Saving for down payment

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FullYellowJacket
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Saving for down payment

Post by FullYellowJacket » Tue Feb 02, 2016 10:03 am

So DW and I have officially paid off school and are now working towards a down payment on a house in a HCOL area. We are hoping to be able to save up a 20% down payment by the time our lease is up (early September) and after running the numbers it looks like we will be very close.

An idea I had is that we could drop our 401(k) contributions (currently close to maxing) to company match until we purchase a house. We would then crank up our 401(k) savings to higher than they are currently until we have made up the difference. We are already delaying our IRA contributions until late this year or early 2017 for the 2016 year.

Are there any thoughts on this plan?

Another option is the often maligned 401(k) loan. Does it at all make sense to continue to max the 401(k)s with the plan of taking out a 401(k) loan for a down payment?

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Toons
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Re: Saving for down payment

Post by Toons » Tue Feb 02, 2016 10:06 am

Personally I would not entertain the thought of taking out a loan against the 401k :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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JonnyDVM
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Re: Saving for down payment

Post by JonnyDVM » Tue Feb 02, 2016 10:09 am

Don't take out a 401k loan. I would reduce contributions down to the match for the short period of time it's takes to save a down payment. There's a balance between living in the now and saving for the future. If you need to reduce retirement contributions for 6 months to help you buy the home you really want I don't see anything wrong with that.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

KlangFool
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Re: Saving for down payment

Post by KlangFool » Tue Feb 02, 2016 10:15 am

FullYellowJacket wrote:So DW and I have officially paid off school and are now working towards a down payment on a house in a HCOL area. We are hoping to be able to save up a 20% down payment by the time our lease is up (early September) and after running the numbers it looks like we will be very close.

An idea I had is that we could drop our 401(k) contributions (currently close to maxing) to company match until we purchase a house. We would then crank up our 401(k) savings to higher than they are currently until we have made up the difference. We are already delaying our IRA contributions until late this year or early 2017 for the 2016 year.

Are there any thoughts on this plan?

Another option is the often maligned 401(k) loan. Does it at all make sense to continue to max the 401(k)s with the plan of taking out a 401(k) loan for a down payment?
FullYellowJacket,

Why would you want to buy a house to begin with?

1) Just because you can somehow come up a 20% down payment, that does not mean you can afford a house and you should buy a house.

2) If you have to reduce your savings in order to buy a house, that probably mean you will have problem paying for your house when you bought it. Why buy a house that you cannot afford in order to give the house back to the bank later?

Buying a house that you cannot afford = "House Poor". We know what happened to "House Poor" people.

KlangFool

investor1
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Re: Saving for down payment

Post by investor1 » Tue Feb 02, 2016 10:22 am

You can take up to $10k out of an IRA for the purchase of a house. Why not continue socking away money in your IRAs (rather than 401ks) for now? If you change your mind later, the money is still in your retirement accounts.

Two Headed Mule
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Re: Saving for down payment

Post by Two Headed Mule » Tue Feb 02, 2016 10:38 am

JonnyDVM wrote: I would reduce contributions down to the match for the short period of time it's takes to save a down payment. There's a balance between living in the now and saving for the future. If you need to reduce retirement contributions for 6 months to help you buy the home you really want I don't see anything wrong with that.
Agreed 100%. You are not a slave to your retirement accounts. It is completely normal to save outside of them for important life goals, like owning a home.

Maxing the 401(k) and then taking a loan would be advisable in certain circumstances, but this doesn't appear to be one of them.

Mule

FullYellowJacket
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Re: Saving for down payment

Post by FullYellowJacket » Tue Feb 02, 2016 10:45 am

In Los Angeles, finding an apartment has gotten absolutely insane (3% vacancy rate across the county). We don't like our current apartment, and we would rather not deal with landlords anymore. Reports of landlords raising their rent by 20% or more per year are the norm right now. We are anticipating a huge increase in our own this year, which is why September is a bit of a deadline. Having a locked in monthly price for the long term (besides tax and insurance) is a big reason we would like to buy.

Right now we are saving about 50% of our post-tax income, so affording the mortgage is not the hard part. We could afford the types of places we are looking at even if there was no down payment. It is just that in LA, even 20% cash down payments get turned down for all cash offers.

FullYellowJacket
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Re: Saving for down payment

Post by FullYellowJacket » Tue Feb 02, 2016 11:01 am

I should mention that one big trepidation is the current tax hit on lowering 401(k) contributions. We are in a just about 34% state+federal marginal bracket, so it will hurt to see the total dollar value towards our savings go down, but it is my understanding that if we supercharge 401(k) contributions later in the year then it will even out. I also know that buying new furniture for our new place may take precedence over ratcheting up the contributions :twisted:

LateStarter1975
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Re: Saving for down payment

Post by LateStarter1975 » Tue Feb 02, 2016 11:14 am

JonnyDVM wrote:Don't take out a 401k loan. I would reduce contributions down to the match for the short period of time it's takes to save a down payment. There's a balance between living in the now and saving for the future. If you need to reduce retirement contributions for 6 months to help you buy the home you really want I don't see anything wrong with that.
Seconded
Debt is dangerous...simple is beautiful

hnzw rui
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Re: Saving for down payment

Post by hnzw rui » Tue Feb 02, 2016 11:19 am

KlangFool wrote:FullYellowJacket,

Why would you want to buy a house to begin with?

