patrick.net

how old are you?

I think you'd be hard pressed to not contribute to 401k, considering you make already minimum 100% of your 5% (employer match) not including any other increase, either way, 401k will most likely out perform your home...

This all comes down to the opportunity cost argument. Maybe you can find a happy medium? How much do you contribute now? I would do 5% (so you get the full match) then save the rest

That employer match is a fantastic benefit -- it's essentially a 100% return on your savings even if the value of your 401(k) doesn't move at all! (Looked at another way, your 401(k) could lose up to half the value of what you paid into it in the past year and you're still ahead of the game if your employer had been matching your contributions!)

Normally I'd recommend buying, even with a high LTV ratio, because there are few safe investments in the world that pay out returns that are higher than the return you get in paying off your mortgage early. But a matched 401(k) makes it tough to decide.

How much do you put into your 401(k) every month? How much is your rent per month? What's the value of the homes you're looking at? Your question really can't be answered without filling in numbers.

Employee match is hard to beat deal. That's 100% return on investment guranteed. 401k is something you will need in the future. I'd definitely not skimp on it.

What you're basically saying is that, you haven't saved enough for 3.5%, don't have money now, and you'd like to tap on your retirement fund to buy something. Man, that is poor decision, and there must be a reason why you end up with this situation. I am not gonna tell you should have done this and that stuff. The thing I can tell you is, you'd be better figure out why this happened, adjust yourself according to that and start building your own nest egg, otherwise you're going to be left out paying someone else's mortgage.

I'd say the depressed market such as yours is not going to bounce up in a day, so you got time to sort things out and build your own while you're renting.

Regarding to your question, I think it all depends on the numbers. Can't get you any answer w/o those numbers.

LOL...LMFAO....

Assuming like most posters here that you are in a city area of California......

HOW THE HECK DO YOU AFFORD A $250-500K MORTGAGE BUT YOU CAN'T SAVE 3.5% DOWN IN A SHORT PERIOD OF TIME.....$10.5-17.5K?!?!?!??!?!?!?!?!?!

Assuming an income of $80K, a current rent of $1500, and no deductions....you should be able to EASILY save $1500/mo(your take home should be ~$4200/MO.....SO $18k IN ONE YEAR!!!!!!

Anything I'm missing here?

You know what happens when you assume.....

No savings b/c is very clear and precise:
1. Wasn't able to save the $ due to family member sick for a few years and they had no insurance, so I had tremendous amount of medical bills to take care of.
2. I guess no one here knows how much child support an spousal support can dig into your "take home" per month.
3. Not in California

I agree with some of the comments on the 100% return with the match, hence the difficult scenario.. Then again, what do I become a lifelong renter?

I have thought of investing the max possible "for me" in the 401K then 1-2 yrs borrow up to 50% for the down payment, but it might get messy afterwards:
1.mortgage payment
2.401K contribution
3. payments towards the 401K loan..So I could reduce contributions at that point , but that's not a good idea.

WUANAME,

It's tough not to contribute to a 401K that is employee matching 5%... My employer doesn't match and I can't take a loan on my 401K... (company cheaped out and didn't give that option). So any withdrawal from my 401K would be a hardship withdrawal.... I invested heavily in my 401K in 2008 thru end of 2010. (10% of my income). So i got a really good nest egg built!

I decided to stop all my 401K contributions to seriously save for a downpayment starting in 2011... and haven't regretted that decision. The stock market is pretty bloated right now... More downside risk then upside risk after the run from DOW 6000.

Housing has downside risk as well though... But to me it sounds like by the time you have a decent sized downpayment you'll know more about where the housing market is heading.

I like SF Ace's idea of continuing to invest in your 401K and then borrowing against it for your downpayment money... You're paying yourself the interest (in after tax dollars ... People make far to much on the whole double tax issue of taking a loan.. The amount you are double taxed on is so little it's not worth considering... and is still better than paying a bank the interest).

I on the other hand didn't have that option... And I didn't really see investing in the market as it was approaching 13000K as having much upside in the near term.

Maybe try to save 10% atleast, so you don't have to pay FHA mortgage insurance for the life of the loan.. But then again, FHA loans are assumable and that loan rate FHA loan might come in handy in 15 years when you go to sell....

Don't give up the match. It's free money.

If interest rates go up, you will probably be better off because prices could drop to compensate. The housing market should be relatively flat for a few years while recovering from the bubble, so there's not that much urgency here.

