Author Topic: Considering Buying - Downpayment Options?  (Read 2461 times)

therethere

  • Pencil Stache
  • ****
  • Posts: 768
Considering Buying - Downpayment Options?
« on: January 26, 2017, 02:01:29 PM »
I'm considering buying a house this year. Still on the fence as to whether the market is too inflated or its a worthwhile purchase blah blah blah. But those questions aside, I'd like to figure out the strategy of how much of a downpayment should I put down and how to get it.

In my area houses I would be interested in range from 260-325k. The thought of pulling 60-65k out of my savings (almost 20% of our NW!) is a little sickening to say the least. So ideally I'd like to put as little down as possible. House prices in the area are high but I believe will be stable for the near future.

To be general we have:
40k would be available for a 401k loan.
55k in a taxable brokerage account (meant as a student loan payoff fund)
(-49k) in student loans at 3.45% - 577/month payment
39k in Roth contributions
5k emergency fund savings
Reducing after tax 401k and HSA contributions for 2017 could net about 10-15k while still letting us max 401k.

A few ideas I've heard but have not vetted:
1. I've heard some people talk about fronting the 20% with a 401k loan then immediately taking out a heloc to pay it back. How much of the downpayment could I predictably do this for 10%?
2. Take out a piggyback loan. Are these available in the current climate? What rates are we talking about for the 2nd loan. Any loan companies recommended for this?
3. Pay only 10% down and accept that PMI is countered by having extra 30k in VTSAX?
4. Cough up the 20%. Not exactly sure where I would pull from. Probably cash out entire brokerage account and take the rest from Roth contributions. But then I'd feel technically "in debt" again which is the main reason why I don't like this option.
5. What would change if I purchased a duplex or house with a mother-in-law rental for higher amount (450k-500k)?

Sorry for being a little spacey. All the details of homebuying are fairly new to me. I'm in a really hot market so if I do decide to start looking at houses I want to have all my ducks in a row.

« Last Edit: January 26, 2017, 02:08:10 PM by therethere »

therethere

  • Pencil Stache
  • ****
  • Posts: 768
Re: Considering Buying - Downpayment Options?
« Reply #1 on: January 26, 2017, 02:42:45 PM »
I would wait and focus on paying off the student loan early.  Then build up a bit more cash to be able to put down 20%.

The "problem" is we now have access to do a mega backdoor roth. So all our month savings is going to some retirement account vehicle and thus we are in a way living paycheck to paycheck. This year we have almost 16k of extra tax advantaged space we can't use. Since the rate on the loans are so low, and cashflow isn't a problem right now, I'd rather have money in a Roth IRA that I can pull out than paying extra towards the principal of the loans. The brokerage account was started with all the snowflake loan payments once I paid off all loans above 5%.

Yeah, it sounded like an optimal, mathematically correct idea at the time. But now having extra accounts is just making everything more entangled emotionally.

thenextguy

  • Stubble
  • **
  • Posts: 205
Re: Considering Buying - Downpayment Options?
« Reply #2 on: February 16, 2017, 04:03:23 PM »
Remember that you can use up to $10,000 from retirement accounts for a new home if you haven't owned a home in the previous 2 years.

http://www.kiplinger.com/article/retirement/T046-C001-S001-roth-ira-withdrawal-rules.html

If you have $10K in Roth earnings (beyond contributions) you can pull that out tax free.
« Last Edit: February 16, 2017, 04:05:09 PM by thenextguy »

Scortius

  • Bristles
  • ***
  • Posts: 472
Re: Considering Buying - Downpayment Options?
« Reply #3 on: February 21, 2017, 12:05:09 PM »
I'm in a similar situation as you are.  Looking to buy a primary residence soon.  It looks like i have access to a mega backdoor above and beyond the standard limits.  At the moment we're simply saving aggressively to hit our 20% goal and keeping that money liquid.  I figure the short-term cost of not investing that will be minimal.  Given that we are saving towards our target, I'm not actively taking advantage of our retirement options beyond the employer match.  Once we hit our down-payment goal (plus extra for closing costs and a cusion for hew house moving-in pains), I intend to pivot quickly towards maximizing all of our retirement allocations.  For reference, as of now I intend to apply for a 30-year fixed with the intention of not paying it off early and investing the different in tax-advantaged retirement accounts.

therethere

  • Pencil Stache
  • ****
  • Posts: 768
Re: Considering Buying - Downpayment Options?
« Reply #4 on: February 21, 2017, 12:25:40 PM »
Ah I love the much simpler method of just being able to save for a downpayment. That's the problem with being a constant optimizer is nothing is simple its all messy! Unfortunately, it would take years for us to save starting now, even with halting all our retirement savings. We are in the 25% bracket right now so maxing out the 401k is almost a must. That doesn't leave us too much leftover with our current spending plan and it would take 2-3 years to save for a 20% downpayment. Which at the rate houses and rates are going up is just too long. The past few years house prices have been going up faster than I could save 20%.

