What you are paying for housing has a direct impact on your ability to save for retirement. Today, this means that more people than ever who are considering buying a home could be putting their retirement savings in jeopardy. Interest rates are still low, but they are increasing and are currently nearly one full point above last year's top rates.
Home prices are rising despite existing heights
While interest rates are indeed still low, these rates have put upward pressure on housing prices. This is a function of supply and demand. More people are in the market to purchase a home when interest rates are low, which increases demand. The higher the demand, the higher home values climb. Since rates are still affordable, there are still numerous potential home buyers in the market. Consequently, this mean prices on homes will continue to increase, making them even less affordable.
Increasing interest rates and poor decisions
Since the current trend indicates interest rates are likely to continue increasing as 2017 progresses, there are several hurdles to overcome. These include rising home prices, fewer buyers who can afford homes, more buyers locking in rates to protect themselves, and more creative financing options which contribute to real estate crashes.
One of the problems with increasing home prices is that lenders tend to seek creative ways of converting clients from renters to buyers. This often means they create risky loan products, offer lower down payments, or use multiple loans to help these buyers. In most cases, as we have seen in the past, this does not tend to help a homeowner. In fact, it may further damage their ability to save money.
Locking in interest rates on a mortgage seems like a smart choice. However, more buyers are locking in interest rates on a mortgage before they have ensured they are getting the best possible rates. Unfortunately, locking rates also means that buyers are not able to take advantage of downward drops should they occur during the lock period. Keep in mind, each time the interest rates increase by even an eighth of a point, the interest payments on a $100,000 mortgage increase about $125 a year, making it harder for some families to qualify.
Income spent on housing impacts savings patterns
There is no doubt that the more we spend on housing costs, the less money we have available for saving. This is problematic, especially since there is a continuing issue of lower-than-average savings in the United States. With the cost of housing and interest rates both increasing, this problem is likely to get worse. If you are considering buying a home in 2017, your priority should be to determine how your housing costs will impact your savings.
We need to save more for retirement
We should all have a plan in place to meet our financial needs during retirement. The fact is that most of us have very little savings designated for retirement. If you are like most people, you may borrow money from your retirement account to purchase your first home. This is never a good idea. Remember, you will be depending on the money you save for retirement to supplement your social security income in your senior years, so it is important to have a plan in place to save more money today.
Whether you are a current homeowner considering refinancing your mortgage or you are looking at purchasing your first home, you need to plan for your savings in addition to your housing costs. While this may be more challenging in a market where both interest rates and home prices are rising, it is crucial to your future. The last thing you want to do is allow your housing decisions to have a negative impact on your retirement savings plans.
Ash Toumayants is the founder of Strong Tower Associates, a Pennsylvania-based financial and retirement planning firm. His commentary has appeared in Kiplinger’s Personal Finance and Financial Advisor.
The views expressed by contributors are their own and are not the views of The Hill.