Your savings are your assets. They are also counted to be investments at times, as the money you put down in your savings, grows on interest periodically.
So the big question for today is, should you drain out your savings while buying a house?
Any layman would readily say “why not”? But a sensible man would advise not to compromise savings while buying a new home!
I won’t take much of your time and will help you to understand a few basics of buying a house and whether or not you should use all of your savings to purchase it!
Is buying a house an investment?
Well, surely it is.
I would even sometimes say, it is the safest way to invest after you consider normal savings accounts.
The real estate usually sees a rise in the market price gradually, except in cases of an anomaly. (Example - housing crisis in the first decade of 2000)
So don’t think that the money you are going to buy your house with will be a loss.
It is building equity, which is definitely an asset and obviously an investment.
But don’t give everything to buy your dream house, even though it has a good ROI (Return On Investment).
At times, the money you have in savings might actually work out well if you shift its place to a real estate instead of keeping it in your account!
But yes, liquid cash has its own benefits and flexibility that other investment products or vehicles can never give you!
How to buy a house sensibly:
If you are buying a house, just out of sheer emotion, then that’s a mistake.
Remember wherever money is involved, your brain should come first than your heart!
Your “sweet emotions” won’t last long if you make a bad investment! So, even if your family members or your heart demands a dream home, you should stick to your brain and see whether or not you will profit from this investment.
You need to ask over and over again, how much you can spend, how big a house do you need, how’s the location, and how much down payment you can make.
Next comes the real purpose!
Will this house be your primary residence or it will be put up for rent?
As you can see these are very important decisions that you should make prior to purchasing a house.
Should you use all of your savings to buy a house?
I will never do that. The first thing that I will do is, I will diversify my savings game and have multiple savings accounts with each assigned a specific purpose.
One will be my regular savings account, the other will be for my emergency fund - that which I will only use in cases of financial downfall, and the next will be a big lump sum for buying a house.
If you can bifurcate your savings strategy and pool out money from a dedicated account, then your goal is reached without any hindrance.
Here my advice is not to drain out your savings.
Remember your brand new house won’t be enough to save you in times of financial crisis, while your regular savings actually can.
It is pointless to argue, why you shouldn’t use your savings to buy a house, or in other words, making that hefty 20% down payment on your mortgage.
The fact is, personal savings is intended to be a different asset,that should be treated as your treasury.
But you can definitely cross check my words and ask how to cope up with such big loan amounts.
My suggestion can sound immoral, but the truth is, to play it safe, you should halt for a few years and build up good savings, and then buy a house.
The main motto is you shouldn’t at all compromise your personal savings.
It will take time for you to build equity on your property that you can access like a HELOC or a home equity loan. So, if anything happens in the meantime and you realize that you have used your funds to purchase the house, then you will be underwater!
Another thing is, should you use your retirement funds to buy a house.
Here again, I will suggest you not to consider your retirement investments for buying a house.
But no matter what you do, it is always better to have a talk with a financial advisor and then make any decision.
Otherwise, you might have some $100,000 in your savings, and you are stepping back from making a down payment of $30K or $40K, then that my friend will be utter foolishness!