First Time "Future" Buyers in Irvine Here - Confused... 20% Down or 15% 401K Contribution?

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[quote author="NewToOC" date=1215580988]I too have wondered what that avatar is... I think I'll start a thread in the Water Cooler Forum.</blockquote>


These are starfish stacked under the Newport Pier. I was talking a walk and saw those under the pier, it was pretty cool to see hundreds of gewy starfishes out of the water on all the pillars. I must admit the picture might not come out as nicely as it was!
 
[quote author="CTNative" date=1215511472]Borrowing against the 401K is an option, but I always thought it was not a good one. I've read so much advice against ever touching your 401k for any reason that I've just shelved the concept since nobody ever seems to advocate it. If anyone considers it viable, I'd be more than interested in their ideas about it.</blockquote>


Take a look at this spreadsheet. The pros of taking a loan against your 401(k) are that you pay back the interest to yourself, the interest rate is lower, and the length of the loan is shorter. The cons are the risk of having to payback the loan when you leave employment, the interest not being tax-deductible, and monthly payment being higher.



I can't say one is better than the other. Personally, it doesn't seem like a big enough difference to take additional risk and take a loan against my 401(k).



More details on the spreadsheet. Option A: I modeled a $10,000 loan at 8.75% for 30 years with a 30% tax rate. I am showing the monthly payment (interest & principal). I also show how your 401(k) would grow (the $10,000 you leave in there since you take a conventional loan). The last column "401(k) (invest back in 401(k))" also show what happens to your 401(k) if you invest the difference in payment between the two options in your 401(k). Since payment are lower under option A, you can put a little more money in your 401(k) for the first 15 years.



Option B: I modeled a $10,000 401(k) loan at 5.75% for 15 years. You pay the interest back to your account, but it is not tax-deductible. Your 401(k) starts at $0 (since you took the $10,000 out), but grows each month as you put money back in it. The last column shows what happens to your 401(k) if you invest the difference in payment between the two options in your 401(k). The addtional payments only start once the 401(k) loan is paid back. Therefore after 15 years, you can invest in your 401(k) what you would be paying if you took a conventional loan.



Hopefully, I didn't confuse anyone too much! You can play with the input in blue to see what happens under different scenarios.



I have a nice spreadsheet that models the Rent vs Own over 30 years. I also have another spreadsheet that shows the LTV, payments, and salary increases over 30 years. I still have to review those before I post them.



Note: I am not a financial advisor and this spreadsheet as not been peer reviewed, however, I hope it is error free and can help someone understand the cash flow differences between two types of loan.



Can someone help me attach the file. I get the follwoing error message :

"Error Message: The file you are attempting to upload has invalid content for its MIME type. "
 
Does one of you make at least $150K? How are your careers set for future income growth? Do you have an advanced degree (would it help you make moer $$$ in your field?) I would say that your'e getting hosed on taxes without a mortagge interest deduction (unless you have a side biz) and foregoing the 401K manes paying more $$ to the man. Max the 401k and let the RE tumble. Figure out how one of you can get to $200K/yr.
 
[quote author="Boston2theBay" date=1215639309]Does one of you make at least $150K? How are your careers set for future income growth? Do you have an advanced degree (would it help you make moer $$$ in your field?) I would say that your'e getting hosed on taxes without a mortagge interest deduction (unless you have a side biz) and foregoing the 401K manes paying more $$ to the man. Max the 401k and let the RE tumble. Figure out how one of you can get to $200K/yr.</blockquote>


Why 200k, is that a magical number? Wouldn't we all want to make 200k if it was possible?
 
[quote author="irvine123" date=1215520326]In general, borrowing agaist your 401k is not a great idea. Most plans require you to pay back the loan immediately when you leave the company, which can cause great financial stress if you are laid off.



If I were you, I will cut down 401K contribution (but at least enough to get the company contribution) and start saving towards down-payment and emergency cash ( if you don't already have one). 401K money is not as liquid as cash and other after tax investments. Any asset portfolio need to be "balanced". In your situation, "balanced" means not only have a balanced stock / MF portfolio in 401K, but also a balanced portfolio among before tax saving ( i.e. emergency cash), after tax saving ( 401K), and equity towards your residence.</blockquote>


I am concerned about pay back for one reason in particular...I never had the intention of working for one company for very long. What I do is very consultant-like even if I am on their payroll, so when I reach a certain point of satisfaction with what I've done there, I move on...generally for two reasons. 1) I get bored and 2) more importantly...the largest increases I have ever gotten are from jumping companies every 2-4 years. I've just learned that companies only respond to your value when they might lose it, otherwise you get your 3%, thank you very much. For that reason, vesting schedules are meaningless to me, and 401k repayments upon termination are very real.
 
