"Get all debt paid off by retirement," Petote says. "The less debt, the more control you have over your finances and decisions." While not everyone has that goal for their mortgage, as a homeowner any equity you have in your home is similar to money in the bank and can only help you when you retire. That said, there are three things to think about before funneling money into your home:
1. Pay down highest interest rates first.
While it's important to look for the highest rate of return when investing, when repaying debt, work to eliminate your highest rates first.
2. Fully fund 401(k)s.
Always take advantage of employer matching contributions. In fact, Petote
recommends maxing out your retirement plan before funneling extra money
into building home equity. Matching funds are essentially free money and
Petote advises putting as much money away as possible. "Even if your
employer matches 25 percent, that's better than I can do even on my best
day," he says. "And it probably exceeds the return you would receive
on your home."
3. Defer prioritizing home equity if home values depreciating.
When the housing market in your area is sliding, Petote suggests investing
in higher return portfolio investments first. Many people count on the equity
in their home to help sustain them in retirement, but a house is not always
the high-yield investment it first appears to be. Petote advises checking
the annual return. Let's say you look at your house after 20 years and see
that it's tripled in value, you might think that type of equity growth will
continue. "That's deceiving," says Petote. "If you look at annualized return,
it's probably in the 2 (percent) to 4 percent range." He says it's best
to invest wisely with a professional than "just sinking the money into your
house." Invest in the house after maxing out your retirement plan, when
putting money into the house becomes a debt reduction issue.