1) Just because you can somehow come up a 20% down payment, that does not mean you can afford a house and you should buy a house.

2) If you have to reduce your savings in order to buy a house, that probably mean you will have problem paying for your house when you bought it. Why buy a house that you cannot afford in order to give the house back to the bank later?

Buying a house that you cannot afford = "House Poor". We know what happened to "House Poor" people.

KlangFool
In HCOL areas, it's possible that rent is the same as the mortgage payment (or rent may even be higher). Rents can also increase (and quite significantly if there's no rent control). At least mortgage payments are fixed and you can take a deduction for mortgage interest and property tax.

If the job is relatively stable and they plan on staying in the area for a long time, buying a house could be better than renting.

KlangFool
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Re: Saving for down payment

Post by KlangFool » Tue Feb 02, 2016 12:03 pm

FullYellowJacket wrote:In Los Angeles, finding an apartment has gotten absolutely insane (3% vacancy rate across the county). We don't like our current apartment, and we would rather not deal with landlords anymore. Reports of landlords raising their rent by 20% or more per year are the norm right now. We are anticipating a huge increase in our own this year, which is why September is a bit of a deadline. Having a locked in monthly price for the long term (besides tax and insurance) is a big reason we would like to buy.

Right now we are saving about 50% of our post-tax income, so affording the mortgage is not the hard part. We could afford the types of places we are looking at even if there was no down payment. It is just that in LA, even 20% cash down payments get turned down for all cash offers.
FullYellowJacket,

Please use the rent versus buy calculator before you proceed.

http://www.nytimes.com/interactive/2014 ... .html?_r=0

<<Right now we are saving about 50% of our post-tax income, so affording the mortgage is not the hard part.>>

What will be your saving rate after buying the house? That is the question.

Please note that for every additional dollar that you spend on your housing expenses, you pay 30+% of tax on those money.

KlangFool

KlangFool
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Re: Saving for down payment

Post by KlangFool » Tue Feb 02, 2016 12:07 pm

hnzw rui wrote:
KlangFool wrote:FullYellowJacket,

Why would you want to buy a house to begin with?

1) Just because you can somehow come up a 20% down payment, that does not mean you can afford a house and you should buy a house.

2) If you have to reduce your savings in order to buy a house, that probably mean you will have problem paying for your house when you bought it. Why buy a house that you cannot afford in order to give the house back to the bank later?

Buying a house that you cannot afford = "House Poor". We know what happened to "House Poor" people.

KlangFool
In HCOL areas, it's possible that rent is the same as the mortgage payment (or rent may even be higher). Rents can also increase (and quite significantly if there's no rent control). At least mortgage payments are fixed and you can take a deduction for mortgage interest and property tax.

If the job is relatively stable and they plan on staying in the area for a long time, buying a house could be better than renting.
hnzw rui,

Come on. They were renting an apartment. Now, they are buying a house. Their housing expense will go up. It costs more to buy versus rent for OP. And, they will pay 30+% tax on all additional housing expense. So, please tell me why it could be better than renting? It will not be.

Very few people buy the same house as they are renting. Most people upgrade and then try to justify their decision that it is cheaper to rent the house that they upgrade to.

KlangFool

FullYellowJacket
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Re: Saving for down payment

Post by FullYellowJacket » Tue Feb 02, 2016 12:37 pm

Klangfool,

I do share some of your concerns, and I have no plans to put us into the house poor category. Our mortgage will not exceed 3 times our gross income, which is likely below average in extreme HCOL areas.

By my calculation our post-tax savings rate would go to 25-30%.

KlangFool
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Re: Saving for down payment

Post by KlangFool » Tue Feb 02, 2016 12:49 pm

FullYellowJacket wrote:Klangfool,

I do share some of your concerns, and I have no plans to put us into the house poor category. Our mortgage will not exceed 3 times our gross income, which is likely below average in extreme HCOL areas.

By my calculation our post-tax savings rate would go to 25-30%.
FullYellowJacket,

Let's assume that financially, it works out. Then, how do you know that you will stay at this neighborhood after you have kids? This is the other danger of buying a house too soon. The schools around the house may not be good enough. Then, you will have to move again.

<<I have no plans to put us into the house poor category. Our mortgage will not exceed 3 times our gross income, >>

Do you have asset (excluding the house) that worth 2 to 3 times the house's value? If not, most of your net worth is tied to the house. Aka, you are "House Poor". Besides the house, you have little to no net worth.

<<which is likely below average in extreme HCOL areas.>>

Average people lost their houses regularly in HCOL areas whenever they hit some financial emergency. I live in one of these area. I seen many instances of this among my peers.

KlangFool

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Re: Saving for down payment

Post by Twins Fan » Tue Feb 02, 2016 12:53 pm

KlangFool thinks folks should only buy a home that is equal to half their current savings/investments or less, also. :annoyed

OP, I don't see lowering the 401k contributions until September as a big deal at all. You're still saving, just in a savings account rather than the 401k for now. And, if you plan to crank up the savings/contributions again after September, no biggie. Or, crank up the 401k contributions now to max those out by May or so to max them out, and then save like crazy for the down payment. See, it doesn't matter much...

