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I'm 25, and I'm in the process of closing on a $260,000 mortgage for a very nice condo in downtown Salt Lake City. My salary is $80,000 right now, which I feel is pretty solid, but I'm starting to get cold feet as I am a first-time homeowner and the amount of interest just seems devastating to me.

My question is, are my fears warranted, or am I just being paranoid? Reading a few finance articles, I have heard that most people can afford anywhere from 3-5 times their gross salary on a mortgage. Clearly, I am within that range, but there are also property taxes, HOA fees ($150 per month), and utilities to take into consideration. Another consideration is that I do not have much cash saved for a down-payment. I had a substantial sum, but family troubles combined with paying off my student loans ate up most of my savings.

Some other nuggets of information to aid in any advice/calculations:

  • I've rented for the past 4 years; my current rent is $600 per month.
  • The condo is a 2-bedroom and I do have a roommate in mind. His monthly budget is $700 per month.
  • For the down-payment, I am considering taking a loan on my 401k. I can take up to 50% of the total balance with no penalties. The balance right now is around $25,000. Of course, if I do take a loan, that's another monthly bill I will have to pay.
  • I have $6,000 in liquid cash, and the condo association has agreed to pay $7,500 towards closing costs.
  • The interest rate I am looking at is 4.625%.

Am I in a reasonable position, or am I setting myself up for being "house-poor?"

SIX MONTHS LATER:

I appreciated all the good advice, and I figured I would give you an update and let you know how it all turned out.

Basically, I ended up pulling the trigger. Researching the economy in Salt Lake City made me feel quite optimistic and I was pretty much in love with the location, so I went ahead with it and even took out $12,000 from my 401k for the down-payment (coincidentally, the stock market plunged immediately afterward). Interest rates dropped to 4.375%. In addition, my roommate and I worked out a deal where he would pay 4 months rent upfront, so I was able to get $2,400 more to put into initial home-related expenses.

After a fairly drawn-out closing process, I finally moved in at the end of August. The property appraised for nearly $280,000, and is projected to increase to $300,000 over the next five years! The place is beautiful and such a step up from the dingy apartments I've been renting; I couldn't be happier with the decision. Here's some pictures to give you a feel for it.

Kitchen Living Room Balcony View

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    I can't process it all, but I am very worried that you are borrowing from your retirement. money.stackexchange.com/questions/6666/… and money.stackexchange.com/questions/5171/…
    – MrChrister
    Commented Jun 16, 2011 at 4:57
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    You will be losing a lot of time that you aren't earning interest on that loan. Penalties or not, that cash stops working for your retirement if you take it out.
    – MrChrister
    Commented Jun 16, 2011 at 19:23
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    A useful exercise, especially if you rarely pay cash, is to take the last few months of your credit card and checking statements. Put everything you paid into a spreadsheet, ideally with categories. Just label ATM withdrawals "cash." Total it up, divide by # of months. Now add up all your paychecks in same period. You now know your monthly surplus (or deficit). Look at your current rental costs, and if your mortgage+maintenance+taxes+insurance bill exceeds current rent plus your surplus, you have a big issue. But really, you want 10-12% of your salary surplus since you need to save that much.
    – Havoc P
    Commented Jun 17, 2011 at 3:21
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    @Mason: That's not a better question, that's a different question-- one which I already know the answer to. If my only consideration was buying cheap and scraping by, I would keep renting for the rest of my life. Or I would move out of downtown and live in some ghetto suburb. Or I would step down from 1,400 sq ft to 800 sq ft. Of course, that's not my only consideration. I want to live downtown, enjoy the city lifestyle, have top of the line furniture and appliances, and get the most sq footage possible. And since that is the case, this is exactly the right question to ask. :)
    – Charlie
    Commented Jun 21, 2011 at 23:37
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    The fact that the 401(k) wasn't a withdrawal, but a loan, and only for $12,000 doesn't trouble me. You'll have lost nothing, as you are paying interest back into the account. By the way, I appreciate the update and pix, the view is beautiful!
    – JTP - Apologise to Monica ♦
    Commented Jan 9, 2012 at 5:01

7 Answers 7

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Let's start with income $80K. $6,667/mo. The 28/36 rule suggests you can pay up to $1867 for the mortgage payment, and $2400/mo total debt load. Payment on the full $260K is $1337, well within the numbers. The 401(k) loan for $12,500 will cost about $126/mo (I used 4% for 10 years, the limit for the loan to buy a house) but that will also take the mortgage number down a bit. The condo fee is low, and the numbers leave my only concern with the down payment. Have you talked to the bank? Most loans charge PMI if more than 80% loan to value (LTV).

