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My husband and I are looking to buy our first home. He is 39 and I am 37. We live in a major city and house prices are terrible. We are probably looking at a 500K-600K home. We were late bloomers, so to speak, so took a while to graduate and actually make steady income. We now both have good jobs (combined salary of $150K) with pending raises (maybe 15K total) and good prospects for the future. We also have 200K in student loan debt (which will be erased by the government--theoretically--in 8-9 years due to the type/field of loan) and about 45K in credit card debt (I know, but we are paying it off at approximately 2K/month)

Our assets are:

  • $8000 in savings (we can start bumping this up if we invest in it rather than paying down credit cards, but not by much)
  • Spouse 1 401K of $5000
  • Spouse 2 401K of $8000
  • Spouse 2 IRA of $28000

The only way we can get a house right now is to cash in most or all of these accounts to put down a down payment, which would also slow down our credit card payments. Part of me thinks that these accounts are pretty meager and it's a better investment than throwing money away on rent each month. Part of me says I should suck it up and get a cheaper house outside of the city rather than repeat the mistakes of my youth, but I don't know how that will affect resale value.

We also are eager to start a family, and we're not getting any younger. Our apartment is way too small for just the two of us, much less a child. We'd have to move before we had a child and we'd like to live in our own house when we do.

EDITED to add: When I say house, I mean condo. I see that makes a difference based on some of the (great) answers. And yes, a cheaper condo makes a car a necessity, which we have gotten by without so far.

  • Comments are not for extended discussion; this conversation has been moved to chat. – JohnFx Apr 6 '16 at 3:02
  • One good point to know - Do your 401(k) accounts get a matching company deposit? If so, up to what % of income? – JTP - Apologise to Monica Apr 6 '16 at 12:12
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    Where in this plan(s) do you factor in the staggering cost of having a child? What if something goes wrong? My first hit my out-of-pocket max on insurance in consecutive years. ~$25000 before birthday #3 in medical bills and my daughter was perfectly healthy by 3 months of age. Hell, even if all goes well day care in my much cheaper part of the US is $1000 per month for infants. Not including diapers etc. If you want to have kids I think that's great, but plan for the expense. – Jared Smith Apr 6 '16 at 19:15
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    So you have 2 spouses? Get yourself out of debt first and then buy your condo/house. You also don't need a brand new car, or one < 5 years old. You need a safe car because you will be carrying precious cargo (babby). The bank will look at your application more favorably with less outstanding debts. – Mathemats Apr 7 '16 at 22:45
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    @GorchestopherH - One investment that exists better than paying off your credit card debt is 401K contributions with employer matching. That's usually a 50% and some companies even 100% profit immediately. Of course you have to wait a few years before you have access to the cash but that profit will continue to grow while you don't have access. Also, if you are willing to manage your credit card debt you can usually move it around to get 0% or 1.99% interest 18 months to 2 years at a time. So while I agree paying off credit card debt is important, it isn't always the best option. – Dunk Apr 8 '16 at 15:46
75

It is normally a bad idea to cash in retirement accounts to buy a house, in your case it is a horrible idea because you are way behind on saving for retirement.

Other fallacies in your reasoning:

  1. A house is not an investment, it is an expense.
  2. Paying rent is not throwing your money away.
  3. A cheaper house affects the resale value. That argument makes no sense to me. In terms of resale value the only number that matters is the difference between what you paid and what you later get back. Of course a cheaper house will have a lower resale value because it is worth less, that seems irrelevant to the decision process.

My advice, increase the amount you are saving for retirement considerably, and also put some money aside to save for a down payment on a house. Buy the house when you have enough non-retirement money to afford the down payment. If you can't wait that long, buy a house you can afford.

It may help to think of it this way: Visualize yourself as a 65 year old retired person with very little income, and living on your retirement account. Would you as a 39 year old ask that person to give you $175,966 (the amount you are talking about withdrawing compounded annually at 6% interest for 25 years with no additional contributions) so that you could put a down payment on a house? Because that is what you would be doing. When you hit retirement age would you kick yourself for making such a decision? Because unless you die young, that person is sitting out there in your future needing that money to live off of.

Don't take this the wrong way, but the tone of your question seems like you are looking for support to make what you already know is a bad financial decision.

  • Comments are not for extended discussion; this conversation has been moved to chat. – JohnFx Apr 8 '16 at 0:04
50

So you're making $150,000 per year and you have $245,000 in debts. You're in your late 30s and have $41,000, or less than 1/3 of a year's pay, put away for retirement. That's a bad situation, but not disastrous. Lots of people have recovered from far worse.

