Funding a Down Payment

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TA_Lurker
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Funding a Down Payment

Post by TA_Lurker »

I'm a single person in my early 30s looking to buy a small home or condo in the greater Boston area within the next year or two. I make 60k/year and am targeting a home or condo in the 250k range. Given the following account balances how would you fund a down payment?

Cash in low yield savings account $20,000 (this includes emergency funds)
Roth IRA $42,000 (of which $30,000 is contributions and can be withdrawn tax & penalty free)
Rollover IRA $100,000 (I believe $10,000 can be withdrawn penalty free for a first time home purchase, correct?)
401k w/current employer $40,000 (potential for a 401k loan? - i have a very stable job)

Additional yearly cash savings $10,000
ZERO debt. No car loans, student loans, or credit card debt.

For sake of argument rule out the idea of waiting 4-5 years until cash on hand has reached $50,000. What's the best way to tap my resources for a down payment sometime in the next 24 months?
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Phineas J. Whoopee
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Re: Funding a Down Payment

Post by Phineas J. Whoopee »

Hi TA_Lurker,

There have been no replies, and I think it's because there's no responsible way for you to buy a home costing 4+ times your income by foregoing long-term tax advantaged retirement assets.

I'll rule out the 4 - 5 year $50,000 idea if you'd like, but that means renting or reducing your housing ambitions.

Seldom as I like to cite Suze Orman, but to give credit where it's due, she's right when she says if you can't afford the house with a 20% down payment and a 30-year fixed mortgage, you can't afford the house.

Sorry if I'm coming across as harsh. That's the way I see it. Maybe the inherent bump will attract other, gentler responses.

PJW
Johm221122
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Re: Funding a Down Payment

Post by Johm221122 »

With a similar income and savings rate,I also think this purchase is a stretch IMHO

John
Calm Man
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Re: Funding a Down Payment

Post by Calm Man »

I do not live in the Boston area anymore but I believe in any northeastern solid city, you will get very little desirable at 250K. I also think it is a major stretch for you and would advise against it.
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OAG
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Re: Funding a Down Payment

Post by OAG »

2.5 X Income (in your case) is $150K - doubt there much available in your area for that amount. (2.5 X Income used to be a reasonable yardstick to use) I believe it still is!
OAG=Old Army Guy. Retired CW4 USA (US Army) in 1979 21 years of service @ 38.
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grabiner
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Re: Funding a Down Payment

Post by grabiner »

Cash in low yield savings account $20,000 (this includes emergency funds)
Roth IRA $42,000 (of which $30,000 is contributions and can be withdrawn tax & penalty free)
Rollover IRA $100,000 (I believe $10,000 can be withdrawn penalty free for a first time home purchase, correct?)
401k w/current employer $40,000 (potential for a 401k loan? - i have a very stable job)
Any money in any retirement account which you intend to use for a down payment should be treated as a short-term need and invested accordingly. If you are going to withdraw from that Roth IRA, put the money you want to withdraw in a short-term bond fund, so that you don't risk losing half of it if the stock market crashes before you make your down payment.

Check the terms of the 401(k) loan. If you can continue to max out your retirement plans while paying back the 401(k) loan, this may be the best deal; if you lose your job, you must pay off the 401(k) loan immediately, but you can do this from your IRAs and then roll the 401(k) back into an IRA without much loss.

If you can't max out, it's probably better to withdraw from the IRAs penalty free; if you take out a 401(k) loan, you lose retirement savings in the same way as if you withdrew, because the money borrowed from your 401(k) is no longer there, and the loan paybacks are money that you would otherwise be adding to the 401(k).

You can withdraw $10,000 in earnings from the Roth IRA for a first-time home purchase, instead of using the rollover IRA. This has the advantage that the earnings are not taxable, but if you are in the 15% tax bracket, it's probably better to take the withdrawal from the rollover IRA because the money will be taxed less now than later.

