How to best put together a down payment?

[Peachtea]

I'm trying to figure out how to best put together a down payment. About us: DH (34) and I (33) have a toddler (1). We moved to a new city last July and really like the neighborhood we're renting in. We're thinking of buying sometime in Spring 2025.

Houses in this neighborhood that suit our family go for between 280-350k. We would probably be aiming at around 315k based on the average home sold price. And so we will need a 60-70k down payment - we'd like to do 20% down to avoid PMI.

Assets:
Retirement accounts: ~410k (60k Roth IRAs).
Brokerage acct: 171k (10k bonds)
Other investments: 529s, HSAs, (federal) pension
Cash: 13k emergency fund

Liabilities:
Federal student loans: a ton that are 1.5 years away from PSLF forgiveness. Yes, I know the rules and have been keeping track, the gov records match mine so far.
Car loan: 17k at 2.99% (3 year loan that just started)

Income:
This is in flux because of the move and child. I will be taking a 15k pay cut eventually once my status goes from pandemic remote work to regular remote work. Date TBD, possibly in June or July? But then I will probably get a ~7k COLA raise next Jan. DH (now) works part time when he can. It was 10 hrs/week, but our kiddo finally started taking naps alone so now he's up to 20hrs. I estimate we'll end up 180k gross this year and next year 178k gross, but it's definitely an estimate.

Assuming 178k gross

Payroll deductions:
28k fed, state, OASDI
5k health insurance
5.5k HSA (employer also contributes)
45k 401k
6k mandatory pension contributions
Total post deductions: 88.5k

2024 Expenses:
45k living expenses (based on 2022 tracked, which is up from prior years with the move, having a baby, surprise mold issue etc.)
9k SL payments (paused right now, anticipated Aug 2023 restart, will be forgiven Fall 2024)
6k car loan (in 2023 we're using the EV tax credit for payments - I lowered my withholdings to account for the tax credit)

Leftover for other savings: 28.5K - usually 13k of this would go to Roth IRAs.

For 2023, we decided to finish funding the 529 accts to an amount we anticipate will grow to provide full tuition and room and board for 2 kids at the state flagship school. I just want the peace of mind of having that goal finished. I anticipate that will be done Aug 2023, right about when my SL payments will probably start back up. After Aug/SL payments restart, I anticipate having 1k/month to direct to cash savings.

We also contribute the max to our Roths, so right now $1080 a month. This could be redirected to cash savings for the rest of 2023 (and 2024) too.

Questions:

If we continue to contribute to the Roths that's only about 23k in cash by 2025. Should we stop Roth contributions so our cash fund will be ~45k by 2025? Or does it make more sense to just pay the taxes on selling bonds/stocks from the brokerage account and continue putting money into the Roths?

If we stop Roth contributions, we still need another 15-25k. I'm thinking it makes more sense to sell investments from the brokerage acct rather than withdrawing from the Roths or dropping our 401k contributions to matching? We save about 10k on taxes by maxing out the 401ks vs only matching, plus in 2024 another 2k or so in savings on SL payments since they are tied to AGI.

And if we sell from the brokerage acct, I'm planning on getting rid of the bonds first. Does that sound like a good idea? My understanding is that bonds are a tax drag in a taxable account anyways. The bonds are from when we first started investing, before we got comfortable with a higher stock asset allocation. And I now consider the (federal) pension to be our bond allocation.

A part of me also considers just selling 70k from brokerage, put it in cash savings, and then direct all future extra cash (after Roths) back to the brokerage acct. That way if we see something sooner we can jump on it. But we still would miss out unless we continuously get pre-approved for a mortgage. (Even now in winter, homes are sold within a week.) We'd have to pay a decent? amount in taxes, although I haven't calculated it yet. And both DH and I would like to wait until after the SLs are forgiven in 2024 to buy a house. That way we have better cash flow and don't have to worry about that monstrosity plus a mortgage. A mortgage etc will be much more than our rent, like 2400/month for mortgage, taxes, insurance compared to 1375/month in rent for our upcoming lease renewal, which is why we like the idea of more cash flow.

