Author Topic: Where to start?  (Read 5478 times)

eecyclone

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Where to start?
« on: April 11, 2012, 10:53:42 AM »
I would like input from the MMM community on my current situation in regards to personal finance. I graduated at 22 and began earning about 55k a year. I am almost 24 and earning about 60k a year.

My assets are as follows:
old 401k: 21,000 (6,000 is from Roth contributions)
new 401k: 3,100
Roth IRA: 5,200
Cash: 6,000

I also have a car loan and student loans that I am paying back.
Car: 11,000 @ 3.75%, for 44 more months
Student loan: 14,000 @ 0% (from my parents), 35 more months

My current monthly budget includes pre-tax retirement savings to my 401k of 25% (about $1250/month) 6% of this is matched 50% by my employer.
The rest includes:
Rent - $725
Student loans - $400
Car payment - $350 (actualy payment amount is 275 but I have been overpaying by 75 a month)
insurance -  $166
Utilities -  $150
auto gas varies but averages about $200
Groceries - around $150
Cell phone - $30

I would like to get your input on purchasing a house within the next year. There are nice houses available in my area starting at about $100k. When I initially funded the Roth IRA, I had planned on using the first time homebuyer clause to access those funds. I believe I could roll-over my old 401k's roth contributions into the Roth IRA. If I did that, between the Roth IRA, and cash savings, I would have close to the recommended 20% for a down payment on a house.

My thinking is that the sooner I purchase a house, I will be able to save more money because of my high rent. At current interest rates, even a $90,000 mortgage is only $350 a month for 30 years. Adding in $200 a month tax and insurance, I'm still paying less than my current rent. I think this would allow me to build equity in a home instead of paying rent, while also saving money by lower monthly housing costs.

Long-term, I would like to be a landlord so ideally the house I live in would be able to rent out after its paid for or when I'm ready to move on. So when I buy the house I also need to somehow balance paying it off and saving a downpayment for another home.

What are your thoughts? In my situation is waiting to save a 20% down payment really necessary? Is it a terrible idea to tap into retirement savings to fund a down payment? Should I finance more of the house because of current interest rates on mortgages?


fiveoh

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Re: Where to start?
« Reply #1 on: April 11, 2012, 11:51:36 AM »
I would never buy a home and pay PMI. Its just throwing that money away.  IF you can qualify for a loan without pmi or put down 20% then go for it.  Otherwise I'd wait and save.  Just my .02.  :)

AJ

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Re: Where to start?
« Reply #2 on: April 11, 2012, 12:11:54 PM »
At current interest rates, even a $90,000 mortgage is only $350 a month for 30 years.

What rate are you using? At $90k I have to plug in 2.5% to get down to $350 a month, and that doesn't count the PMI you'd pay. I'm seeing 3.875% 30 yr rate without paying points, which would make your payment $425 at $90k (plus PMI), or $375 at $80k. Also, figure 1-3% per year in home maintenance, depending on the age and condition of the home. You'll probably still come out ahead of renting, but not by a huge margin. Good plan, but no reason to rush it.

In my situation is waiting to save a 20% down payment really necessary?

Yes. Nothing about you situation warrants putting less than 20% down.

Is it a terrible idea to tap into retirement savings to fund a down payment?

Not terrible, but certainly not ideal. You can't ever put those contributions back. There is no rush to buy right now, the market isn't moving anywhere quickly.

Should I finance more of the house because of current interest rates on mortgages?

Yes, but not if means paying PMI. There's no reason to put more than 20% down, but don't finance more than that unless you can get a loan without PMI.

gooki

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Re: Where to start?
« Reply #3 on: April 11, 2012, 02:55:14 PM »
As you are young, are you planning to let out rooms in the home you plan to purchase while you live there? If so buying now (provided you can scrape together the 20% deposit) could be a financially smart move even if it means taking out some of your retirement savings. Even with just one additional tenant paying $400 a month for a room, it will cover over 1/2 the mortgage, insurance and tax costs. I'd plan to do this at least until you've paid off your car, and your parents.