A caution:
Phineas J. Whoopee wrote:There have been no replies, and I think it's because there's no responsible way for you to buy a home costing 4+ times your income by foregoing long-term tax advantaged retirement assets.
While the 2.5x income rule of thumb may not be valid given current low rates, condos have extra expenses because you are effectively buying part of your home and renting other parts. Banks take this into account as well. If you take out a $200K mortgage at 4% for 30 years, the monthly payment is $955, but if this is a condo with condo fees of $350 per month, both you and the bank should use $1305 in determining whether you can afford it. (Some of the condo fee covers maintenance that you would otherwise pay for in a single-family house, such as mowing the lawn and clearing snow from the parking lot, but you also pay for maintenance of the common areas which are part of your home such as the hallways and elevators.)

Still, I don't think "foregoing long-term tax-advantaged retirement assets" is the right way to look at this. The reason you need to withdraw from retirement accounts is that you have chosen in the past to save a lot in those retirement accounts instead of in a taxable investment, so they have grown tax-deferred rather than taxable. To have $100K in a rollover IRA and $40K in a 401(k) at his age implies you contributed much more than most young workers. If you had contributed $40,000 less to your old employer's 401(k) and had a $40K rollover IRA rather than $100K, you would have the down payment already in the bank.
Wiki David Grabiner
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TA_Lurker
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Re: Funding a Down Payment

Post by TA_Lurker »

Phineas J. Whoopee wrote:Hi TA_Lurker,

There have been no replies, and I think it's because there's no responsible way for you to buy a home costing 4+ times your income by foregoing long-term tax advantaged retirement assets.

I'll rule out the 4 - 5 year $50,000 idea if you'd like, but that means renting or reducing your housing ambitions.

Seldom as I like to cite Suze Orman, but to give credit where it's due, she's right when she says if you can't afford the house with a 20% down payment and a 30-year fixed mortgage, you can't afford the house.

Sorry if I'm coming across as harsh. That's the way I see it. Maybe the inherent bump will attract other, gentler responses.

PJW
While I don't disagree with what Phineas said (and I appreciate his or her rational tone) can someone help me understand real estate? I make almost the median income in Massachusetts, but median home value in this state is $100,000 higher than the home I'm trying to buy. If what Phineas says is true how can the median income of 67k support a median home value of $335k (numbers from here: http://quickfacts.census.gov/qfd/states/25000.html). Why doesn't the real estate market conform to the rules of thumb prescribed on these boards?
Last edited by TA_Lurker on Sun Aug 03, 2014 2:01 pm, edited 1 time in total.
Topic Author
TA_Lurker
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Re: Funding a Down Payment

Post by TA_Lurker »

grabiner wrote:Still, I don't think "foregoing long-term tax-advantaged retirement assets" is the right way to look at this. The reason you need to withdraw from retirement accounts is that you have chosen in the past to save a lot in those retirement accounts instead of in a taxable investment, so they have grown tax-deferred rather than taxable. To have $100K in a rollover IRA and $40K in a 401(k) at his age implies you contributed much more than most young workers. If you had contributed $40,000 less to your old employer's 401(k) and had a $40K rollover IRA rather than $100K, you would have the down payment already in the bank.
Thank you grabiner for understanding how I perceive my last decade of savings and for your advice on why I should withdraw from specific accounts.
jmg229
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Re: Funding a Down Payment

Post by jmg229 »

TA_Lurker wrote: While I don't disagree with what Phineas said (and I appreciate his or her rational tone) can someone help me understand real estate? I make almost the median income in Massachusetts, but median home value in this state is $100,000 higher than the home I'm trying to buy. If what Phineas says is true how can the median income of 67k support a median home value of $335k (numbers from here: http://quickfacts.census.gov/qfd/states/25000.html). Why doesn't the real estate market conform to the rules of thumb prescribed on these boards?
My guess is dual-income hosueholds, people spending more than is advisable on houses, renters with high percentages of their income going to rent (a growing problem noted in the news recently).
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grabiner
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Re: Funding a Down Payment

