Home Savings vs Retirement Savings

[lucija]

As far as OP's original question goes... I agree completely with Lusitan...

Originally Posted by Lusitan

Just my opinion ...

I'd max out the Roth and 401(k) first, and then save the remainder for a down payment on a home.

As your earnings increase you'll be able to pick up steam and increase your savings for the down payment, but the tax-favored retirement plans limit annual contributions so you won't be able to make up for lost time in those accounts (at least not until you hit 50 and get the ability to make "catch up contributions ... but clearly that's not in your plans!).

Not to mention that with stocks likely entering a bear market it's a great time for a young investor to start saving as much as possible. And the housing market looks like it will continue to sink or at least remain flat (thus sinking in real dollar terms) for the next few years, so it's not a bad idea to take it slow when it comes to buying a house.

Also - not sure what your situation is or what type of home you're looking at, but maybe you can look at buying a smaller place for your first home.

Just my two-cents.

Also, I did not get a sense you can't wait to own a place... why rush into ownership? A condo/house will come along with additional demands on your wallet and time (maitenance, repairs, improvement, cond fees, RE tax, etc.)

[DaveNineFive]

Thanks again to everyone for the input. I was curious if everyone would highly encourage buy immediately, or if I'm alright renting for a few more years. I've been told by some older wiser relatives and friends that they wish they'd bought a home young. But they do not share the goals of FI and RE, so I think they're coming from a different perspective.

I also don't like living in the city, and I'd much rather buy a home a few miles out (or perhaps find a different place altogether). It would have been an option to buy now and sell in a couple of years, but all of you have confirmed my initial gut feeling, and I'm going to focus on my 401k and Roth IRA for the time being. I'll continue putting some cash aside to buy a home in 2-5 years instead of rushing into it now.

Thanks again! Love this forum!

[Lusitan]

Sounds like a good plan, Dave. And by the way, you're off to a great start so just keep doing what you're doing.

[seabourne]

A couple of thoughts from a 29yrold in Chicago who bought a little over a year ago:

1)if you think that you don't want to stay in the city for more than a couple of years, don't buy here. just don't. Rule of thumb is that staying less than about 7 years in a place you are better off renting, and that would be an average market. Are you betting that the Chicago market is going to strongly bounce back before you plan to move out? Living in a new condo (Uptown) I wouldn't take that bet. there are a lot of good deals out there compared to a couple of years ago that probably make sense longterm, but the friction costs would kill you.

2) are you comfortable renting in a place that isn't as nice as the one that you would buy? I rented in a studio for 3 years or so and a friend's second bedroom for another year for about $700 a month. I would never have been willing to buy the studio I was living in, but was happy to stay there (disclaimer: I have a habit of living on old wooden boats - old small slightly dirty places are no problem for me) for the ability to save the difference. I live in amuch nicer place now because of that.

3) you are currently flexible. you don't know exactly where outside the city you want to buy. Use your ability to rent to explore. Take a metra line out from your office and see where it lands you. Would you be happy there? if yes or maybe, rent there for a year. on the ground and talking to neighbors is also a lot more likely to help you find exactly the place and price that you want to buy rather than trying to swoop in from the city to look and buy in a short period of time.

4) max your Roth. as noted, you can use your contributions. nuff said.

[podey]

I am going through the same dilemma about saving for a house/apartment, although mine is a little different. My dilemma is between paying back student loans at 5.62% or putting money in an account now paying 4.88% to save for the down payment. The spread's not that big but I hate "losing money" by not paying down the student debt first. However, I realize I have to save so I am funneling 90% of the money towards the down payment. This is of course after maxing out company 401k and all (can't do a Roth).

[rachael24]

Podey...My position is exactly like yours. I am paying student loans and am trying to get a down payment for a new home. Im about 85% to the down payment

[podey]

Originally Posted by rachael24

Podey...My position is exactly like yours. I am paying student loans and am trying to get a down payment for a new home. Im about 85% to the down payment

I'm a little father behind you, but hoping to buy in 3 years or so.

[kcowan]

Avoid real estate for now. Be a contrarian investor in your 401k and Roth. When the market crashes in Chicago, shop the auctions and pick up a bargain. Use a mortgage broker to get the best financing. Good luck...

[ziggy29]

Originally Posted by kcowan

Avoid real estate for now. Be a contrarian investor in your 401k and Roth.

Wow. My crystal ball doesn't work this well. Can I borrow yours?

[brewer12345]

Originally Posted by podey

I am going through the same dilemma about saving for a house/apartment, although mine is a little different. My dilemma is between paying back student loans at 5.62% or putting money in an account now paying 4.88% to save for the down payment. The spread's not that big but I hate "losing money" by not paying down the student debt first. However, I realize I have to save so I am funneling 90% of the money towards the down payment. This is of course after maxing out company 401k and all (can't do a Roth).

Its such a tiny spread that you are better off remaining liquid so that you can take advantage of opportunities that might arise. Don't sweat it.

[seabourne]

I agree with Brewer. unless you have your emergency fund for 3-6 mo AND your downpayment ready, liquidity has a good deal of value to you. if you were forgoing matching funds, the liquidity probably wouldn't be worth the difference. You can't draw against the student loans again if you need to - a re-accessible line of credit would be different.