I know it's almost a sin to say :happy , but sometimes other savings goals take priority over retirement savings.

hnzw rui
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Re: Saving for down payment

Post by hnzw rui » Tue Feb 02, 2016 1:02 pm

KlangFool wrote:
hnzw rui wrote:In HCOL areas, it's possible that rent is the same as the mortgage payment (or rent may even be higher). Rents can also increase (and quite significantly if there's no rent control). At least mortgage payments are fixed and you can take a deduction for mortgage interest and property tax.

If the job is relatively stable and they plan on staying in the area for a long time, buying a house could be better than renting.
hnzw rui,

Come on. They were renting an apartment. Now, they are buying a house. Their housing expense will go up. It costs more to buy versus rent for OP. And, they will pay 30+% tax on all additional housing expense. So, please tell me why it could be better than renting? It will not be.

Very few people buy the same house as they are renting. Most people upgrade and then try to justify their decision that it is cheaper to rent the house that they upgrade to.

KlangFool
Rent can be insanely expensive in HCOL areas. Last I checked, going rate for 2B/2B apartments in our area is $3,000+/mo. I haven't actually seen any single family houses for rent lately. Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions), I'd rather take the latter. At least with buying, mortgage payments stop eventually (although you are on the hook for maintenance).

KlangFool
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Re: Saving for down payment

Post by KlangFool » Tue Feb 02, 2016 1:14 pm

hnzw rui wrote:
KlangFool wrote:
hnzw rui wrote:In HCOL areas, it's possible that rent is the same as the mortgage payment (or rent may even be higher). Rents can also increase (and quite significantly if there's no rent control). At least mortgage payments are fixed and you can take a deduction for mortgage interest and property tax.

If the job is relatively stable and they plan on staying in the area for a long time, buying a house could be better than renting.
hnzw rui,

Come on. They were renting an apartment. Now, they are buying a house. Their housing expense will go up. It costs more to buy versus rent for OP. And, they will pay 30+% tax on all additional housing expense. So, please tell me why it could be better than renting? It will not be.

Very few people buy the same house as they are renting. Most people upgrade and then try to justify their decision that it is cheaper to rent the house that they upgrade to.

KlangFool
Rent can be insanely expensive in HCOL areas. Last I checked, going rate for 2B/2B apartments in our area is $3,000+/mo. I haven't actually seen any single family houses for rent lately. Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions), I'd rather take the latter. At least with buying, mortgage payments stop eventually (although you are on the hook for maintenance).
hnzw rui,

<<Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K >>

Please find a condo/townhouse in your area for 3K in PITI in order to validate your assumption.

KlangFool

surfstar
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Re: Saving for down payment

Post by surfstar » Tue Feb 02, 2016 1:31 pm

hnzw rui wrote: Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions),
Could you show me that math?
We currently rent a 1BR apt. $1205/month. Vacancy rates as low as 0.5% last year, I believe. These same, simple, old apts now go for $1450+ for new tenants.

BUT, if we get pregnant and need a 2BR - we have to look into condos. With HOA fees, PITI to me it seems like $3500+ a month for $500-600k units. I've run the NYT rent vs buy calculator many times. As insanely overpriced as housing is, we may have to buy something if we plan on staying in the area and having a kid.
I'm somewhat seriously hoping for a market crash.
:oops:

So yeah, $2k 'effective' per month vs $1205 rent - sign me up to buy that place!

emoore
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Re: Saving for down payment

Post by emoore » Tue Feb 02, 2016 1:45 pm

Well in my area (Denver Metro) a mortgage is cheaper than rent. For example my rental house is 1500 square feet renting for $1900 and my primary residence is 2400 square feet and my PITI is $1800. That doesn't include the tax deduction for mortgage interest either. There is no way I would want to rent instead of buy. I don't have close to 3x my house price in net worth.

joelly
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Re: Saving for down payment

Post by joelly » Tue Feb 02, 2016 1:48 pm

So, should he buy a home or shouldn't he? I"m confused reading these responses.

FullYellowJacket
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Re: Saving for down payment

Post by FullYellowJacket » Tue Feb 02, 2016 2:09 pm

joelly wrote:So, should he buy a home or shouldn't he? I"m confused reading these responses.
I'm not sure if we should or not, but I think we would sleep better at night with a mortgage rather than rent that it at the whims of a landlord. I can link posts on other websites where rents have gone from 1200 to over 2000 for a 1 BR in the last year. I learned the hard way how hot the market is in LA when I moved here last year. Apartments would be posted at 1600 only to be removed the same day and reposted at 2000 or more due to call volume. Some apartments had over 70 applications submitted.

I would rather have the risk of both of us losing our jobs at the same time over the fear every 12 months that rent is going up another 20%.

We are looking to purchase in a school district with a really good elementary and middle school with a so-so high school. High school would be 17 or so years away, so it's not exactly high on my concerns list.

bigred77
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Re: Saving for down payment

Post by bigred77 » Tue Feb 02, 2016 2:12 pm

I would not decrease my 401k or IRA contributions. That space is gone forever if you miss the window.