But like the old joke goes, when you realize that you're deep in a hole, STOP DIGGING. The worst thing you could do right now is liquidate the few assets you have and go deeper into debt.

I don't know where you live or what the housing market is there. But the easy answer is: find a cheaper house.

I'm not sure what you mean about "affect the resale value". Yes, if you buy a cheaper house it will have a lower resale value. So what? The days when a house was an investment that would skyrocket in value are over. (And even in those days, it didn't help most people. So when you move, you get a big profit on the sale of your house. But the house you're moving to probably went up by a similar percentage, so you really didn't gain anything.) Even if your house did increase in value, unless you sell it, that doesn't help you make the mortgage payments. It's a paper profit.

Get yourself out of debt. Step 1 is to stop taking on new debts.

And if at all possible, you should be putting bare minimum 6% into your retirement plan. I don't know where you work, but most employers match some percentage of the first 6% you put in. If you don't take advantage of that, you're giving up free money.

  • Comments are not for extended discussion; this conversation has been moved to chat. – JohnFx Apr 8 '16 at 0:05
25

Whatever you do, you need to be saving a lot more to have a good chance at retirement at a reasonable age. With a combined salary of $150,000, I'd recommend:

  • contributing the maximum allowed amount to your 401k, $18,000/year each,
  • contributing the maximum allowed to an IRA, $5,500/year each, and
  • investing about that much again paying down your debts, and when those are paid off, in a taxable account.

In total, that's $47,000/year in tax advantaged accounts, plus whatever you put into taxable accounts. Your $150,000 yearly income, less $90,000/year in savings is still an income of $60,000. People live comfortably and raise families on a lot less. Consider how fortunate you are. You could retire in 10 years, if you wanted, by increasing your savings and decreasing your expenses. Seriously, I'm speaking from first-hand experience.

If you stay on your present course (saving $2,000/mo), at a 7% real return, you'll need about 37 years to accumulate $3,800,000 (in today's dollars), which is enough to:

  • pay off your $245,000 in debt
  • buy that $500,000 condo
  • have an extra $3,055,000 which will yield enough investment income to equal your current after-savings income.

Even if those student loans are forgiven, that only knocks off about 2 years. If you are in your late 30s now, there's a decent chance you'll be dead before you retire.


As for buying a house or not, this depends a lot on your personal circumstance and how the rental market in your city compares. In your decision, don't forget to consider:

  • Living in a house probably means living away from the city. Do you work in the city? How much time will you spend on gas and car maintenance? How much could you save by living really in the city and not needing a car at all? How much of your time will be lost commuting?
  • If you are currently living in a city, it's likely because you enjoy an urban lifestyle. Will you get the same enjoyment if the city is a long drive away?
  • Houses come with expenses that rentals do not. Property taxes, insurance, usually more utilities, maintenance, etc. Maintenance in particular is more expensive than you might think. A significant portion of the costs come from infrequent but huge expenses, like replacing the roof. Budgeting $200/mo for maintenance is not unreasonable. More might be wise.

Renting is not necessarily throwing money away any more than buying a house is. If you take out a mortgage, you'll be "throwing away" a lot of money anyway. Look for a "loan amortization calculator" to see how much goes to interest versus principal. For a $500,000 loan at a 3.5% rate, you will be paying approximately $1400 per month in interest versus only $800 towards the principal. When you deduct insurance, taxes, maintenance, etc from that $800, you may find you are still throwing away most of your monthly payment on interest and expenses you wouldn't have if you rented.

The money you do "save", after interest and expenses, isn't really saved. Housing markets go up and down, but on average, over the long term, they go up just enough to keep up with inflation, meaning a 0% real return.

If renting means less cash out of pocket per month, you can put that extra cash towards investments that yield a much higher return. Sure, you may need to continue making rental payments in perpetuity, but you can save enough extra money to pay for the rental in investment income.

Again, it depends considerably on how the housing and rental markets compare where you live. Popular cities (San Francisco, New York, Paris, etc.) tend to favor renting. Unpopular cities (Detroit, St. Louis) and rural areas tend to favor buying.

