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  #1  
Old 03-19-2013, 10:48 AM
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Down payment vs reitrement fund

I'm a young'n, out in a real job for 2 years. Rent around here is roughly the same price as a mortgage for the size/ type of house I'd like. The problem is that since I'm paying roughly half my car's worth in rent each month, I don't have a whole lot to put into the down payment for a house fund.

Is it a terribly irresponsible idea to pull my 2yrs of retirement funds and use that as a down payment?

I'm really getting sick of living in an apartment. Granted, I've lived in much worse, but for the fortune that I'm paying I'd rather be chipping away at a mortgage for my own place than making my rental company rich. With my job and the lady's job, we're planning on being in Baltimore for at least 10 years (probably longer)

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Old 03-19-2013, 11:00 AM
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The reality is: House ownership & maintenance will take money out of your pocket;... and you are not free to pack up and move whenever you feel like it like when you rent.
(BUT: If home prices are depressed in your area; now is the time to buy.)
But the question is: can you comfortably afford to own a house without being financially strapped, living paycheck to paycheck; arguing with the missus.
Will buying a house tap you out so when an emergency comes up (and they will) will it be devastating? Or just an annoyance?
Let me say; it sucks to be poor or broke.
I own my house outright; have no debt; everything is upside; life is Great!
If I was to go back to my 20's I would have never got into debt trying to keep up with some sort of social expectations.
I would have saved, saved, saved, and invested, invested, invested and live life to the beat of my own drum.... Look poor; be rich.
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Old 03-19-2013, 11:04 AM
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If you own a home, you're still free provided the possible rent from the property exceeds the expenses (probable these days unless you're stupid and overpay). If you need to pick up and move, you can rent out the place.

Ideal situation would be a mortgage that allows for conversion to an investment property even if you have to pay a slightly higher rate, but one could always go under the table and just forward their mail/bills without officially changing address with the mortgage co.
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Old 03-19-2013, 11:08 AM
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What type of retirement fund do you have? Depending on the plan you may not even be able to access it. And if you can access it, you will likely be taxed and penalized on that withdrawal (again, depending on the plan).
My experience is that tapping a retirement fund is the beginning of a slippery slope toward having-not in your later years. Retirement funds are not short term savings vehicles. If there's another source for the down payment use it instead. You will be better off in the long run by making cuts to your budget (do you smoke, drink, gamble, eat out a lot, have a cel phone plan or television plan that's expensive...) and saving the difference. You could also suspend contributions to your retirement account for a time in order to save more.
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Old 03-19-2013, 11:15 AM
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You'd be wrong, of course. He's not proposing to spend it on hookers and blow, but to put it into a different investment vehicle. Even if he gets taxed on it, if home prices will be 20% higher 2 years from now, it may be worth eating the tax.
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  #6  
Old 03-19-2013, 11:25 AM
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Personally, I would take the money (depending on penalties) and buy a home. As spdrun commented, it is merely a different investment vehicle. Some retirement plans will allow you to borrow from yourself for home purchase. This would probably be the best option.
If you cannot borrow in that manner, you should crunch the numbers and try to purchase a house which will be less than your current rent, and you can begin immediately rebuilding what you have taken out.
The sooner you start paying a mortgage, the sooner you are done paying a mortgage...
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  #7  
Old 03-19-2013, 11:26 AM
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Thanks for the input. Rent/utilities around here are ~1500 for a 2 bedroom, and I'm not even allowed to keep my rusty project car in the parking lot! :p
Not a lot to drop from the budget. Moving out of my area would reduce my car insurance though-when I moved from the rural area north of Baltimore to the Baltimore area it went up $400/yr, which is insane.

I can pull my retirement with minor repercussions-basically it would be as if I just started working here.
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  #8  
Old 03-19-2013, 11:34 AM
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Quote:
Originally Posted by Simpler=Better View Post
Thanks for the input. Rent/utilities around here are ~1500 for a 2 bedroom, and I'm not even allowed to keep my rusty project car in the parking lot! :p
Not a lot to drop from the budget. Moving out of my area would reduce my car insurance though-when I moved from the rural area north of Baltimore to the Baltimore area it went up $400/yr, which is insane.