[biophase]

With regards to buying a house in Chicago vs renting. I would say that you should not purchase now. Being from Chicago and owning a rental property there, I cannot think of any part of the city in which the financial numbers will make owning vs. renting the same property worthwhile.

You mention that a property will cost about $300,000. Can I ask what your current rent payments are? I am assuming that this is a condo and not a single family home also.

We must remember that on top of mortgages are taxes and HOA and various other home maintenance costs.

Chicago property taxes are very high and HOAs for just 1 bedroom or studios will easily run above $250/mo.

Going with a standard $300k 1br 1ba condo in the city. I would expect that you taxes would be around $4,000/yr and HOAs $250/mo. This is an additional $583/mo. that you are getting no return on.

Assuming you went 0% down and got a 6% interest only loan, your mortgage would be $1,500/mo. Add your taxes and HOA and you are paying $2,083/mo. with $0 going to principle.

So even if you are renting for $2,083/mo today. Why would buying be worth it? Two reasons, appreciation and taxes.

In this market where there is no appreciation, that makes taxes the only other reason why you'd buy vs. rent in this scenario. To me, taxes is no a good enough reason to buy. Remember as an owner, you are stuck with all the maintenance bills, building issues and special assessments.

As a renter, you pay rent and that's it.

[podey]

Originally Posted by brewer12345

Its such a tiny spread that you are better off remaining liquid so that you can take advantage of opportunities that might arise. Don't sweat it.

I agree with Brewer. unless you have your emergency fund for 3-6 mo AND your downpayment ready, liquidity has a good deal of value to you. if you were forgoing matching funds, the liquidity probably wouldn't be worth the difference. You can't draw against the student loans again if you need to - a re-accessible line of credit would be different.


Thanks for the reassurance guys. It was hard to switch from loan payback mode to saving for downpayment mode.

[spideyrdpd]

Hi Biophase.

Hi
If your willing to do the roomate thing then the #'s might work out better, but as others mentioned there are many costs involved with ownership. Somethings are small but repetitive. Things like Hoa', garbage, the lawn etc. Then there are the bigger less often items. Various maintaince costs. Its breaks its your responcibility to replace from the fridge to the roof.
Taxe breaks are nice property taxes no so nice.....
Rob

[Anne]

NYT has a great rent/buy calculator. Very easy to use but make sure you fill in ALL the assumptions and get the most accurate figures you can for the sale prices and rent prices.

http://www.nytimes.com/2007/04/10/bu...=1&oref=slogin#

[podey]

Originally Posted by Anne

NYT has a great rent/buy calculator. Very easy to use but make sure you fill in ALL the assumptions and get the most accurate figures you can for the sale prices and rent prices.

http://www.nytimes.com/2007/04/10/bu...1&oref=slogin#

Thanks! That's very useful.

[Tulsaboyw]

Doing any sort of 80/20,80/10/10,80/15/5 is a good idea...even the if the bank or loan person doesnt... gives u the flexibility to pay the smallest loan off quicker.

Despite commetns to the contrary.... some sort of 'avoiding' pmi is always going to be doable.. (if u can swing it).

Even if i u cant, u can still get loan#2/#3 to force the same anyway.
Ie; still doing 100% financining, but the 80/20 peices come from different sources.

[brewer12345]

Originally Posted by Tulsaboyw

Doing any sort of 80/20,80/10/10,80/15/5 is a good idea...even the if the bank or loan person doesnt... gives u the flexibility to pay the smallest loan off quicker.

Despite commetns to the contrary.... some sort of 'avoiding' pmi is always going to be doable.. (if u can swing it).

Even if i u cant, u can still get loan#2/#3 to force the same anyway.
Ie; still doing 100% financining, but the 80/20 peices come from different sources.

Um, have you been under a rock for the last 9 months? Mortgage money is a teensy bit tougher to come by these days.

[Tulsaboyw]

for some in some areas.

but locally here in Tulsa Ok...nope.

My moms neighbors homes sold quickkly.. and the mortgages:
1. 1st one was below market but was per neighbor motivation to move.
2. 2nd one sold at $10k below market...

In my area.
5 houses sold in the last 6 months.
All normal mortgages.

Its really depends on the area. Tulsa is a somewhat median town on some things and way below national avgs on others.

What i said still applys, because some way of avoiding pmi is still the best thing to do... and can still be done even now.

Note, In my own case Ive never gone to the same bank or loaner to get the 20 part anyway...and if need be have even used existing equity to get the 20% In one case I bought a house with the 5% being my cc ($5k)

Naturally I didnt like that idea, but I needed $5k I didnt have and the house was worth it. (I borrowed $5k from my brokerage acct to pay the CC off in a hurry), and used my sources to lock that $5k down to a much lower rate. Since bank options were not there.

In another, 10% came from my credit union, 10% from the mortgage broker, 80% from the bank. Bank only knew about the broker.
Bank thought I put $12k in cash down.

[brewer12345]

Originally Posted by Tulsaboyw

In another, 10% came from my credit union, 10% from the mortgage broker, 80% from the bank. Bank only knew about the broker.
Bank thought I put $12k in cash down.

And you don't find that state of affairs ethically challenged?