I would however consider using a 401k loan or a 80/10/10 mortgage (10% cash down, regular mortgage at 80% of the purchase price, and a piggyback loan of 10% of the purchase price with a higher interest rate and likely a balloon in year 15 or something, no PMI involved).

If simply decreasing your 401k contributions would get you close to 20% down, then you can take an 80/10/10 mortgage and have the piggyback loan payed off in under 2 years or so. You're going to want cash on hand after the purchase anyway for unforeseen expenses, furniture, paint, landscaping, movers, etc. Paying 6% on the piggyback loan for a year or 2 is not the end of the world (it is also tax deductible).

I also think a 401k loan (if you're confident in your job security) is an underutilized tool. Simply consider it part of your fixed income allocation and your stock exposure never changes. Check your plan to see if you can continue making new contributions to your 401k on top of the loan repayments. If your plan does not allow new contributions while in loan repayment this would be much less attractive to me.



Many people in real life are first time homeowners with a 3.5% down FHA mortgage after buying the maximum value home the bank would approve them for and little in reserve. Many Bogleheads recommend 20% down, 8 months of expenses in a cash reserve, a portfolio of financial assets at least as big as the home value, a 529 on track to cover 4 years at MIT, and a mortgage balance under 2X gross income (only counting base salaries because equity awards and bonuses aren't guaranteed). Ohh and don't even think about anything other than a 15 yr fixed rate mortgage where PITI is under 25% of your net income.

It's OK to pick a path in between these 2 extremes.

joebh
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Re: Saving for down payment

Post by joebh » Tue Feb 02, 2016 3:48 pm

FullYellowJacket wrote:An idea I had is that we could drop our 401(k) contributions (currently close to maxing) to company match until we purchase a house. We would then crank up our 401(k) savings to higher than they are currently until we have made up the difference. We are already delaying our IRA contributions until late this year or early 2017 for the 2016 year.

Are there any thoughts on this plan?

Another option is the often maligned 401(k) loan. Does it at all make sense to continue to max the 401(k)s with the plan of taking out a 401(k) loan for a down payment?
I vote Yay for temporarily halting 401k contributions above the company match, and Nay for taking a loan against your 401k.

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ray.james
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Re: Saving for down payment

Post by ray.james » Tue Feb 02, 2016 4:04 pm

KlangFool wrote:
hnzw rui wrote: Rent can be insanely expensive in HCOL areas. Last I checked, going rate for 2B/2B apartments in our area is $3,000+/mo. I haven't actually seen any single family houses for rent lately. Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions), I'd rather take the latter. At least with buying, mortgage payments stop eventually (although you are on the hook for maintenance).
hnzw rui,

<<Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K >>

Please find a condo/townhouse in your area for 3K in PITI in order to validate your assumption.

KlangFool
This is true for a lot of places in Bay area. You can rent but buy at similar PITI for same amount. If one choses other than condo/townhouse, then for SFH it will be higher.

The way it works out same with condo/townhouses is using the tax deductions. With tax deduction on PITI+ RE taxes the amount can be at least a 1K less in HCOL areas which brings closer to rent amount. Of course one is on hook for maintenance.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

KlangFool
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Re: Saving for down payment

Post by KlangFool » Tue Feb 02, 2016 4:09 pm

ray.james wrote:
KlangFool wrote:
hnzw rui wrote: Rent can be insanely expensive in HCOL areas. Last I checked, going rate for 2B/2B apartments in our area is $3,000+/mo. I haven't actually seen any single family houses for rent lately. Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions), I'd rather take the latter. At least with buying, mortgage payments stop eventually (although you are on the hook for maintenance).
hnzw rui,

<<Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K >>

Please find a condo/townhouse in your area for 3K in PITI in order to validate your assumption.

KlangFool
This is true for a lot of places in Bay area. You can rent but buy at similar PITI for same amount. If one choses other than condo/townhouse, then for SFH it will be higher.

The way it works out same with condo/townhouses is using the tax deductions. With tax deduction on PITI+ RE taxes the amount can be at least a 1K less in HCOL areas which brings closer to rent amount. Of course one is on hook for maintenance.
ray.james,

Just for my own curiosity and research, please show me a spot at bay area via Zillows and / or some other real estate web site that it is true.

Thanks in advance.

KlangFool

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ray.james
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Re: Saving for down payment

Post by ray.james » Tue Feb 02, 2016 4:14 pm

Op, if you need only few months to get to the 20% I would reduce current contributions. A partial year /1 year lower 401k contributions is not a big deal. This is better than on hook for 401k loan due to job changes.

There are very few cases where 401k loans make sense. Eg.,One has money but to pool up 20% : - you don't want to sell investments for short term gains; moving available funds in other location in hassle, have help from parents but only want to depend if emergency arises etc.,
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

hnzw rui
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Re: Saving for down payment

Post by hnzw rui » Tue Feb 02, 2016 4:26 pm

surfstar wrote:
hnzw rui wrote: Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions),
Could you show me that math?
We currently rent a 1BR apt. $1205/month. Vacancy rates as low as 0.5% last year, I believe. These same, simple, old apts now go for $1450+ for new tenants.