Further reading: Mr. Money Mustache: Rent vs. Buy: If You Have to Ask, You Should Probably Rent

  • "Renting is" -- you'missing the word "not" in the first paragraph after the bullet points. May be obvious from context but should probably be fixed anyway. – keshlam Apr 5 '16 at 20:48
  • If you participate in a 401k, you are married, and your combined income is over $118k (as of 2016), you cannot deduct contribution to an IRA. – Jay Apr 6 '16 at 7:06
  • @Jay You can still contribute to a Roth IRA. That doesn't begin to phase out until $184k, and even above that there are other things that can be done which are better than putting the money in a taxable account. – Phil Frost Apr 6 '16 at 11:24
  • Phil - you got my +1, but I'm shaking my head a bit at the numbers. Saving 1/3 of salary is great, and given the late start, probably a requirement. "That much again" in debt payment and taxable accounts? Huh? You see that their employment offers student loan forgiveness, so that debt evaporates on its own. Paying the cards over 2 years and keeping sane is preferable to doing it in 12 months and being stressed out. In the big picture, I agree that nearly half should go to saving and debt repayment, just not as extreme as your approach. – JTP - Apologise to Monica Apr 6 '16 at 13:28
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    @JoeTaxpayer Everyone has different goals, I suppose. Compared to the question, I have similar income, a six figure net worth, and I'm younger, so arguably I should need to save even less. Yet I save more: 55% of gross income. I am neither stressed out nor unhappy. 2 adults making $150,000/yr is in the richest 0.1% of the world's population -- there is substantial headroom there to save tons of money while still having a luxurious standard of living. – Phil Frost Apr 6 '16 at 13:40
12

Unfortunately, what you are finding is that your past decisions to take on debt have limited your choices now. Learn from this fact and choose not to go further into debt. Your condo will become a burden if you don't have the liquid funds to maintain the property, keep the mortgage current, and hedge against any other significant life events. You already have almost no financial margin.

  1. Pay off Credit Cards
  2. Pay off student loans
  3. Save up 3-6 mo expenses
  4. Save for more aggressive retirement and 20% down payment (either order or concurrently)

These steps will almost guarantee that you will enjoy your house and have a worry/stress free experience. You make plenty of money for you to complete this cycle in a handful of years and be ready to buy.

Also, don't give yourself false either/or choices. You have options.

Our apartment is way too small for just the two of us, much less a child. We'd have to move before we had a child and we'd like to live in our own house when we do.

Not true. Rent a cheaper apartment further outside the city, which will also be larger. It probably won't be as nice as the one you have now. Buy a car for cash under $5000. It is a sacrifice for few years while you work for your dream home.

You already know this is a bad decision. Continuing down this path will leave you with the same frustrations 10 years from now.

Good Luck!

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    RE false either/or: Yes. "Live in a tiny apartment in the city" and "live in a $600k house in the city" are surely not the only options. You yourself mentioned getting a house outside the city where it would be cheaper. You could get a bigger apartment, again, maybe outside the city. You could buy a house that needs work at a discount and do a lot of the work yourself. You don't have to choose between the most fashionable neighborhood in the city and the worst slum. Likely there are many choices in the middle. Etc. – Jay Apr 6 '16 at 7:12
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    +1 This is the only answer that seriously addresses credit card debt. – Gorchestopher H Apr 8 '16 at 13:03
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I'd be curious to understand where you live, with a condo costing nearly 3X the average home price in the US.

That said, if you are hell bent on this, money is loosening up. I am a real estate agent, and part of my distaste for the industry is the fact that it is the near opposite of financial fiduciary. I am responsible to be truthful and act in the best interest of my client. I am specifically not allowed to offer tax or financial advice. A client that told me she had a prequalification, only later shared that she's using a 3% down, FHA mortgage, and from what I see, getting in over her head.

In your case, look at the requirements for an FHA loan. I recommend 20% down, and the payment be less than 28% (Principal, interest, property tax) of monthly gross. The FHA allows as little as 3% down, with payment as high as 31%. In your case, $15K is 3%, and, depending on the other expenses for the house, the payment should be manageable.

If your 401(k) accounts offer matching, I'd deposit the amount to capture the match, no more, no less. Let me illustrate the power of matching - say the match is on your first $10,000 total, between the 2 of you. $10,000 deposited, is $20,000 in your retirement account, and you are just out of pocket $7500, as that's your net after tax. Now, the $20K in the account allows you to borrow half, $10,000 at a favorable rate for a 10 year payback. So, to your question of raiding your retirement accounts, I'd advise the opposite. A $10K withdrawal will cost $2500 in tax and $1000 penalty. Net $6500. Better to take the IRA, transfer it to the 401(k), and borrow 50%. Your $40K across the accounts will let you borrow $20K and keep the retirement savings going.

Last - I respect the answers that say "don't," they are actually the right answers. Mine only applies if you won't listen to them. In effect, you've asked where to buy rope, and I'm just letting you know where the store is. It's the banks who are happy to sell you the rope to hang yourself.

