I have this strong internal dilemma going on. It’s difficult to talk to people IRL about this as all my friends I work with so I don’t feel comfortable disclosing this information, and my family is financially incompetent and thus is little help. So here’s the situation:
High-Level Information
I am 24 and single
I make a little more than 75k
I currently contribute the maximum to my 401k (16.5k for 2009)
I currently contribute the maximum to my Roth IRA (5k for 2009)
I currently contribute the maximum to my HSA (~3k for 2009)
I can get what I consider a great home in my area for about 150k
I have no intention of leaving my current area
My job is as stable as it could get for someone in my area and experience level
Lease expires at the end of October
I should have excellent credit. About 2 years ago my score was a 740 and it should have only gotten better.
Debt
A 12k car loan at 7%
Savings
10.7k in high yield savings account and saving 1k per month so that by October I could have 20k
My ultimate goal is to be financially independent so lowering 401k/IRA/HSA contributions really isn’t an option for me unless absolutely necessary. On the surface it looks like the best thing to do would be to pay off the car loan. And I would agree because I hate debt, but the 8k first time homebuyers credit is really calling me.
Running some numbers I come up with the following sort of assuming worse case scenarios:
Say I get a home for 150k and put down 15k so I am borrowing 135k and getting an 80/10/10 loan (my credit union apparently still offers this)
Suppose my first loan is at 5.5% (thus 108k at 5.5% is a monthly payment of $613.21 on a thirty year fixed and first year interest of $5903.69)
Suppose my second loan is at 8.5% (thus 13.5k at 8.5% is a monthly payment of $103.8 on a thirty year fixed and a first year interest of $1143.60)
My yearly interest paid is 5903.69+1143.60=7047.29
Speaking with my friends who have homes of similar value they pay 1.5k in insurance and property taxes (1k to property taxes and 500 to insurance)
I currently pay approx 2k in state taxes
I currently take the standard deduction 5.5k
Itemizing on my taxes would yield 7047+2k+1k~=10k so this would give me about 1k back in taxes above the standard deduction ( 10k - 5.5k)*.25 for a 25% tax bracket so this would pretty much pay my property taxes
So what I am looking at is a current monthly payment of:
first mortgage: 613
second mortgage: 104
property taxes + insurance: 1500/12 = 125
So I would have a monthly payment of ~900. This is comparable to what I could rent a place for (my rent is currently about 600 for a shitty apartment). After maxing all retirement I mentioned above, this is about a fourth of my take home pay. So in summary, I would be putting down 15k on a 150k home with 5k remaining for closing costs and that would leave me with almost no savings until the 8k tax credit rolled around. Am I crazy for thinking this is viable? If it wasn’t for the “free” 8k there’s no way I would do it. If I move in the house I have no money for a lawn mower (not that I would need one since I would be buying in the fall and would have the tax refund by spring), but I have nothing to fall back on immediately should the pipes break or I lose my job. After moving in I could begin putting away 1k per month so I would build up the emergency fund pretty quickly.
I would pay off my Jeep and continue to save for 20% down on a 15 year fixed, but I planned on buying anyway within the next year and a half or two years and this is making me want to jump now. I am an engineer and have a tendency to over analyze things. What would you do?
Wow. I guarantee you’ve put more thought into this than 90% of homebuyers. I think that not having any cash at all after moving in is a bad thing. But it sounds like you can just wait a few months and save up some cash and then everything would work perfectly. Also, IMHO, reducing retirement savings in this market would be a very very costly decision.
So: wait a few months (or get some extra cash some other way (i.e., weekend job)) and sounds like you’ll be in great shape.
Thanks for the input Rand Rover. After looking at http://www.federalhousingtaxcredit.com/ is appears that it’s actually for people who purchase during this year:
So that leaves me 2 months or so to save up a little extra cash and give me a little more of a cushion. It also puts it closer to when I would be getting the refund so I would be minimizing risk, too.
Ah, got it. Another idea may be to get a credit card with a decent line before you get the house so you have some source of funds if you come home and there’s water everywhere (or whatever). Anyway, good luck.
I’m maybe overly conservative. I would suggest waiting 12-24 months. This would give you time to
save more
probably get an even cheaper house (there’s virtually zero risk that property prices are going to rise in that time frame)
and if a depression does come on, 12 months from now you’ll be in better shape than if you had bought
For me, it was much more important to get a good cash reserve going before I bought property. You definately be safer waiting and year and probably get that house cheaper as well.