BUT, if we get pregnant and need a 2BR - we have to look into condos. With HOA fees, PITI to me it seems like $3500+ a month for $500-600k units. I've run the NYT rent vs buy calculator many times. As insanely overpriced as housing is, we may have to buy something if we plan on staying in the area and having a kid.
I'm somewhat seriously hoping for a market crash.
:oops:

So yeah, $2k 'effective' per month vs $1205 rent - sign me up to buy that place!
http://www.zillow.com/homes/for_sale/Lo ... _zm/0_mmm/

Single, 25% federal marginal, 9.3% CA state marginal ($93k gross, $75k after $18k 401k contribution).

Purchase Price: $500k (condo or townhouse, SFH is much more expensive)
Downpayment (20%): $100k
Interest Rate: 4.5%


Annual
P+I: $24.5k
Property Tax (@1.1%): $5.5k
Hazard Insurance: $1k
HOA: $2.4k


Monthly PITI: $2.8k
Annual PITI: $33.5k


Itemized Deductions
1st year Interest: $18k
Property Tax: $5.5k
State Income Tax: $2.3k

Federal Taxable Income: $45k
Federal Income Tax: $7k
CA State Taxable Income: $52k
CA State Income Tax: 2k


Standard Deduction
Federal Taxable Income: $65k
Federal Income Tax: $12k
CA State Taxable Income: $71k
CA State Income Tax: $4k

Tax Savings: $7k

Annual PITI - Tax Savings
$33.5k - $7k = $26.5k

Effective Monthly Cost: $2.2k

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ray.james
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Re: Saving for down payment

Post by ray.james » Tue Feb 02, 2016 4:35 pm

KlangFool wrote:
ray.james wrote:
KlangFool wrote:
hnzw rui wrote: Rent can be insanely expensive in HCOL areas. Last I checked, going rate for 2B/2B apartments in our area is $3,000+/mo. I haven't actually seen any single family houses for rent lately. Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions), I'd rather take the latter. At least with buying, mortgage payments stop eventually (although you are on the hook for maintenance).
hnzw rui,

<<Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K >>

Please find a condo/townhouse in your area for 3K in PITI in order to validate your assumption.

KlangFool
This is true for a lot of places in Bay area. You can rent but buy at similar PITI for same amount. If one choses other than condo/townhouse, then for SFH it will be higher.

The way it works out same with condo/townhouses is using the tax deductions. With tax deduction on PITI+ RE taxes the amount can be at least a 1K less in HCOL areas which brings closer to rent amount. Of course one is on hook for maintenance.
ray.james,

Just for my own curiosity and research, please show me a spot at bay area via Zillows and / or some other real estate web site that it is true.

Thanks in advance.

KlangFool
San Mateo median rents for 2 bedroom:
https://www.rentjungle.com/average-rent ... nt-trends/ 3222
San Mateo median prices for 2 bedrooms - this will pick condo/townhouses mostly. choose the filter in the second graph for bedroom sizes.
http://www.zillow.com/san-mateo-ca/home-values/ 810k

810k -20% = PTI= 3865 with RE taxes but no tax deductions applied.

San Jose(In this area you can even go all the way to 4 bedroom.)
https://www.rentjungle.com/average-rent ... nt-trends/ 2944
http://www.zillow.com/san-jose-ca/home-values/ 558k

558K - 20% = 450K ~= PTI = 2796 including RE taxes but with out tax deductions.
Tax deductions make up 1K which will cover condo fee/insurance/other extras apart from maintenance..or even partial maintenance.

To be fair, San jose rent seems inflated. Based on personal/region experience, I would say it is around 2600 - 2800. Again, to be fair in San Mateo area there aren't many 2B/2B on sale which might skew. The most are 3B/2B which are at 1Mill$. But they rent for 3800-4200. These are 2 large areas. I can go on....
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

FullYellowJacket
Posts: 317
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Re: Saving for down payment

Post by FullYellowJacket » Tue Feb 02, 2016 4:50 pm

hnzw rui wrote:
surfstar wrote:
hnzw rui wrote: Between spending $3K in rent or $3K in PITI for a similar condo/townhouse for $500K (possibly $2K effective because of tax deductions),
Could you show me that math?
We currently rent a 1BR apt. $1205/month. Vacancy rates as low as 0.5% last year, I believe. These same, simple, old apts now go for $1450+ for new tenants.

BUT, if we get pregnant and need a 2BR - we have to look into condos. With HOA fees, PITI to me it seems like $3500+ a month for $500-600k units. I've run the NYT rent vs buy calculator many times. As insanely overpriced as housing is, we may have to buy something if we plan on staying in the area and having a kid.
I'm somewhat seriously hoping for a market crash.
:oops:

So yeah, $2k 'effective' per month vs $1205 rent - sign me up to buy that place!
http://www.zillow.com/homes/for_sale/Lo ... _zm/0_mmm/

Single, 25% federal marginal, 9.3% CA state marginal ($93k gross, $75k after $18k 401k contribution).

