Balancing competing goals

autoxer · #1 (**permalink**) 07-17-2006, 05:15 PM

I'm considering using some of my Roth contributions towards a house downpayment, but I can't figure out how much I'm willing to use. I have 22k in my Roth, 15k in my 401k and after I sell my car and liquidate some stocks, I will have around 16k in cash for a house. I figure on a 150k house that will cover 5% down and closing costs. Now I could use some of my Roth to increase the downpayment, lowering the PMI, lowering the monthly payment and possibly lowering the interest rate. But long term, I know I'll be better off not touching my Roth. I can also put off buying for a while, but I'm getting excited to have my own space.

I am currently contributing about 12% of my income into my retirement accounts. I could lower that slightly to help boost my downpayment fund, but I feel like that is also a bad decision. I'm 27 and retirement seems so far away, so it seems tough to balance. Any words of wisdom or stories of how you made that balance?

cschin4 · #2 (**permalink**) 07-17-2006, 05:22 PM

My words of wisdom are don't use retirement money for anything except retirement. Live your life as if that money did not exist. So, if you have to put off buying a home for awhile to save up some cash, then do so. Just my opinion.

kristinecfp · #3 (**permalink**) 07-17-2006, 06:22 PM

I agree that you shouldn't use retirement money for your down payment. Saving for retirement should be a priority, especially in a world where pensions are almost extinct, and SS is so uncertain.

Mortgage rates are still very low (historically), so you shouldn't take money from investments (especially retirement assets) that should earn a higher rate of return (in the long run) than the mortgage rate you would have on a home loan.

Also, there are financing options available to avoid PMI, including 80/20 loans (where you finance 80% of the home with a conventional mortgage, and finance the remaining 20% with a higher interest line of credit or home equity loan) and 80/15/5 loans. You should research mortgages and talk to a mortgage specialist to determine the best option for you.

Or, lastly, you can always hold off on buying a house until you have a larger down payment.

Good luck,
Kristine

disneysteve · #4 (**permalink**) 07-17-2006, 07:46 PM

Another vote for not touching retirement savings for anything but retirement.

I don't think temporarily trimming your retirement contribution to help save your downpayment is a bad idea, though, as long as you have the committment to reinstate the higher contributions once you buy the house. At your age, ideally, you should be saving 15% toward retirement.

mbhunter · #5 (**permalink**) 07-17-2006, 08:18 PM

If I'm not mistaken, even if you can withdraw money from the IRA without the standard penalties, you can't put it back in any faster than you're normally allowed to contribute.

autoxer · #6 (**permalink**) 07-17-2006, 08:30 PM

Quote:

Originally Posted by mbhunter

If I'm not mistaken, even if you can withdraw money from the IRA without the standard penalties, you can't put it back in any faster than you're normally allowed to contribute.

That is true, but I can increase my 401k contribution.

So ideal budgeting ratios might be:
-15% towards retirement
-30% mortgage PITI
-25% taxes
-30% all other living expenses

Do these ratios seem similar to any of your budgets?

disneysteve · #7 (**permalink**) 07-18-2006, 06:26 AM

Quote:

Originally Posted by autoxer

-15% towards retirement
-30% mortgage PITI
-25% taxes
-30% all other living expenses

Do these ratios seem similar to any of your budgets?

Well, my PITI is lower, about 12% of income. And my savings are higher, about 27% of income.

poundwise · #8 (**permalink**) 07-18-2006, 06:56 AM

I have to say that the vast majority of the time I would be dead-set against taking money from retirement funds to buy a house, however, in this case, I am not.

The reasons?

You are 27 years old and have $37K in retirement.
A house is an investment too.
You state that you are able to increase your 401K contribution.
The 80/20 route is not wise IMO.
You can avoid or at least lower PMI by doing so.

It's a tough call for me, personally, because I would not want to touch my retirement. However, I am 35 and am presently not as well set as you are now.

Is it possible you could find a house for less? If so, you could possibly utilize enough money from your IRA, along with the $16K you say you will have, to get a better rate and avoid PMI without devastating the IRA. That would be ideal, if it didn't cost you too much from your IRA.

