. If you’ve ratcheted up high-interest debt and now see your home equity as a way to deal with the problem, you need to recognize that the loan is just a temporary fix. Clearing the decks so you can start spending again will be destructive to your financial health.
Whether it’s a HEL or a HELOC, consider yourself a good candidate only if you have the discipline to use the funds for a dedicated purpose, you’re spending the money on something of vital importance, and you can repay on time. If that’s you, tapping into home equity can be a useful strategy for accomplishing your goals.
Save more, spend smarter, and make your money go further
Conventional wisdom says to pay off the mortgage in its entirety before you retire. That way you won’t have to worry about sizable housing costs when living on a fixed income.
Lately, this age old rule has been challenged by a lot of folks because mortgage rates are at unprecedented low levels (or were).
Heck, they still are super low, which makes the argument stronger to hold onto the mortgage longer, especially seeing that mortgage interest is tax deductible.
But new research from the Center for Retirement Research at Boston College reveals that those with debt are more likely to continue working well into old age.
In fact, their working paper revealed nearly half of those in their 60s with debt continued to go to work, compared to just a third of those with no debt.
And mortgages seem to be the major culprit, seeing that the debt is often much larger on home loans than credit cards or other loans.
More Than Two-Thirds of 64-Year Olds with Mortgages Are Still Working
The researchers, Barbara Butrica and Nadia Karamcheva of the Urban Institute, found that at age 64, more than two-thirds of homeowners with mortgages still had to huff it to work.
Meanwhile, just over half of those who had paid off their mortgage still went to work each day.
So it’s clear that those who tackle the mortgage before they hit their golden years can actually retire at an appropriate age.
This new research was a follow-up to a study released last summer, in which the pair highlighted increased borrowing among adults aged 62 to 69 since the late 1990s.
For this group, median debt levels jumped from $19,000 to $32,100 (inflation adjusted) and debt as a share of total assets increased.
Should You Pay Off the Mortgage Before Retirement?
This is a great question, and not necessarily the easiest one to answer.
This study tells us that those who pay off the mortgage earlier tend to retire faster.
So if you don’t want to work forever, it might be wise to pay off the mortgage early, or turn to a shorter-term fixed-rate loan, such as the 15-year fixed mortgage.
The other side of the coin is that mortgage rates are exceptionally low right now, with many borrowers enjoying rates in the 2-3% range. And if you factor in the mortgage interest deduction, the real rate of interest is even lower.
In other words, it doesn’t cost a lot to hold onto the mortgage these days. This is especially true if you can put your money to work somewhere better, such as the stock market or even somewhere safer, like bonds.
It doesn’t make sense to pay the mortgage before maxing out retirement contributions either. If your company is willing to match “X” amount of your income, it’s foolish not to take them up on the offer.
There’s also the chance that your house could go down in value, though over time this tends to work itself out. Still, you’re dumping money into an illiquid asset, and tapping the equity will cost money.
Find a Balance to Retire When You Want
There are certainly pros and cons to paying off the mortgage before retirement. The obvious one being that you actually CAN retire!
A paid-off mortgage should give you peace of mind and let you sleep at night, and give you the confidence to call it quits at work.
Those who whittle down their mortgage earlier on might also be more money-conscious knowing they’ll have access to less money.
After all, if you’re paying the bare minimum, you might think you’ve got extra play money to wine and dine and travel the world.
At the same time, there are a lot of benefits to holding onto your mortgage these days, what with the low interest rate and tax deductions. Factor in inflation and today’s mortgage payment could seem like a car payment in 20 years.
At the end of the day, it’s best to find a balance that works for your personal financial situation.
It’s important to contribute to your nest egg AND pay off debts as you travel the road to retirement. That way you’ll actually get there.
Read more: Should I pay off the mortgage or invest instead?