At some point, one of the biggest decisions many homeowners face is whether they should pay off their starter home or save cash to buy a new home. As with most important financial decisions, the answer isn’t black and white.
One of the many factors to consider is the state of the housing market. Currently, there’s still a fairly limited housing inventory across the United States, keeping house prices out of budget for many people. However, while house prices are still high, they’re lower than they have been in recent years. Additionally, mortgage rates have recently declined, which may further impact housing prices in the near future.
Even with the current climate of the housing industry, we can’t predict what 2023 will look like. That’s why it’s important to take these steps to help you determine if it’s best for you to pay off your starter home or save for the purchase of a new home.
LOOK AT THE NUMBERS
Do some math to get a realistic perspective of your situation so you can make an objective decision. Start by calculating how much of your current mortgage you can pay off, and how much money this will save you over time. Then compare this to how much money you could earn if you invested that money instead of using it toward your mortgage.
For example, let’s say you have $20,000 saved. If your use these funds toward your current mortgage, you’ll save a good amount in interest over the remaining course of your loan. However, that same $20,000 invested in the stock market will typically yield a 10% return. So, if you kept the money in the market for 10 years, your investment could grow to $51,874.85, which could be a lot more than the amount of money you would save in interest by paying down your mortgage.
Regardless of the amount you have saved, investing your money usually results in higher earnings over the long run and, therefore, might be a better option than paying off your home. On the other hand, if your financial goals include eliminating debt and having full equity in your home, paying off your mortgage may be what's best for you.
DETERMINE HOW MUCH EQUITY YOU HAVE
If you have a lot of equity in your home, it can be beneficial for your next home purchase. Having a good amount of equity will help cover the closing costs and down payment for your next mortgage. If you have plenty of equity and are downsizing to a less expensive home, you’ll likely be in an even better financial position.
In this case, you may want to consider putting down a larger down payment on your next home so you can lessen the total amount of your mortgage.
To help prepare for your next home purchase, try to pay down your existing mortgage to build more equity in your home. Eventually, this will give you more proceeds to put toward your new home purchase when the time comes.
MAKE SURE YOU HAVE AN EMERGENCY FUND
Finally, you’ll want to avoid dumping all your money into your home. It’s smart to set money aside so you have an emergency fund. Putting all of your money into your home without having additional savings will leave you ill-prepared for unexpected costs, should they arise.
THERE’S NO ONE-SIZE-FITS-ALL ANSWER
When you’re weighing the decision of paying off your starter home vs. saving cash for a new home, you’ll want to analyze the current housing market and consider the above factors.
Since everyone’s situation is unique, it’s vital to assess your current circumstances, know your numbers, and get clear on your financial goals. Once you can objectively look at all these components, you’ll be ready to determine whether paying off your starter home or saving for a new home is best for you.