Purchase Price: $500k (condo or townhouse, SFH is much more expensive)
Downpayment (20%): $100k
Interest Rate: 4.5%


Annual
P+I: $24.5k
Property Tax (@1.1%): $5.5k
Hazard Insurance: $1k
HOA: $2.4k


Monthly PITI: $2.8k
Annual PITI: $33.5k


Itemized Deductions
1st year Interest: $18k
Property Tax: $5.5k
State Income Tax: $2.3k

Federal Taxable Income: $45k
Federal Income Tax: $7k
CA State Taxable Income: $52k
CA State Income Tax: 2k


Standard Deduction
Federal Taxable Income: $65k
Federal Income Tax: $12k
CA State Taxable Income: $71k
CA State Income Tax: $4k

Tax Savings: $7k

Annual PITI - Tax Savings
$33.5k - $7k = $26.5k

Effective Monthly Cost: $2.2k
Which is cheaper than rent in most decent neighborhoods in LA. hnzw rui basically just managed to nail exactly what we are looking to do/buy!

itstoomuch
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Re: Saving for down payment

Post by itstoomuch » Tue Feb 02, 2016 4:58 pm

FullYellowJacket wrote:An idea I had is that we could drop our 401(k) contributions (currently close to maxing) to company match until we purchase a house. We would then crank up our 401(k) savings to higher than they are currently until we have made up the difference. We are already delaying our IRA contributions until late this year or early 2017 for the 2016 year.

Are there any thoughts on this plan?
This is what we told our son to do. We said to save hard and fast to accumulate the DP. There was no way that one can rely on salary increases to achieve a DP. He lives in a city with 8% increases the last 4 years. A condo, one floor above the place we bought October 2015, sold in Jan 2016, for 20% more than what we paid.
GL. YMMV. :beer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

dubsem
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Location: CA

Re: Saving for down payment

Post by dubsem » Tue Feb 02, 2016 5:36 pm

It seems you're cash rich and house poor. Continue to capture the 401k match, max out the IRA, and stow away the remaining cash in a Barclays 1% savings account. If the right property comes along, at least you'll be ready with cash-on-hand to make the down payment. Do not take a loan against your 401k as that money shouldn't be touched until you're in retirement.
G.O.O.D.

FullYellowJacket
Posts: 317
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Re: Saving for down payment

Post by FullYellowJacket » Wed Feb 03, 2016 6:38 pm

bigred77 wrote: I would however consider using a 401k loan or a 80/10/10 mortgage (10% cash down, regular mortgage at 80% of the purchase price, and a piggyback loan of 10% of the purchase price with a higher interest rate and likely a balloon in year 15 or something, no PMI involved).

If simply decreasing your 401k contributions would get you close to 20% down, then you can take an 80/10/10 mortgage and have the piggyback loan payed off in under 2 years or so. You're going to want cash on hand after the purchase anyway for unforeseen expenses, furniture, paint, landscaping, movers, etc. Paying 6% on the piggyback loan for a year or 2 is not the end of the world (it is also tax deductible).
I looked into this a little bit more. Does anyone have experience with an 80/10/10 or an 80/15/5 (i.e. 15% DP) piggyback mortgage? It's definitely intriguing, and would avoid the need for a 401(k) loan.

Currently the plan of action is to decrease 401(k) contributions to employee match and see if we have enough by the time our lease is up in September. If we do not quite have the 20% with leftover emergency funds, we will look into the above mortgage options.

alex_686
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Re: Saving for down payment

Post by alex_686 » Wed Feb 03, 2016 6:42 pm

FullYellowJacket wrote:I looked into this a little bit more. Does anyone have experience with an 80/10/10 or an 80/15/5 (i.e. 15% DP) piggyback mortgage? It's definitely intriguing, and would avoid the need for a 401(k) loan.
Research if you can actually get them. I did one of these before 2008 real estate crash when they were common. It was great! All for it if you can get it.

Now they are rare. The last time I check it would have prevented me for getting a conventional conforming loan - the type of loan that gets the lowest interest rates. So I am a little skeptical.

FullYellowJacket
Posts: 317
Joined: Thu Apr 03, 2014 8:21 am

Re: Saving for down payment

Post by FullYellowJacket » Wed Feb 03, 2016 7:02 pm

From my reading, it looks like you have to be well qualified with more stringent requirements on debt to income ratio, credit score, and require a 10% DP. We should be OK in regards to all of these things.

If push comes to shove using some IRA money to get to 20% would be a possibility, but for some reason I'm not super excited about that since it would be taxed.

hnzw rui
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Re: Saving for down payment

Post by hnzw rui » Wed Feb 03, 2016 7:31 pm

FullYellowJacket wrote:From my reading, it looks like you have to be well qualified with more stringent requirements on debt to income ratio, credit score, and require a 10% DP. We should be OK in regards to all of these things.

If push comes to shove using some IRA money to get to 20% would be a possibility, but for some reason I'm not super excited about that since it would be taxed.
Is your IRA traditional? Because for Roth, you can withdraw contributions at any time without tax and penalty. You can also withdraw up to $10K of earnings for home purchase without tax and penalty (although I think your first Roth IRA account needs to be at least 5 years old for it to be tax free).