PS can you live without a car, or live with a much cheaper and more fuel efficient car? Saving $100 a month on petrol and having no car repayment will give you a healthy $450 extra a month to pay down the mortgage quicker.
« Last Edit: April 11, 2012, 02:57:25 PM by gooki »

eecyclone

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Re: Where to start?
« Reply #4 on: April 12, 2012, 06:18:06 AM »
What rate are you using? At $90k I have to plug in 2.5% to get down to $350 a month, and that doesn't count the PMI you'd pay. I'm seeing 3.875% 30 yr rate without paying points, which would make your payment $425 at $90k (plus PMI), or $375 at $80k. Also, figure 1-3% per year in home maintenance, depending on the age and condition of the home. You'll probably still come out ahead of renting, but not by a huge margin. Good plan, but no reason to rush it.

You're right, I thought I had remembered those numbers from some research I had done a few days ago but I got something mixed up. Using a mortgage calculator, I get the same numbers you do.

Yes. Nothing about you situation warrants putting less than 20% down.

Okay, I like the idea of saving for 20% down and not having to pay PMI. On average, how much does PMI cost?

Not terrible, but certainly not ideal. You can't ever put those contributions back. There is no rush to buy right now, the market isn't moving anywhere quickly.

I am having trouble right now balancing investing for retirement and saving a down payment for a house. Right now I am doing 25% (company max for automatic withdrawals) to the 401k, but nothing to an IRA. If I were to put 5,000 a year into a Roth IRA in addition to that, it would be very tough to accumulate any funds for a house down payment.

Yes, but not if means paying PMI. There's no reason to put more than 20% down, but don't finance more than that unless you can get a loan without PMI.

Perfect, sounds like I am going to be saving for a 20% down payment. I'm not in a hurry, but just want to make the most of my monthly budget.

eecyclone

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Re: Where to start?
« Reply #5 on: April 12, 2012, 06:24:23 AM »
As you are young, are you planning to let out rooms in the home you plan to purchase while you live there? If so buying now (provided you can scrape together the 20% deposit) could be a financially smart move even if it means taking out some of your retirement savings. Even with just one additional tenant paying $400 a month for a room, it will cover over 1/2 the mortgage, insurance and tax costs. I'd plan to do this at least until you've paid off your car, and your parents.

I am new to the area and don't know any people around here that I could rent a room to. I would say it makes me uncomfortable letting a stranger live in my home with me.

PS can you live without a car, or live with a much cheaper and more fuel efficient car? Saving $100 a month on petrol and having no car repayment will give you a healthy $450 extra a month to pay down the mortgage quicker.

While I live close to work and could bike to/from work on a day-to-day basis, my car is necessary for visiting my out-of-town family and friends occasionally. My car gets about 30mpg on the highway, and ~20mpg in the city for when I'm running errands. I could probably get by with a cheaper car, but I think the conveniences are worth the extra money when it comes to the longer trips.

arebelspy

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Re: Where to start?
« Reply #6 on: April 12, 2012, 08:19:28 AM »
As a first-time homebuyer, you can quite likely qualify for an FHA loan or something similar, where you only put a low percent down, 3.5 to 5%, and still don't have to pay PMI.

 As others have said, you definitely don't want to be paying PMI. However, that doesn't necessarily mean that you do have to put 20% down.
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windawake

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Re: Where to start?
« Reply #7 on: April 12, 2012, 08:38:41 AM »
Hey, I just wanted to plug Craigslist as a great way to meet potential roommates.  I met mine on there and a bunch of my friends met theirs through there and all of us have had good, of not great, experiences. You just have to vet them and meet up a few times before making anything official to make sure you'll get along. Also having a friendly roommate would be a gateway to meeting new people so you might now have to drive to visit distant friends as much.

Also, I use my car (with similar mpg, 30) only to visit friends and family out of town and only go through one tank per month (or 300 miles).  It sounds like you don't currently bike to work or for running errands which is probably costing you over $100/mo.

AJ

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Re: Where to start?
« Reply #8 on: April 12, 2012, 11:02:26 AM »
As a first-time homebuyer, you can quite likely qualify for an FHA loan or something similar, where you only put a low percent down, 3.5 to 5%, and still don't have to pay PMI.