Note: I’m not sure if this is a 2009 only tax credit.
Ever since I was able to, I’ve always had at least 2 years worth of lving expenses in savings as my minimum bar. That makes me sleep a lot better at night.
When you say “savings,” do you mean cash (i.e., CDs, cash in money market accounts, etc.) or are you also including investments? If it’s cash, that’s a very expensive night’s sleep you’re getting (i.e., expensive because of the forgone gain on investments).
Making 75K a year I’d be all over home ownership. China Guy brings up a good point about waiting a bit though. Also, if at the end of 12-24 months you could possibly have a big enough down payment saved up so you could avoid PMI or a 80-10-10 loan.
I take it this is for living in and not strictly an investment right? If so, I think the general rule is that you’re almost always better off paying a mortgage than you are paying rent (caveats of course for bad loan agreements, shitty property etc etc). I’d say you’re in a good position to buy, so long as you find a place you’re happy living in. The price you quoted seems very low, so I don’t know whether your just living in an area where housing is cheaper or the place you are buying is small or rundown.
In any event, no one knows what is going to happen to property values right now. Everyone is just making educated guesses. If you think your job is stable, and you like the place you have your eye on, then go for it.
I also think that you’re in a good position to buy. However…
While you are clearly thinking very well about long-term money have you paid adequate attention to the short term? You say your job is stable, and for your sake I hope it is, but what if something happens? You need to cover today and the short-term as well as your retirement.
You should have at least six months worth of cash on hand if at all possible whether your own or rent - in my case, that’s the only thing that has saved us from bankruptcy after I lost my job in 2007. You need this to protect against job loss, sudden home repairs if you’re an owner, and various other emergencies. In today’s environment 1-2 years worth is not unreasonable although (Og help me, I can’t believe I’m saying this) I agree with Rand Rover that if you do that you need to stash the majority of it in some sort of interest-earning form. The key is that you can get to it easily and quickly. Another key is that this is not 6 months (or whatever) of your current income, it’s 6 months of the minimum you need to get by.
I’ll even go out on a limb and say if you don’t have at least six month’s cash on hand right now that you should temporarily reduce your 401(k) and IRA contributions until you DO have that in place. At age 24 a temporary reduction in those two will make little to no difference by the time you retire, but if Something Happens having that short-term cash fund may make a huge difference. It can also double for emergency home repairs, such as needing a new furnace or water heater or whatever. Once you have your cash stash go back to maxing out the retirement funds.
Buying a home without having sufficient funds available for repairs, maintenance, and the like is a bit risky. Clearly, if you had to you could borrow to cover such costs, but that is not as good as being able to simply pay immediately and without interest. It’s not the craziest risk, and you might decide to take it for the benefits of owning sooner rather than later, but do be aware it is there.
Well, when I say “cash” I mean that in the financial sense, which is “cash or near cash assets” such as bank deposits, treasuries, money market funds or y’know just a bank account.
I don’t mean investments such as an IRA or even stocks. I mean if you held some really blue chip stuff like GE, Microsoft or god forbid a bank stock like Citi, that 2 years of liquidity is worth maybe a year now, and in the case of Citi about a week. :o
Sure, I do count “investments” in the overall mix. Just like I have asset allocation and put a % into very high risk stuff. But my rule of thumb has been 2 years of liquidity in stuff I’m pretty guaranteed to be able to turn into hard dollars even if a depression hits.
I’ll echo what some other posters said, if you’re really thinking about doing this deal. There’s no harm and a lt of good in holding off on the retirement accounts for the next 6-12 months. I would think as an engineer, that you would be freaking crazy not to have 2 years in reserve to cover your mortgage payments. Turn your engineering brain onto this. Think circuit breakers. I’ve never met an engineer in my life that was satisfied that a bog standard circuit breaker and the minimum recommended level is “good enough.” You’re either outside the norm for an ahem engineer, or you haven’t been trained to put the same analytic emphasis on financial engineering.
I have to agree…while saving for retirement is a GREAT thing and saving young is a GREAT thing, you have a lot going to retirement right now, which is maximizing your long term goals (early retirement), but really limiting what you can do now (you have a car loan, you don’t have the cash for a house). Back off - not completely - on the amount you put into retirement until you can get into a house, have a savings cushion (2 years is a LOT for most people - but does make sense for others, and probably makes anyone who has that sleep well at night right now), and carry no debt except your mortgage. Work towards a little more balance between today and tomorrow.