In the end, I would say that if I were in your shoes, I'd sit down at my desk, with my inclination being not to tap my IRA but definitely willing to consider it. One thing I would want to calculate is what would my retirement accounts look like in 5 years, 10 years, after I bought the house taking into account what I could contribute, conservative estimated growth of the accounts, and tax benefits of home ownership. I would also want to work things out where I could eliminate PMI rather than simply reduce it.

Whatever you decide, best wishes to you. You are doing great!

sakigt · #9 (**permalink**) 07-18-2006, 07:17 AM

Since you are a first-time homebuyer, look at the programs in your state. Although I have to automatically pay PMI for the first 2 years, the $25,000 downpayment assistance I received will end that. I put $1,500 cash down on my place total. If you could find a similar program in your state, you could reinvest that money you would have otherwise had to use as a downpayment. Perhaps use it to pay off your home sooner

flash · #10 (**permalink**) 07-18-2006, 04:26 PM

Before I considered # and %'s, I'd look at why you want a house right now. Besides the downpayment, there are quite a few costs with owning. And you only receive all the first time buyer perks once. Is there any chance you will relocate within a year or two?

Not to discourage you from buying a house. It's just not always the best financial investment, and if you are looking at pulling out Roth or other investments, you need to make sure you look at the big picture.

autoxer · #11 (**permalink**) 07-18-2006, 06:01 PM

Thanks for all of the input everyone. I feel better about separating my two goals. I have started a dedicated house downpayment savings account, to defer me from using my Roth contributions. As soon as I have eliminated all of my debt, I'm going to pretend I have the mortgage by sending the amount to my ING account.

Quote:

Originally Posted by disneysteve

Well, my PITI is lower, about 12% of income. And my savings are higher, about 27% of income.

I figure it will become a smaller portion as wages keep up with inflation while the payment stays the same, so what was your PITI / income ratio like when you first got a mortgage?

Quote:

Originally Posted by sakigt

Since you are a first-time homebuyer, look at the programs in your state. Although I have to automatically pay PMI for the first 2 years, the $25,000 downpayment assistance I received will end that. I put $1,500 cash down on my place total. If you could find a similar program in your state, you could reinvest that money you would have otherwise had to use as a downpayment. Perhaps use it to pay off your home sooner

I've been researching programs, but they are mostly for bad credit or no downpayment buyers. And the program with the good interest rates had very low income limits. What program did you use?

Quote:

Originally Posted by flash

Before I considered # and %'s, I'd look at why you want a house right now. Besides the downpayment, there are quite a few costs with owning. And you only receive all the first time buyer perks once. Is there any chance you will relocate within a year or two?

Not to discourage you from buying a house. It's just not always the best financial investment, and if you are looking at pulling out Roth or other investments, you need to make sure you look at the big picture.

I plan on staying here long term. I have been working for the family business for 5 years and will continue to do so. I don't need to buy a house, I just want a space that I can call my own and do what I want to it. I have been doing my research, changing my spending habits and eliminating debt so that I can get it done. I'll determine how much I can get pre-approved for without using any Roth money and start shopping for a house, probably late this year. If I can't find anything reasonable within my range, then I'll keep saving.

disneysteve · #12 (**permalink**) 07-18-2006, 07:19 PM

Quote:

Originally Posted by autoxer

I figure it will become a smaller portion as wages keep up with inflation while the payment stays the same, so what was your PITI / income ratio like when you first got a mortgage?

Good point, though in our case not a big difference. When we bought the house in 1994, we were at about 14%. Our income has risen, but so have our property taxes. We chose to by a relatively modest, affordable home. Our purchase price was well under 2 times our income at the time and we put down 20%.

sakigt · #13 (**permalink**) 07-19-2006, 08:03 AM

Quote:

Originally Posted by autoxer

I've been researching programs, but they are mostly for bad credit or no downpayment buyers. And the program with the good interest rates had very low income limits. What program did you use?

Mine was a no downpayment program. You have to have a low income and buy a modestly priced home. I have the info for Florida, but your best bet it to contact one of the listed supporting bank's representatives and see what they can do for you.

They get their commission, whether or not the government helps you out.