You shouldn't think too much about "paying someone else's mortgage." For most people, buying a house is forced savings because the overall return isn't that great, and instead you can save on your own terms, and get a match to boot. As long as you pay a reasonable amount of rent, what you're doing is best for your own security.

If you cannot save your down payment in addition to funding your 401(k), it's worth considering whether it might be risky for you to buy a house right now. What if you need a sudden big repair or have a few bad months with expenses? What if you need to move for a job? Etc.

wuaname says

Then again, what do I become a lifelong renter?

It seems like this is more of a psychological issue than a monetary issue, no? Or at least, you are convinced that you need to buy a house, and you're just asking if you're crazy for doing so instead of funding your 401(k)?

It's hard for any of us to answer that question because we're not in your exact scenario. My risk profile might make me less likely to compromise 401(k) savings and match, and instead buy a house, whereas yours may result in the reverse.

A few questions I would ask myself:
Is buying a house cheaper for you when doing a rent vs. buy (including PITI + maintenance + property tax, etc.)?
Is this really your last chance ever to buy a house? (if so, what are your fears? higher interest rates? higher prices? that your income won't go up?)
Could your job situation change? Could your family situation change (e.g. getting married/having kids/etc)?
What is the likelihood of your moving in the next 7-10 years?

I agree with all who said you should keep contributing your share to the max to get the max of company contribution. Free money.

Personally, I don't think anyone who has to make sacrifices to save up for a paltry 3.5% down payment should be buying a house at all.

If you can't make 20%, you can't afford a house. Period. Buying at 3.5% means you will be slave to that house for life.

StoutFiles says

Personally, I don’t think anyone who has to make sacrifices to save up for a paltry 3.5% down payment should be buying a house at all.
If you can’t make 20%, you can’t afford a house. Period. Buying at 3.5% means you will be slave to that house for life.

This, but on the flip side you can walk away when you are heavily upside down on your mortgage - at the cost of taxpayers.

StoutFiles says

Personally, I don’t think anyone who has to make sacrifices to save up for a paltry 3.5% down payment should be buying a house at all.
If you can’t make 20%, you can’t afford a house. Period. Buying at 3.5% means you will be slave to that house for life.

I can put in more than 20% DP but I am intrigued by the 3.5% FHA loans. I can easily get the 3.5% back by squatting 12-18 months.

A lot of interesting comments.

Does anyone have a statistic of foreclosures on FHA / 3.5% down vs those that put 20% down? Obviously I was wiser 5 years ago and didn't buy vs. getting into a an ARM or one of those 80/20's with little or no money down and be upside down today...

Yes, it is part mental about buy vs rent.. especially when you do the math... in 5 years I've paid $65K in rent.

Plus you have properties going for a 1/3 of what they were going for before in very good areas, not the ghetto, etc..

Valid point, what if a repair / emergency were to occur... I would have a cushion before making a home purchase... I'm not looking to make the decision tomorrow, nor next month, etc.. As we know prices aren't going up any time soon..

As others have said, you should definitely contribute up to the employer match, that is money you are leaving on the table otherwise and and a 100% return. But 5% (10% total with employer contribution) isn't much and should still allow you to save money on top of that. If you don't have that much wiggle room in your budget I would advise against buying right now.

Also as others have said, you should aim for 20% even if it takes a few years, it will prove to yourself that you can actually afford the financial commitment. I don't think housing is suddenly going to skyrocket back up, so I wouldn't feel pressured to buy now.

I still rent when others I know in similar financial situations bought. Sure I'm paying somebody else's mortgage, but the small amount of rent I pay compared to others mortgages allows my wife and I to save or invest significantly more money. I feel much better with the financial freedom I have, than they do trapped under such a huge financial commitment every month.

I have lowered my 401k contributions in the short term to save more aggressively for a down payment. Previously I was maxing a 401k and my Roth. I want to be ready with 20% or hopefully much more once I think home prices are reasonable again. But no rush, if homes do come back to normal in Los Angeles on the westside in the next five years I'll be ready, if they don't I'll continue to rent much cheaper and invest the difference.

wuaname says

You know what happens when you assume…..
No savings b/c is very clear and precise:
1. Wasn’t able to save the $ due to family member sick for a few years and they had no insurance, so I had tremendous amount of medical bills to take care of.
2. I guess no one here knows how much child support an spousal support can dig into your “take home” per month.
3. Not in California
I agree with some of the comments on the 100% return with the match, hence the difficult scenario.. Then again, what do I become a lifelong renter?
I have thought of investing the max possible “for me” in the 401K then 1-2 yrs borrow up to 50% for the down payment, but it might get messy afterwards:
1.mortgage payment
2.401K contribution
3. payments towards the 401K loan..So I could reduce contributions at that point , but that’s not a good idea.