For what it's worth, I personally have saved for DP money in our 457's stable value fund (planned on getting it as loan). My combined marginal tax rate is already 34.3% and it was a bit frustrating see all that money go to taxes when we were trying to save as much as possible for DP. However, there's less ramifications compared to 401k so it was a relatively easier choice to make.

1. Not required to repay the loan immediately upon separation from employment. Just need to continue the required payments at least every quarter.
2. It's a deferred compensation plan, not a qualified retirement plan. In case of layoff and inability to continue making payments, I can convert the payoff amount to a distribution. No early withdrawal penalty although I would need to pay income tax.

Didn't end up buying a house (LA area, circa 2010-11ish). Seemed like all the properties we offered for, there were competing all cash offers. :(

One regret, we should have just bought a condo/townhouse instead of letting ourselves be convinced by family to only consider single family homes. Back then, SFH was still $500K minimum while condo/townhouses were going for $250-350K. We could have easily afforded the condo/townhouse even with 20% DP. SFH was just too much of a stretch. Now, even the condos/townhouses are going for $500K. :oops:

Given we didn't end up buying a home, it was a good thing I had continued contributing to the 457 instead of prioritizing taxable savings.

bigred77
Posts: 1996
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Re: Saving for down payment

Post by bigred77 » Thu Feb 04, 2016 9:14 am

FullYellowJacket wrote:
bigred77 wrote: I would however consider using a 401k loan or a 80/10/10 mortgage (10% cash down, regular mortgage at 80% of the purchase price, and a piggyback loan of 10% of the purchase price with a higher interest rate and likely a balloon in year 15 or something, no PMI involved).

If simply decreasing your 401k contributions would get you close to 20% down, then you can take an 80/10/10 mortgage and have the piggyback loan payed off in under 2 years or so. You're going to want cash on hand after the purchase anyway for unforeseen expenses, furniture, paint, landscaping, movers, etc. Paying 6% on the piggyback loan for a year or 2 is not the end of the world (it is also tax deductible).
I looked into this a little bit more. Does anyone have experience with an 80/10/10 or an 80/15/5 (i.e. 15% DP) piggyback mortgage? It's definitely intriguing, and would avoid the need for a 401(k) loan.

Currently the plan of action is to decrease 401(k) contributions to employee match and see if we have enough by the time our lease is up in September. If we do not quite have the 20% with leftover emergency funds, we will look into the above mortgage options.

I did an 80/10/10 in 2013 with no problems. I qualified for a regular, conventional mortgage at the best rates. Our credit scores were around 750 I believe. Our debt to income and other ratios were withing the banks guidelines but were a little stretched (they would only count base salaries and a significant portion of my compensation in bonus/equity). Additional closing costs were very minimal (the piggy back loan added maybe $600 to closing costs versus putting up 20% cash).

The only issues I had with all of this was when I went to refinance my primary mortgage (the 80% one) last year. I was able to significantly cut my interest rate but I had to get the lender of my piggyback loan to subordinate the new mortgage. We got it done, but it was a pain because the lender was so unresponsive.

My experience is that 80/10/10's are available (especially in HCOL areas where 20% is pretty burdensome on young workers) if you decide they they meet your needs.

Dulocracy
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Location: Atlanta, GA

Re: Saving for down payment

Post by Dulocracy » Thu Feb 04, 2016 9:52 am

hnzw rui wrote: In HCOL areas, it's possible that rent is the same as the mortgage payment (or rent may even be higher). Rents can also increase (and quite significantly if there's no rent control). At least mortgage payments are fixed and you can take a deduction for mortgage interest and property tax.

If the job is relatively stable and they plan on staying in the area for a long time, buying a house could be better than renting.
This.

It is also often the case that it is cheaper to own in LCOL areas as well.

OP: What are the terms of the 401k loan? Are there high fees? If you are going to take a loan anyway, using the bond portion of your portfolio is not necessarily an absolutely bad thing to do. Essentially, you would be buying a single bond: your own debt. Yes, it is borrowing from Peter to pay Paul, but if the fees are low, it can make sense in limited situations. The plus side is that you will likely get a higher return on your bonds than in a fund, and you would have to pay someone for the loan anyway. The alternative is to have less money in your 401k. Tax advantaged space is extremely valuable. In almost every circumstance, I recommend maximizing money you hold in tax advantaged space.

I would not cut back the retirement to get a house. Honestly, as people have stated, if you cannot afford to save for retirement and pay for your house, you probably cannot afford the house.

Of course, there is a middle way. Instead of cutting back to the match, consider cutting back to 15% saved in retirement accounts (now commonly accepted as the minimum you should be setting aside). Use the balance for house savings.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

dsmil
Posts: 562
Joined: Tue Sep 08, 2009 10:51 am

Re: Saving for down payment

Post by dsmil » Thu Feb 04, 2016 10:57 am

bigred77 wrote:Many people in real life are first time homeowners with a 3.5% down FHA mortgage after buying the maximum value home the bank would approve them for and little in reserve. Many Bogleheads recommend 20% down, 8 months of expenses in a cash reserve, a portfolio of financial assets at least as big as the home value, a 529 on track to cover 4 years at MIT, and a mortgage balance under 2X gross income (only counting base salaries because equity awards and bonuses aren't guaranteed). Ohh and don't even think about anything other than a 15 yr fixed rate mortgage where PITI is under 25% of your net income.
Agreed! We put 3.5% down in 2012 to the dismay of almost every Boglehead, are very happy in our home, my wife is able to stay at home, and we are approaching a 25% savings rate shortly. We are talking here about someone who is saving 50% of their post-tax income and wants to decrease this temporarily in order to save for a down payment. After saving for that, they'll still be saving 25-30% of their post-tax income!
Save up the 20% and buy the damn house!

