Author Topic: Smartest Way to Buy a Home  (Read 3474 times)

Carini

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Smartest Way to Buy a Home
« on: March 18, 2016, 08:35:45 AM »
Ok, bear with me. I'm here to learn, and some of these questions might be really simple. There's a decent chance that I'll be changing jobs soon and that means buying a new house in a different area. Our goal is to upgrade the quality of home we live in when we move, not have to pay PMI, and borrow the money the smartest way possible.

I'm going to lay out all of the possible ways I could receive money to buy a new house, and let the conversation start from there. I'm trying to wrap my head around what will make the most sense.

-We still owe around 80k on the house we are in now, and it was recently appraised at 140k, but I think that's a little high to be honest.  I'm also afraid of how long it will take to sell. HUGE buyer's market here and even really nice homes can sit forever. 

- Our max amount for a new home purchase will probably be around 200k (Probably more like 180k). We'd be living in a cheap part of the country.

- We would probably be starting another 30 year term, which is hard to swallow....  I'm 38

- I have 90k in a 403(b) that I can borrow money from over 10 years, and the rate is lower than current mortgage rates, plus I'm paying myself back and the money stays in the market while I do that. I'm thinking of borrowing a decent amount of this to use as a down payment to avoid PMI.

- I also have the option to just withdraw some of this money to use as a down payment (I'll incur a total hit of 30% when this is all said and done though) but it would be less I'd have to pay back and lower my payments per month.

How should I be thinking of approaching this? 


little_brown_dog

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Re: Smartest Way to Buy a Home
« Reply #1 on: March 18, 2016, 09:16:47 AM »
I'm a bit confused - to avoid PMI you typically need a 20% down payment. 20% of 200k would only be 40k. Do you need to take out a 403b loan to fund a 40k down payment? Do you have any cash savings/efund? Can you piece it together with whatever you net off the sale and saving some more? I don't know your circumstances, but I am hesitant to recommend taking out a loan (even a low interest one) for something that you might otherwise find in your budget or current assets.
« Last Edit: March 18, 2016, 09:19:26 AM by little_brown_dog »

zolotiyeruki

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Re: Smartest Way to Buy a Home
« Reply #2 on: March 18, 2016, 09:18:09 AM »
A couple thoughts come to mind:
1) the change is not a sure thing, so keep that in perspective.
2) if you're in a cheap part of the country, $180 is going to buy you a LOT of house.  How much house do you actually need, and why?  Could you buy a smaller and/or cheaper home with good bones, and fix/renovate/upgrade it gradually as you have the funds?
3) you could rent in the new location until your current home sells, then use that equity for your down payment

slugline

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Re: Smartest Way to Buy a Home
« Reply #3 on: March 18, 2016, 09:26:01 AM »
Why do you think your retirement money stays in the market if you've borrowed it for another purpose?

To me it looks like the smartest way to go about this would be to rent in the new area until your old house sells, then use the proceeds as the downpayment on a new house. (I'm assuming that you lack the typical 20% needed to avoid PMI at the moment and can't save it in time for the move.)
« Last Edit: March 18, 2016, 09:31:27 AM by slugline »

ShoulderThingThatGoesUp

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Re: Smartest Way to Buy a Home
« Reply #4 on: March 18, 2016, 09:50:47 AM »
I agree, rent a house in the new area -if at all possible since IIRC you have kids in school.

Carini

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Re: Smartest Way to Buy a Home
« Reply #5 on: March 18, 2016, 11:14:19 AM »
Why do you think your retirement money stays in the market if you've borrowed it for another purpose?

To me it looks like the smartest way to go about this would be to rent in the new area until your old house sells, then use the proceeds as the downpayment on a new house. (I'm assuming that you lack the typical 20% needed to avoid PMI at the moment and can't save it in time for the move.)

That's how it was explained to me by TIAA-CREF yesterday. I guess selling the other house first makes sense, except like I explained, houses are taking forever to sell in our town and there are so many for sale. I'm also not keen on renting a home with 3 young kids.

zolotiyeruki

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Re: Smartest Way to Buy a Home
« Reply #6 on: March 18, 2016, 11:22:09 AM »
If you're sure that your move will happen, you *could* list your home now, wait for it to sell, then rent (in your current area if the job change hasn't happened yet, in the new area if it has) while you househunt.

Fishindude

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Re: Smartest Way to Buy a Home
« Reply #7 on: March 18, 2016, 11:31:55 AM »
Stay out of the 403(b), that shouldn't be a consideration, it's for retirement.
If you don't have 20% for a down payment laying around somewhere else or a rich uncle who will give it to you, selling your home to utilize those proceeds is really your only option.  I'd put your place up for sale now, then do some high speed house hunting when it sells. This way you won't have a rent payment plus a house payment.

slugline

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Re: Smartest Way to Buy a Home
« Reply #8 on: March 18, 2016, 01:25:06 PM »
Why do you think your retirement money stays in the market if you've borrowed it for another purpose?

That's how it was explained to me by TIAA-CREF yesterday.

This is the way I see it: If you start with $90K in your retirement account and borrow $40K (20% downpayment on a $200K house) that will leave $50K in the account. That remaining $50K is still in the market earning returns.

The $40K you borrowed, however, is not in the market; it becomes your equity stake in the new house. Yes, the loan eventually gets paid back into your 403(b) with interest, but that interest isn't being earned in the market, it's coming out of your future paycheck. The gains that the $40K could be making during the ten-year loan period is your opportunity cost for the loan.

Jack

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Re: Smartest Way to Buy a Home
« Reply #9 on: March 18, 2016, 01:59:55 PM »
Why do you think your retirement money stays in the market if you've borrowed it for another purpose?

That's how it was explained to me by TIAA-CREF yesterday.

This is the way I see it: If you start with $90K in your retirement account and borrow $40K (20% downpayment on a $200K house) that will leave $50K in the account. That remaining $50K is still in the market earning returns.

The $40K you borrowed, however, is not in the market; it becomes your equity stake in the new house. Yes, the loan eventually gets paid back into your 403(b) with interest, but that interest isn't being earned in the market, it's coming out of your future paycheck. The gains that the $40K could be making during the ten-year loan period is your opportunity cost for the loan.

It can also be proven by contradiction: if the $40k did remain in the market, then it would essentially turn the 403(b) into a margin trading account. I highly doubt such a thing would be allowed.

SeanMC

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Re: Smartest Way to Buy a Home
« Reply #10 on: March 18, 2016, 02:50:15 PM »
If it might be slow to sell the current house and it is very likely that you are going to move, then get your current house on the market ASAP.

Whether or not you rent/buy in the new location, you will still have the problem that you will be making payments on this one until you sell it. Every additional month your house is on the market is pure loss. So get the ball rolling NOW.

If the house sells before you move, you'll know how much equity you got out of it and can put in a down payment.

Next - I would not advise taking money from a 403(b) to get a better mortgage rate or be able to afford a more pricey house. The smartest way to buy a house is to buy one that you can afford. For me, taking money out of an underfunded retirement account means you cannot afford the house you are seeking to buy. An upgrade in the quality of house you have now is not worth the downgrade in the quality of life you will have if you need to exit the workforce as you age and do not have sufficient assets.