Another part of me wonders if we should buy at all. It's partly why I'm hesitant to mess up our current investments. Interest, even averaged out over 30 years, taxes and insurance are more than our rent. Let alone maintenance costs. Renting is also more flexible. We've been able to pick up and move on a dime several times when it's suited us for jobs, family, or to get away from noisy neighbors. We've been able to lower our costs by renting smaller spaces that match our current needs vs projecting out years in advance and by moving to cheaper neighborhoods/places we find. I.e., 10 years ago our rent was $1650...and now after moving up space wise it's only going to be $1375 (June 2023 renewal).

The last two paragraphs aren't really questions, so much as other considerations bouncing around in my head that might also be relevant to answering the other questions above.

Thoughts?

[Freedomin5]

Renting seems to make the most financial sense.

[Peachtea]

Renting seems to make the most financial sense.

Agreed, it is. Mostly because we're pretty good at finding affordable apartments with good landlords and don't mind smaller spaces. If we decided we needed more space or looked for a place with more of the "wants" (second toilet!!) that we'd be looking for in a house, then it would be closer to a wash long term.

We would be buying for lifestyle reasons not because it's financially better than renting. I'd just like to minimize the damage of making such a large purchase by putting together the down payment in a smart (tax wise etc) way.

[sonofsven]

Have you accounted for the taxes you will once the student loans are forgiven?

[Dicey]

Roths can't be replaced once you tap them, so...don't. I would lower the 401k contributions. Not necessarily to just the match, but not maxing 401ks out in order to save for a DP isn't the worst thing in the world. I'd also start an austerity spending program. The Frugalwoods No Spend Month and the dated, but classic "The Complete Tightwad Gazette" (blue cover) are excellent resources. In two years, you should be able to cash flow most, if not all of the down payment. Also, during inflationary times, paying PMI isn't necessarily a terrible decision.

HOWEVER, this is just what you could do. In your market, there's no way I would buy vs. rent, and I'm a huge RE fan. Keep renting, keep saving. Use high interest savings to help counter inflation for another few years and then revisit.

You're doing great so far!

[economista]

Have you accounted for the taxes you will once the student loans are forgiven?

There are no taxes owed on PSLF. Other forms of forgiveness do require you to pay taxes, but with PSLF you don't.

I am also planning to receive PSLF in September 2024. I've worked for the same federal government agency since before I graduated and entered my repayment period and am not worried at all about not getting it.

[Sandi_k]

+1 to @Dicey - the Roth space is the most valuable space you have; I would not use your Roths.

Between 401(k), Roths, HSA and pension, you're saving ~ $54k of $178k annually.That's nearly 30%, and it doesn't even count the 529 funding.

I think it's OK if you dial back the 401(k) for a couple of years, and build up your cash for a future DP.

We bought our first house with 10% down; it was a low-income buyer program, so we had no PMI. If you're *desperate* to get into a house, and things are slowing in your market, I'd be OK with 2 years of PMI - it would probably total under $1000 for those two years. But since the market is still hot-ish, you don't sound desperate, and interest rates are relatively high, I'd sit tight, and stash cash.

[Peachtea]

Roths can't be replaced once you tap them, so...don't. I would lower the 401k contributions. Not necessarily to just the match, but not maxing 401ks out in order to save for a DP isn't the worst thing in the world. I'd also start an austerity spending program. The Frugalwoods No Spend Month and the dated, but classic "The Complete Tightwad Gazette" (blue cover) are excellent resources. In two years, you should be able to cash flow most, if not all of the down payment. Also, during inflationary times, paying PMI isn't necessarily a terrible decision.

HOWEVER, this is just what you could do. In your market, there's no way I would buy vs. rent, and I'm a huge RE fan. Keep renting, keep saving. Use high interest savings to help counter inflation for another few years and then revisit.

You're doing great so far!

Thanks for the feedback. It's a bit depressing to hear that about buying since we relocated from Chicago to a "lower cost" small, university city, but it's reassuring in that it matches my own impression of the situation (and the NYTimes calculator). Locals here will think I'm crazy to say so, but Chicago can be so much cheaper in many ways.