[quote author="Trooper" date=1215560839]First, pay off the car loan. I would vote for lowering your contributions right to the employer match....and saving cash. Tell your wife to be patient and have her read the IHB.



I also looked into borrowing from my Deferred Comp account. The interest rate I was going to "pay myself back" was at 10%... I liked the concept, but did not like the fact that I couldn't pre-pay it. The repayment was going to be a set amount automatically deducted from my paycheck, for I think a 3 year period. I always pre-pay off debt, so since I didn't have the option to do so, I ruled it out.



Now considering how crappy the returns would have been (on the mutual funds), the "loan" and paying yourself back 10% interest....sounds like it would have been a good play if done last year. I personally took all of my $$ and banked it in a CD at 5.35%. It is due for a renewal in August....and I think I'm going to keep it there, safe and sound....but at a much lower interest rate.



If I wasn't a reader of the IHB, I would have just left it in funds and lost a whole lot of $$$ (thanks everyone!)



Where in CT? Me: Hebron, Bolton, Chester</blockquote>


Born and raised in New Fairfield, CT. As much as I love CA, I haven't seen a real autumn in 16 years. :(
 
[quote author="Trooper" date=1215576926]<em>"How in the world did you know that ?"</em>



Google is my friend.</blockquote>


After I told you PMI is now deductible. :)
 
[quote author="Trooper" date=1215576926]<em>"How in the world did you know that ?"</em>



Google is my friend.</blockquote>


Your Google-Fu IS powerful....



LOL



-bix
 
Looks like this is very complicated case, you might need to talk to your team of CPAs and financial advisors to solve the puzzle. And I bet you'll get different suggestions.



But I had developed a simple tool help any buyer to make informed decisions. What I need is the input of marginal tax rate, investment return of your 401K as the cost of capital, your current rent payment, your future predication of home appreciation rate, etc.



Please be aware of GIGO, garbage in garbage out as in any financial models.





http://www.teamworkhomes.com/crm/sample/buyvsrent.pdft



Hope this will help. Any questions regarding this proprietary model, feel free to comment.
 
Congrats on the high household income. Here is my "two cents." Reduce 401K contributions enough to ensure getting the full employer match. Save the rest in a money market, etc. "Borrow" from your 401K only to the extent you need to - to get to 20%.



Shop the cost of money like crazy. Seriously, you should be getting no fewer than 4 GFE's (at least 2 from credit unions). Search this site for references to good places to get a competative mortgage loan. Its not the PMI that's the difficulty so much as it is the interest rate. To the person who suggested BoA for a loan. Please stop helping people into the fire-pit. Anyone who actually shops a loan will realize that the rates they offer are beyond uncompetative... The same goes for any "no cost" loan. It is a long term rip-off. Look at various credit unions - they have strict credit criteria... but often have excellent rates... because they frequently DO NOT resell the loan... meaning there is not a need to inflate the loan costs to induce another to buy it off their hands. Anyway, what you will also find is that you will need 20% to get a Jumbo loan (anymore).



How much house are you considering buying? 700K? more? less?
 
[quote author="GrewUpInIrvine" date=1216293669]

Shop the cost of money like crazy. Seriously, you should be getting no fewer than 4 GFE's (at least 2 from credit unions). Search this site for references to good places to get a competative mortgage loan. Its not the PMI that's the difficulty so much as it is the interest rate. To the person who suggested BoA for a loan. Please stop helping people into the fire-pit. Anyone who actually shops a loan will realize that the rates they offer are beyond uncompetative... The same goes for any "no cost" loan. It is a long term rip-off. Look at various credit unions - they have strict credit criteria... but often have excellent rates... because they frequently DO NOT resell the loan... meaning there is not a need to inflate the loan costs to induce another to buy it off their hands. Anyway, what you will also find is that you will need 20% to get a Jumbo loan (anymore).

</blockquote>


This article has some useful thoughts about borrowing against your 401K

http://www.investopedia.com/articles/retirement/06/eightreasons401k.asp

I borrowed against my 401K in the mid 90's to remodel the house, and regretted it looking back at the real opportunity costs (after repaying it back in after tax dollars) and reduced flexibility in changing jobs (since need to payoff loan if changing employers).



As far as mortgages, agree that BofA is non-competitive from my personal experience. As mentioned in prior posts, try the Pentagon fed credit union for competitive rates. Their current 30 fixed rate is 6.25%, 0 pts and they offer a 5/5 ARM (adjusts every 5 yrs) and I think closing costs are low. Even if you are not military, you can join for a yearly fee ($20) through NMFA and put a small amount into the savings account (I did recently) and they have good interest rates. I also found Wells Fargo rates and customer service to be competitive.

https://www.penfed.org/howtojoin/overview.asp
 
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