Doesn’t the Roth IRA serve as a cash cushion, since you can withdraw the your contributions from it? You cannot withdraw the earnings without penalty, but since the money you put in was post-tax, you are free to withdraw it. Assuming you’ve been contributing for a couple of years, this could take the place of opening up a credit card or additional saving for just-in-case scenarios.
A general rule of thumb is that you should plan to stay in the house for at least 5 years. How does that fit with how you see your plans in terms of potentially getting married? Is it a house you’d bring a spouse to? Is marriage not something you see yourself doing in the next 5 years?
Probably, but it probably isn’t that much money - 5k for a few years, and dgr seems to be (and I’m reading a lot into his post) the type who would fall back on retirement savings only as a last resort. He also needs money around he is willing to touch - particularly in the wild wilderness of homeownership where “oh, damn, we need a new roof” and “did the washer just flood the basement?” happens.
(He is still doing a darn sight better than most people and would be better off than most homebuyers if he’d just jump in. And he’d be as likely to be fine as anyone)
My take is a bit different. A house is an investment.
So, right now, is that house a good investment (ie likely to go up in value), or a bad investment?
My take is houses in most of America have another 20-40% to fall, while houses in LA & Miami have another 60% to fall. Once they cost about what they did in 1980 they’ll be properly priced and then there’s some expectation they’d be a neutral or slightly positive investment for the next 20 years.
In other words, buying a house now is dirt-stupid. Even foreclosures in perfect condition (as if any of those exist) are overpriced by 20+% in most markets and 40% in the former boom markets.
Keep saving, keep renting cheaply, and keep investing smartly. You’ll be able to steal a house in another 2 years.
It’s a gamble, true, but I think you’re being overly pessimistic about the market nationwide. We’re stable here, though prices are good, and I think in two years the steals will be mostly gone. I don’t think foreclosures are necessarily the best option, but profiting from people who have to sell (I just bought an estate house) is probably not unwise. Keep in mind in that two years you’ll have paid down on the house as well as gotten a large tax benefit that’s currently limited to only this year.
I guess it depends on the market in your area, but I can’t see that huge of a drop in prices here; prices are already quite low, and there’s essentially no cost difference between renting and owning (if anything, owning is cheaper, even factoring in mortgage insurance and upkeep). A 20% drop would create a huge surge of buyers from the rental market.
I wouldn’t be buying a 400k home in California right now, but the market on starter homes in my state is very good for buyers. The big problem is getting a loan if you don’t already have home equity, which has led to a lack of buyers.
I may be overly conservative but I wouldn’t touch a new home without having the traditional 20% down for it. And an additional $10K in cash for all the hidden expenses that pop up in the first year.
Being single, 24, and not in any real “need” of a house I’d put some thought into if you want all the things that tie you down with a house. Maintenence, repairs, replacements, updates, etc. that are a constant drain on your checkbook. Not being able to immediately move across town or out of state if another opportunity suddenly pops up.
I was pretty much exactly the OP 3 years ago and I bough the house. You don’t realize how much you are tying yourself down when you do it. Make sure that you really want to stay where you are. I can probably still sell my house for 95 - 100% of what I paid for it, and even still I would lose money based on the money I put into the place (new diswasher, new patio, new fridge, fence, landscaping) and the various fees associated with selling. And my situation is better than people in other areas who have lost 30-40% of their home’s value.
I tend to agree. If you are going to rent a place for $900 a month - that isn’t building ANY equity. If you are going to stay in a house five years, your chances that the market will continue to crash beyond what you would’ve put into rent anyway are pretty slim, plus the tax advantages…
Even if you sell at a loss because the market is down, if you decide to be a homeowner, you’ll be able to rebuy a “bargain” (assuming you are in the same market).
The bigger question is the whole “do you really want to be a homeowner.” And I think that is a really good question. There are definately advantages to making the plumbing someone else’s problem.
A few things: Check out your local County or City and see if they have special programs for 1st time homebuyers. Mine has a special deal for the downpayment.
Next- check your credit now, using Annualcreditreport.com, only need to hit one of them for now. Weird mistakes creep in.
Yes, pay off that car loan.
A home is an investment, but it’s an investment you can live in. In the OP’s case, his payments will be around what his rent would be in a decent domicile. So, it doesn’t matter if the price goes down a bit.
You can also borrow from your IRA/401k for the down. In some cases, it’s a good idea.
Ok, so pay off that car loan, get more info, then go for it.