Noted re the Roth space. Yeah, I'm loath to take funds from any of our investments. I'm still debating on not contributing to Roth vs lowering 401k. At our income level, we just get so much more upfront savings from the 401ks. But Roth IRAs are more flexible for later withdrawals.

We should definitely cut back now that we're past the blur of the first year of parenting and we know our expenses have inflated. There were lots of "who cares, it's just money" sarcastic/sad face jokes as we bought our way out of problems, stress purchased things (maybe this swaddle will magically make the baby sleep!), or paid $$ for convenience/time saving measures. I think we should easily be able to cut spending by 4-5k this year.

[Peachtea]

+1 to @Dicey - the Roth space is the most valuable space you have; I would not use your Roths.

Between 401(k), Roths, HSA and pension, you're saving ~ $54k of $178k annually.That's nearly 30%, and it doesn't even count the 529 funding.

I think it's OK if you dial back the 401(k) for a couple of years, and build up your cash for a future DP.

We bought our first house with 10% down; it was a low-income buyer program, so we had no PMI. If you're *desperate* to get into a house, and things are slowing in your market, I'd be OK with 2 years of PMI - it would probably total under $1000 for those two years. But since the market is still hot-ish, you don't sound desperate, and interest rates are relatively high, I'd sit tight, and stash cash.

We were putting 12k a year in 529s (this year 24k), plus 12k (now 13k) in Roth, and then an additional amount into brokerage. It was a high savings rate and it is still pretty decent. It just feels like we're a bit pinched because we're used to having more cash to direct to savings than we do now that our income has dropped and our expenses have gone up.

We're not in a hurry in the sense that we don't feel a house is necessary to raise our child and we don't feel renting is a waste of money. We do dream about a second toilet, the ability to make permanent changes like solid wood doors and interior soundproofing for the bedroom/office, setting up the kitchen exactly how DH would like it, growing some veggies in a backyard, and etc. And like most wants, we'd rather have them sooner than later!

I'm hoping that if we take a couple years to put together the down payment, the market will soften or interest rates will come down. If not, at least we'll have met some other financial goals in the meanwhile and staved off the inflated lifestyle for a couple more years. And it give us time to really consider if such a large purchase will be worth it (happiness/ lifes satisfaction wise).

[Peachtea]

Have you accounted for the taxes you will once the student loans are forgiven?

There are no taxes owed on PSLF. Other forms of forgiveness do require you to pay taxes, but with PSLF you don't.

I am also planning to receive PSLF in September 2024. I've worked for the same federal government agency since before I graduated and entered my repayment period and am not worried at all about not getting it.

We're 2024 PSLF cohorts! Same, I've been with the same federal agency since I graduated in 2014. I have no worries about getting (tax free) forgiveness.

[Bee21]

I would decrease the college fund contributions. Or pause it altogether until you get the downpayment together. Your child is a toddler,  there is plenty of time to fund it.

Also, you sound like someone who would be able to save up for the downpayment in 2 years, so I think you shouldn't touch investments. It takes a while to build them up, you will have to pay taxes, and saving agressively for a home creates a sense of urgency. Plus you like your current space, renting is cheaper than owning the way you describe it, so....

[lhamo]

I don't quite understand the reluctance to potentially tap the brokerage account funds.  Do you have any losses in there you could tax loss harvest to create a cash cushion for the down payment?  Or even funds with LTCG that would be taxed at a relatively low rate?  Given that CDs/MM accounts are now paying around 5% interest it might be a good time to move some money in those accounts into more liquid form -- maybe not enough for the whole downpayment, but at least enough to cover the gap between what you think you need and what you can save with current income.

It does seem like continuing to rent for longer might be the better choice.  So if you are reluctant to take a small tax hit on the brokerage funds, maybe just keep plugging along with investing and saving and think of the brokerage as a backup plan for 2-5 years down the road if you do find the right place and decide to buy.  Worst case scenario you don't have quite as large a down payment when the right house pops up, but with your income and savings rate that is not a huge problem -- having to pay PMI for a few months or even a couple of years is probably not going to cost you that much.