FullYellowJacket
Posts: 317
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Re: Saving for down payment

Post by FullYellowJacket » Thu Feb 04, 2016 12:35 pm

Dulocracy wrote:
hnzw rui wrote: In HCOL areas, it's possible that rent is the same as the mortgage payment (or rent may even be higher). Rents can also increase (and quite significantly if there's no rent control). At least mortgage payments are fixed and you can take a deduction for mortgage interest and property tax.

If the job is relatively stable and they plan on staying in the area for a long time, buying a house could be better than renting.
This.

It is also often the case that it is cheaper to own in LCOL areas as well.

OP: What are the terms of the 401k loan? Are there high fees? If you are going to take a loan anyway, using the bond portion of your portfolio is not necessarily an absolutely bad thing to do. Essentially, you would be buying a single bond: your own debt. Yes, it is borrowing from Peter to pay Paul, but if the fees are low, it can make sense in limited situations. The plus side is that you will likely get a higher return on your bonds than in a fund, and you would have to pay someone for the loan anyway. The alternative is to have less money in your 401k. Tax advantaged space is extremely valuable. In almost every circumstance, I recommend maximizing money you hold in tax advantaged space.

I would not cut back the retirement to get a house. Honestly, as people have stated, if you cannot afford to save for retirement and pay for your house, you probably cannot afford the house.

Of course, there is a middle way. Instead of cutting back to the match, consider cutting back to 15% saved in retirement accounts (now commonly accepted as the minimum you should be setting aside). Use the balance for house savings.
Reading through the terms of a 401(k) loan, we have decided it is likely not in our best interest to take one due to some of the terms.

Our issue isn't really that we can't pay for retirement and save for a down payment, we definitely can. We are just trying to be a little greedy and have the down payment by the time our lease is up in 6/7 months. Worst case scenario we go month to month or sign a six month lease if we aren't quite there yet.

I think we have some good options thanks to the members of this board. DW and I need to sit down and prioritize our needs. I'll keep everyone updated on how things are working out and I'm sure we will have more questions about home ownership once we get closer to purchasing.

Dulocracy
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Re: Saving for down payment

Post by Dulocracy » Thu Feb 04, 2016 3:30 pm

Allow me to share something about being greedy I learned as a kid from Pac-Man.

Every time I got a super power pellet, I would try to time the ghost transition to get as many as I could before they changed back. Trying to skim the edge of time at the end got me killed more often than anything else. I got greedy and screwed the whole thing up. Taking an extra 6 month lease sounds like the right idea.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

User avatar
ray.james
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Re: Saving for down payment

Post by ray.james » Thu Feb 04, 2016 3:51 pm

Dulocracy wrote: Every time I got a super power pellet, I would try to time the ghost transition to get as many as I could before they changed back. Trying to skim the edge of time at the end got me killed more often than anything else. I got greedy and screwed the whole thing up. Taking an extra 6 month lease sounds like the right idea.
That made me go down memory lane! HaHa nice analogy :sharebeer
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

joelly
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Re: Saving for down payment

Post by joelly » Thu Feb 04, 2016 5:41 pm

FullYellowJacket wrote: We are looking to purchase in a school district with a really good elementary and middle school with a so-so high school. High school would be 17 or so years away, so it's not exactly high on my concerns list.
I live in Burbank so yes I share your concerns. We are currently looking for a home as well. If I have 20% down payment with full-funded emergency fund, I'd start looking for a house.

Best of luck!!!

Chadnudj
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Re: Saving for down payment

Post by Chadnudj » Thu Feb 04, 2016 5:49 pm

KlangFool wrote: Come on. They were renting an apartment. Now, they are buying a house. Their housing expense will go up.
I call shenanigans on this. As someone who lives in a HCOL area (Chicago), we cut our monthly housing expense by $900 ($3400 to $2500 per month) by buying versus renting. And our mortgage will never increase (well, property taxes and insurance might, but nowhere nearly as much as rent can increase), we build about $550+ in equity with each payment (increasing as time goes on), and get to deduct mortgage interest (making buying even cheaper relatively speaking).

So long as we don't exceed $10.8k or so annually in repairs/maintenance ($900 per month times 12 months), which would be an astronomical amount, we're FAR ahead buying than renting.

FullYellowJacket
Posts: 317
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Re: Saving for down payment

Post by FullYellowJacket » Thu Feb 04, 2016 5:59 pm

http://la.curbed.com/archives/2015/11/l ... s_2015.php
http://la.curbed.com/tags/state-o-the-market

Tune out the noise and all that, but these types of articles really are putting the fire under me to lock in to a place ASAP. What if the neighborhoods we are looking at are the ones that are about to explode like NE Los Angeles?

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