  • Washington DC. I know. – thumbtackthief Apr 5 '16 at 19:42
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    A median $980K for 2320 sq feet. Yup, I understand. The only thing I'd ask is whether you can live in a surrounding town, and not have a crazy commute? People working in NYC have parts of New Jersey that are reasonable, for example. – JTP - Apologise to Monica Apr 5 '16 at 20:26
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    @keshlam The cost of running a recent-model used car (and the commute overall) might well be significant, though. Assuming $0.57/mile x 2 commutes, living 15 miles from work is $34/day or $700/month. The interest on an entire $500k mortgage (assuming 2% rate) is under $1000/month. In this simplistic case the other property needs to cost under $180k just to break even financially (never mind the time lost to the commute)... – Andrzej Doyle Apr 6 '16 at 15:03
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    Where are you getting a 2% fixed rate loan? – JTP - Apologise to Monica Apr 6 '16 at 20:37
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    The advice to borrow from your retirement accounts rather than cash them in is spot on, if you must pursue this housing project at this time. – O. Jones Apr 9 '16 at 12:49
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In your situation, you probably should not cash in your IRA and 401(k).

A good mortgage lender will want to see that you have "reserves" -- money that you could fall back on if you hit a very rough patch. Your current savings and retirement accounts might add up to a suitable reserve.

You might want to do something like this instead:

  • Find an area with suitable rental housing for a young family, suitable until your oldest child will finish pre-school.
  • Start a family. At your age, this is now urgent.
  • Rent while building up a modest down payment.
  • Buy a home in an area where you would feel comfortable raising children, that would be suitable as your children grow up.
  • Aggressively pay down high-interest debt.
  • Aggressively pay down moderate-interest debt.
  • Catch up on retirement savings.

By the way, instead of cashing in a 401(k), it is usually better to:

  • Obtain an unsecured Personal Line of Credit. This might cost 50 dollars per year, and have a variable interest rate about 3 percentage points per year higher than for a Home Equity Line of Credit. Do not use this PLOC.
  • Borrow against the 401(k). You will need to pay back your 401(k) over 4 or 5 years. If you lose your job, you will need to pay off the 401(k) loan within 60 days. The unused PLOC mitigates this cash-flow risk.
  • Banks usually do not count the 401(k) repayments when calculating your "Debt-to-Income" ratio, because they think you are "paying yourself".

This method avoids large tax penalties, and encourages you to rebuild your 401(k). Unfortunately, your large debt balances might prevent you from getting the PLOC. But even in the worst case scenario (where you cannot use a PLOC to pay off a 401(k) balloon payment), it postpones the tax hit until after the balloon payment.

0

As your main concern seems to be that you are not sure whether you can ever get a house, and actually support the expenses it incurs when you have one, here is a very simple answer:

If you can rapidly pay back the creditcard, you can pay for a house

You say you are currently decreasing your creditcard debt by 2k per month. At that rate it will be finished within 2 years.

Try to pay it off completely, if this succeeds in the next 2 years you can be confident that you can afford a 500k house. (Paying back 50k high interest debt in 2 years, is VERY roughly equivalent to payng back 500k low interest debt over 20 years , a reasonable time period in my environment).

So, just pay back the creditcard as fast as you can, if two years sounds like a long time there is nothing stopping you to pay it back a little bit faster even!


Note: This is written under the assumption that your student loan burden will not increase over time.

-2

Debt will ruin any plans. I guess that the interest on the credit cards is about $450 a month or about $5,500 per year and the school loans is about $6,000 a year. Get a an Excel spread sheet going and start tracking your expensed. Learn to make a amortization spread sheet for all debts, and any future debts that you are thinking about. If you want a family soon plan on one income for a period of time. If you buy a house plan on paying it off while you are working. Then the house payment becomes spendable money during retirement. A cheaper house can be upgraded in the right neighborhood with an excellent appreciation in value. Money put into excellent collectibles and kept for 20 years or more is private and off the radar income no taxes when sold. STUDY STUDY LEARN LEARN

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    You were doing well until you suggested a long plan for tax fraud. – JTP - Apologise to Monica Apr 6 '16 at 0:41
  • Buying collectible household furnishings is not tax fraud. Buying Stamps or coins is not tax fraud. Buying tools is not tax fraud. – Ray Apr 6 '16 at 1:05
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    "and off the radar income no taxes when sold" sounds like fraud to me. (In case a pedantic member suggests it only reads like fraud, I had the missus read the sentence out loud to me.) – JTP - Apologise to Monica Apr 6 '16 at 1:21
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    I believe they're pointing out that you would absolutely be required to report the profit you made on selling the goods. While many people don't and probably easily get away with it, that doesn't make it legal. – thumbtackthief Apr 6 '16 at 16:14
  • So your crystal ball says they will never loose 80% of their income by 2046 when they retire and if they happen to sell some taxable assets their will still not be any tax liability. – Ray Apr 7 '16 at 2:41

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