StoutFiles says

Personally, I don’t think anyone who has to make sacrifices to save up for a paltry 3.5% down payment should be buying a house at all.
If you can’t make 20%, you can’t afford a house. Period. Buying at 3.5% means you will be slave to that house for life.

Excactly. Again, why are you wanting to buy a house?

Are you a first time homebuyer?

One option would be to put some your downpayment money into a Roth IRA....You can use up to 10,000k from a Roth IRA towards the purchase of a first home.

The definition of first home is that you haven't owned a home in three years.

This would be a good strategy if you aren't sure what you want to do.

If it were me, I would at least contribute the 5% to get the match.

--

One more idea: why don't you take some money out of your 401k and move it to another 401k where they allow loans?

Even without the matching it doesn't make sense to reduce your 401K contributions. Max that baby out. Its all pre-tax money. The biggest two tax breaks for the average middle class worker are the 401K and MID (mortgage interest deduction).

I agree with most people on this site. One should not buy a house without having at least 20% down payment AND 6 months of expenses saved up. I'm not saying you should put 20% down, just that you should HAVE it. The decision on how much to put down is very individual, but how much you should have is not...

Don't forget you can take a loan from your 401K. Or if you have an IRA you can withdraw up to 10K penalty free (for first time home buyers)...

@rob8024

You are incorrect. A ROTH IRA has no penalties for withdrawing anything less then the contributions.

A (traditional) SIMPLE or ROLLOVER IRA is the one with the 10K penalty free limit.

In both cases you have to pay INCOME TAX (the ROTH you paid it before putting it in).

contribute to your retirement plan first, then buy a home.
otherwise it's mortgaging your future for present gratification.

wuaname says

Yes, it is part mental about buy vs rent.. especially when you do the math… in 5 years I’ve paid $65K in rent.

Do you think buying will cost you less than $1083/month? Include insurance, tax, maintenance, etc. There are many calculators that can help you out with this online. The best I've seen for is missionite's (http://submedian.blogspot.com/), but it may be somewhat California-centric.

I'm with some of the others here that 3.5% is an extremely low down payment, and our government should not be subsidizing loans this way. For many people, it is very risky to be that close to the margins. The government is basically trying to cause Bubble Part 2.

Well my point is that the original poster could both save for retirement, AND be putting money away for their house downpayment using a Roth IRA; basically pushing the decision about how to use the fund off until later.

More about using an IRA for a down payment for first time home buyers.

http://www.fool.com/money/allaboutiras/allaboutiras12.htm

You know what happens when you assume.....

1. Not in CA

No savings b/c is very clear and precise:
1. Wasn't able to save the $ due to family member sick for a few years and they had no insurance, so I had tremendous amount of medical bills to take care of.
2. I guess no one here knows how much child support an spousal support can dig into your "take home" per month.

I agree with some of the comments on the 100% return with the match, hence the difficult scenario.. Then again, what do I become a lifelong renter?

I have thought of investing the max possible "for me" in the 401K then 1-2 yrs borrow up to 50% for the down payment, but it might get messy afterwards:
1.mortgage payment
2.401K contribution
3. payments towards the 401K loan..So I could reduce contributions at that point , but that's not a good idea.

401k, you can borrow against your 401k if you are a first time buyer at a very low rate.

Another option is to just take an early withdrawal and suck up that penalty. Paying 10% more tax on 2x the money beats the pants off of paying normal tax on 1x the money. Assuming you've been saving for a few years already, you might have enough to do that now.

Locking in a low interest on a fairly-priced home that you plan to die in should only prove to be a bad move if you die too soon, or get forced out of it by miscalculation or hardship. Otherwise, your earning power should grow while your housing payment stays fixed.

So it might make sense to buy sooner rather than later to guarantee a low rate. Be sure to account for property taxes, insurance, maintenance, and changes in transportation and utility costs --in addition to the payment.