I can pull my retirement with minor repercussions-basically it would be as if I just started working here.
At $120k for a house (didn't you mention that number), that's $500/mo for mortgage assuming 20% down, $100/mo for insurance, $300/mo(?) for taxes, $200/mo avg for utilities. $1100/mo - $500/mo under the table if you rent out one of the bedrooms. If you can reduce your housing expense in a decent area of an East Coast city to $600/mo, you'd make out like gangbusters.
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  #9  
Old 03-19-2013, 11:36 AM
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If you're speaking of a 401, most of them allow you to borrow money to purchase your principle residence. The money would have to be paid back to the fund or you will be taxed and penalized.
This is a useful tool to get into a house. But 30 years is too long. Unless you plan on renting it out, try to find a good 15 year loan.
Or just leave your retirement money alone! You young guys may not realize that you are on a lonely island as far as your retirement goes. No more company pensions. Big business changed the playing field with the use of the 401.
Good luck to you.
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  #10  
Old 03-19-2013, 11:39 AM
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Quote:
Originally Posted by David Wilson View Post
If you're speaking of a 401, most of them allow you to borrow money to purchase your principle residence. The money would have to be paid back to the fund or you will be taxed and penalized.
This is a useful tool to get into a house. But 30 years is too long. Unless you plan on renting it out, try to find a good 15 year loan.
Or just leave your retirement money alone! You young guys may not realize that you are on a lonely island as far as your retirement goes. No more company pensions. Big business changed the playing field with the use of the 401.
Good luck to you.
Why wouldn't you WANT to have the option of renting it out? You can always pay off a 15-yr loan early if that floats your boat.
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  #11  
Old 03-19-2013, 11:39 AM
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Quote:
Originally Posted by Simpler=Better View Post
Thanks for the input. Rent/utilities around here are ~1500 for a 2 bedroom, and I'm not even allowed to keep my rusty project car in the parking lot! :p
Not a lot to drop from the budget. Moving out of my area would reduce my car insurance though-when I moved from the rural area north of Baltimore to the Baltimore area it went up $400/yr, which is insane.

I can pull my retirement with minor repercussions-basically it would be as if I just started working here.
I recommend an emergency repair fund of between 5-10k cash available for disasters.
As Mr Kenny pointed out, disasters will come.

Still, its way worth it to own your home, but make sure you examine the property tax rate while you look around.

Couple examples, I rented out a house in southern CT after working for about a year fixing it up. put about 35k into redoing tons of stuff, house was beautiful when done.
As soon as I rented it out, sandy blew through, knocked down a couple trees, the ovens failed, the countertop stove had to be replaced, the well pump failed, and I just had to go through the entire house and put new seals in every sink and toilet as the replacement well pump caused them all to leak. call it about 8k of disasters in the first 3 months of renting.

Every piece of the house is a system, and if any one part of the system is in trouble, it usually affects other parts of the system, or other systems all together.

Another example from the same house, small leak in tub drain fills ceiling above attached garage, wallboard ceiling gets saturated, and without prior signs of any kind, suddenly falls en mass onto a 50k convertible with a brand new top. Stuff like that happens all the time.
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  #12  
Old 03-19-2013, 11:52 AM
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On the other hand . . . kudos to you for having the smarts to start retirement savings early in your career. The extraordinary power of time and willpower are your ally. Cashing in, without dire need, is a risky move.
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  #13  
Old 03-19-2013, 11:54 AM
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Quote:
Originally Posted by spdrun View Post
Why wouldn't you WANT to have the option of renting it out? You can always pay off a 15-yr loan early if that floats your boat.
Most people that buy property to rent opt for the longer term loans to keep the payments smaller. They're not looking to pay off the property, they're looking to maximize the monthly income.
Yes, the loan can be paid off early, but the interest rate for the 15 will always be less than the 30. Someone that plans on staying in the house for the duration of the loan will always come out ahead with a 15.
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  #14  
Old 03-19-2013, 12:00 PM
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Quote:
Originally Posted by spdrun View Post
You'd be wrong, of course. He's not proposing to spend it on hookers and blow, but to put it into a different investment vehicle. Even if he gets taxed on it, if home prices will be 20% higher 2 years from now, it may be worth eating the tax.
A house is an investment vehicle? Absolutely flawed logic. An investment vehicle is something we put money into with the sole purpose of growing that money and/or extracting an income. A house is a place to live. And, if and when we feel compelled to move or sell, if the house has appreciated in value and we are able to sell at a gain it is a favorable situation. If it has depreciated we just have to absorb the loss and console ourselves with the fact that we had a place to live for that time period.
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Last edited by cjlipps; 03-19-2013 at 03:14 PM.
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  #15  
Old 03-19-2013, 12:04 PM
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Things to consider...

Your age
Your current earnings
Your potential earnings
Your profession and it's future
What you're willing to have financed

If I was in my mid 20's again and my professional outlook and potential looked good, I'd go for a 30 year loan, and pay 1.5 times the monthly payment to pay it off in a shorter time period...Equity is generally a better investment than stocks.

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