I anticipate being in a lower tax bracket in the upcoming years (drop from 25% to 15%). Thus making 401k contributions less advantageous. This also affects the student loan/brokerage problem too. If I clear out that account now I'm paying capital gains at 15%. I was hoping that I would not need to empty the account until we dropped into a lower bracket and would owe 0% on capital gains. It's only $1,500 in taxes so not a deal breaker but by using a 401k loan or Roth contributions I wouldn't be paying any tax on withdrawals.



Scortius

  • Bristles
  • ***
  • Posts: 472
Re: Considering Buying - Downpayment Options?
« Reply #5 on: February 21, 2017, 12:56:39 PM »
Yes, that's probably a key difference between us.  I would guess that I'm about half a year away (or less).  If I were looking at a 2 year horizon or more and assuming a relatively high income, I'd definitely max my pre-tax allocations (I think I may still be able to do that this year as it is).  Mega-backdoor contributions are post-tax though, so I wouldn't necessarily prioritize those.  I don't know much about 401k loans, but that may be a reasonable approach if you need a boost and you anticipate being able to pay it back quickly.  I would do the math and compare the results with simply putting post-tax retirement contributions into a high yield savings account.

I'm also a bit motivated to buy now while mortgage and inflation rates and are still so low, but then I don't want to get too caught up with market (mortgage) timing, so that's only a side consideration.

One thing I've been thinking about is riding a relatively small emergency fund if necessary due to 1) I am a relatively high earner in a stable job and could replace it quickly after the house purchase, 2) Once purchased, I may have access to HELOC funds as a replacement in the event of an emergency expense, 3) I have a small amount of retirement funds that I could liquidate against the 10% penalty if absolutely necessary, 4) if worst comes to worst, we could presumably get family support for a short term period or put it on a CC if the debt is small enough and we could pay it back before any interest hits.  If we buy the house and then I lose my job, we'd be in trouble either way, so there isn't really much point hedging against that very rare possibility.

Scortius

  • Bristles
  • ***
  • Posts: 472
Re: Considering Buying - Downpayment Options?
« Reply #6 on: February 21, 2017, 01:11:46 PM »
Also, after reading your post again, I would caution you from becoming too emotionally invested in any one type of investment vehicle.  Over a long enough horizon, the money in all of these accounts are fungible, and thus essentially just numbers.  It doesn't matter if you have more money in an IRA vs a house downpayment as long as the long-term result is more beneficial.  Consider that saving for a short period to hit 20% is somewhat of an investment equal to the amount per month of your PMI, as opposed to the alternative of the expected returns of a 401k investment minus the interest payments on a 401k loan.  In the end, they all just get added up to a number.  Also, if you like the idea of leveraging your assets (such as taking out a 401k loan), then you should consider a 30 year fixed mortgage as one of the best ways to create leverage in that by using your house as collateral you are taking out a loan at extremely advantageous rates with which you can then use the money received to generate higher returns in the market over the course of those 30 years.

Done by Forty

  • Stubble
  • **
  • Posts: 211
  • Location: Tempe, AZ
    • Done by Forty
Re: Considering Buying - Downpayment Options?
« Reply #7 on: February 22, 2017, 12:52:09 PM »
  Over a long enough horizon, the money in all of these accounts are fungible, and thus essentially just numbers.  It doesn't matter if you have more money in an IRA vs a house downpayment as long as the long-term result is more beneficial.

This. Where the downpayment comes from is somewhat arbitrary. The things that matter are the tax consequences and the opportunity costs, but the $60k or whatever you put down is the same cash, no matter its original source.

To the degree that you're comfortable with a 401k loan and you understand the consequences of, say, losing your job while in repayment (check with HR or your 401k plan administrator) it's an option, albeit one with significant opportunity costs. Still, those are somewhat unavoidable.  Saving up $60k in cash has plenty of opportunity costs on THOSE dollars, too.

As the prior posters said: the money in these accounts is fungible. My short answer advice is to make sure you avoid tax consequences. The rest is mostly up to you.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3440
Re: Considering Buying - Downpayment Options?
« Reply #8 on: February 23, 2017, 10:09:32 AM »
It sounds like you don't really want/need to buy a house. If the thought of a $60k downpayment makes you "sick" then I think you should just keep on trucking and max out all your tax advantaged accounts. Houses will still be there in a few years.

-W

Fishinshawn

  • 5 O'Clock Shadow
  • *
  • Posts: 52
Re: Considering Buying - Downpayment Options?
« Reply #9 on: March 05, 2017, 11:34:16 AM »
I can only say that for me personally I would rather pay off all existing debt, then save the 20% for a down payment. My wife and I live in a relatively lower COLA, and renting is cheaper then buying so we are putting away all the extra money we can. We have our 20% down payment, and a separate 10K emergency fund.  Just simply having enough money to pull from to meet your immediate financial needs to buy a house doesn't mean you should. In our case we have run scenarios that show if something happens to the house we could fix it, however we couldn't build our emergency fund back up at a reasonable pace while making a house payment and maintaining our existing savings goals. So home ownership is on hold until such time as rent gets high enough to make it an economic advantage to purchase.