Post by grabiner »

TA_Lurker wrote:While I don't disagree with what Phineas said (and I appreciate his or her rational tone) can someone help me understand real estate? I make almost the median income in Massachusetts, but median home value in this state is $100,000 higher than the home I'm trying to buy. If what Phineas says is true how can the median income of 67k support a median home value of $335k (numbers from here: http://quickfacts.census.gov/qfd/states/25000.html). Why doesn't the real estate market conform to the rules of thumb prescribed on these boards?
This isn't an apples-to-apples comparison, because not everyone could buy his or her home right now with his or her current income. In particular, retirees' income tends to decline when they retire, but their homes continue to increase in value. In addition, people below the median income are more likely to rent, and it's easier to afford renting a home than buying a home of the same value.

And the rule of thumb breaks down if you buy a home with mostly cash. If you earn $100K and have $500K in the bank, you can easily afford a $500K home, or even a $700K home with a $200K mortgage.
Wiki David Grabiner
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Zabar
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Re: Funding a Down Payment

Post by Zabar »

TA_Lurker wrote:While I don't disagree with what Phineas said (and I appreciate his or her rational tone) can someone help me understand real estate? I make almost the median income in Massachusetts, but median home value in this state is $100,000 higher than the home I'm trying to buy. If what Phineas says is true how can the median income of 67k support a median home value of $335k (numbers from here: http://quickfacts.census.gov/qfd/states/25000.html). Why doesn't the real estate market conform to the rules of thumb prescribed on these boards?
• Most homes are purchased by couples who have two incomes, not single people with one income.

• Boston real estate is significantly more expensive than real estate in, for example, Lowell. Yet the median Boston salary is not proportionately higher than the median salary in Lowell.

• Some of those homes have been owned for 20+ years and have appreciated significantly. The current owner is paying a mortgage based on a fraction of the home's current valuation.
NorCalDad
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Re: Funding a Down Payment

Post by NorCalDad »

TA_Lurker wrote:While I don't disagree with what Phineas said (and I appreciate his or her rational tone) can someone help me understand real estate? I make almost the median income in Massachusetts, but median home value in this state is $100,000 higher than the home I'm trying to buy. If what Phineas says is true how can the median income of 67k support a median home value of $335k (numbers from here: http://quickfacts.census.gov/qfd/states/25000.html). Why doesn't the real estate market conform to the rules of thumb prescribed on these boards?
I agree with some of the reasons already given to explain this, but I disagree somewhat with the dual-income explanation since $67,000 is the median household income, not just single-earner income. It's true that many two-income households will land above the median, and thus in a better position to buy a home. Still, $67,000 is above the median for one earner and considered a decent salary for most Americans, so I can understand why TA_Lurker is possibly frustrated by the prospect of being shut out of the housing market despite making more money than most workers.

Those numbers sound similar to where I live in California. I agree that you have retirees who skew the figures (sub-median income/home has appreciated considerably), and certainly agree with Grabiner's and Zabar's point that not everyone could buy the house they live in based on current cash flow. In California, where longtime homeowners have property tax protections, I guarantee there are older residents living in million-dollar homes who make less than TA_Lurker. Also consider that many people who bought decades ago did so when interest rates were in double digits, which kept selling prices low since so much of each mortgage payment had to go to interest. As interest rates fell to 3%, those homeowners, if they still had a mortgage to pay off, kept refinancing into lower payments while their home value soared.

I also think people in Massachusetts and California spend a higher share of income on housing (3-4x is not out of the norm).

It's tough to say keep on renting, but I unless the perfect situation comes along financially and otherwise, I would not jump into homeownership in your situation. You've done a great job of retirement saving, and I would not tap those funds. I'd keep saving in cash for a down payment and look for ways to get creative. I've had friends who have earned about $60,000 and bought a ~$250,000 house but rented out a room, for instance.
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