This isn't exactly correct. Technically, FHA loans don't have PMI, but they do carry Mortgage Insurance Premium (MIP) which is basically the same thing. I would contend that MIP is actually worse, because you have to pay a portion of it upfront, and the rate of MIP has increased significantly in the last few years.

Also, FHA loans aren't for first time homebuyers. Anyone can get FHA, but they are typically aimed at buyers with little down and/or lower credit than would qualify for conventional. Because of the lower qualifying standards, FHA also carries a higher rate than conventional.

The only loans I am aware of that require <20% down and still don't carry PMI are VA loans and 80/10/10 loans (if anyone is still making those). VA would definitely be worth looking into if the OP qualifies.

Edit: Navy FCU has a 100% program with no PMI, but they charge a 1.75% fee to participate, and it comes with a higher rate. Not sure that's a great deal, but its another option.

I am having trouble right now balancing investing for retirement and saving a down payment for a house. Right now I am doing 25% (company max for automatic withdrawals) to the 401k, but nothing to an IRA. If I were to put 5,000 a year into a Roth IRA in addition to that, it would be very tough to accumulate any funds for a house down payment.

Another option to consider is borrowing from your 401k for the down payment funds. There are a lot of factors to weigh there. A 401k loan will be due immediately if you leave your job, you will probably pay an administrative fee to obtain the loan, and you will lose out on market gains from those funds until you pay it back. But on the plus side, you don't have to actually withdraw the funds (i.e. you get to put the funds back), and the interest you pay goes to yourself in the 401k. Just one more option to consider. It is what I did, but that doesn't mean it would be a good choice for everybody.
« Last Edit: April 12, 2012, 01:22:48 PM by AJ »

eecyclone

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Re: Where to start?
« Reply #9 on: May 04, 2012, 07:22:04 AM »
Another option to consider is borrowing from your 401k for the down payment funds. There are a lot of factors to weigh there. A 401k loan will be due immediately if you leave your job, you will probably pay an administrative fee to obtain the loan, and you will lose out on market gains from those funds until you pay it back. But on the plus side, you don't have to actually withdraw the funds (i.e. you get to put the funds back), and the interest you pay goes to yourself in the 401k. Just one more option to consider. It is what I did, but that doesn't mean it would be a good choice for everybody.

I'm curious what other people think about the 401k loan option. From what I have read about it, doing this would prevent me from making contributions to my 401k until the loan was repaid?

Also, its my understanding that the loan gets repaid with after tax dollars.?

What are the standard terms for 401k loans? I have read maximum of 50% of savings, usually repaid over 5 years. Since my 401k loan would be less than I'm currently contributing annually to my 401k, I think I would be able to repay the loan quicker than 1 year.

velocistar237

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Re: Where to start?
« Reply #10 on: May 04, 2012, 08:59:14 AM »
This isn't exactly correct. Technically, FHA loans don't have PMI, but they do carry Mortgage Insurance Premium (MIP) which is basically the same thing. I would contend that MIP is actually worse, because you have to pay a portion of it upfront, and the rate of MIP has increased significantly in the last few years.

It's also worse because "The insurance must be in force for at least 5 years." You can't do an early cancellation earlier than that without refinancing.

gecko10x

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Re: Where to start?
« Reply #11 on: May 04, 2012, 11:11:51 AM »
I'm curious what other people think about the 401k loan option. From what I have read about it, doing this would prevent me from making contributions to my 401k until the loan was repaid?

Also, its my understanding that the loan gets repaid with after tax dollars.?

What are the standard terms for 401k loans? I have read maximum of 50% of savings, usually repaid over 5 years. Since my 401k loan would be less than I'm currently contributing annually to my 401k, I think I would be able to repay the loan quicker than 1 year.

From what I can tell, the terms and options vary greatly by plan. With my plan, I can borrow up to 50% for 5 years, unless it's for a primary residence, and then it can be for 10yrs. It does not prevent me from making contributions.