An important point here - the 28/36 rule allows for 8% (or more ) to be "other than house debt" so in this case a $533 student loan payment wouldn't have impacted the ability to borrow. When looking for a mortgage, you really want to be free of most debt, but not to the point where you have no down payment.

PMI can be expensive when viewed that it's an expense to carry the top 15% or so of the mortgage. Try to avoid it, the idea of a split mortgage, 80% + 15% makes sense, even if the 15% portion is at a higher rate. Let us know what the bank is offering.

I like the idea of the roommate, if $700 is reasonable it makes the numbers even better. Does the roommate have access to a lump sum of money? $700*24 is $16,800. Tell him you'll discount the 2yrs rent to $15000 if he gives you it in advance. This is 10% which is a great return with rates so low. To you it's an extra 5% down.

By the way, the ratio of mortgage to income isn't fixed. Of the 28%, let's knock off 4% for tax/insurance, so a $100K earner will have $2167/mo for just the mortgage. At 6%, it will fund $361K, at 5%, $404K, at 4.5%, $427K. So, the range varies but is within your 3-5. Your ratio is below the low end, so again, I'd say the concern should be the payments, but the downpayment being so low.

By the way, taxes - If I recall correctly, Utah's state income tax is 5%, right? So about $4000 for you. Since the standard deduction on Federal taxes is $5800 this year, you probably don't itemize (unless you donate over $2K/yr, in which case, you do). This means that your mortgage interest and property tax are nearly all deductible. The combined interest and property tax will be about $17K, which in effect, will come off the top of your income. You'll start as if you made $63K or so. Can you live on that?

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  • Thanks for the information. The good news is that I have basically no debt. No credit cards, no student loans, and (soon) no car payment. So my monthly expenditures could be very low if need be. As for the roommate, he is living month to month as a student, so I don't think he would be able to pay anything upfront.
    – Charlie
    Commented Jun 16, 2011 at 19:02
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You're biting off a lot.

Let's say you can swing 5% for a down payment: $13k. A 30-year loan on $247k at the rate you quote gives you a payment of $1,270 per month.

This does not include taxes, insurance, or private mortgage insurance (which you'll pay because you have a down payment less than 20%). The PMI will run you about $150-$200 per month, I think, until your loan-to-value ratio falls below 80%.

Plus your HOA fee, utilities, your 401(k) loan payment, etc., you're pushing $2k/month.

You have a roommate in mind, and that will help, but the roommate can go, and you still own the property. Then you get the whole payment all to yourself.

If I had the option, I'd rent a little longer. Save up for a decent down payment, and shop around for someone who is desperate to sell.

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    Is "someone who is desperate to sell" someone who did exactly what the OP is doing?
    – Jay Bazuzi
    Commented Jun 16, 2011 at 15:48
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    OP had been renting, so he doesn't have to sell. If anything, he's a bit desperate to buy.
    – mbhunter
    Commented Jun 16, 2011 at 17:18
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    @mbhunter: I believe in comparing OP to "someone who is desperate to sell", Jay is suggesting that if OP goes through with the condo purchase, he may in the future need to move or have to sell, and may not be able to find a buyer, and thus become "desperate to sell". Being desperate to buy can lead one to become desperate to sell.
    – mgkrebbs
    Commented Jun 16, 2011 at 17:59
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    "If I don't jump now, I will lose the opportunity." This is not a good reason to buy property. There is always something fantastic that is now-or-never. Car salesmen love this ploy.
    – Jay Bazuzi
    Commented Jun 17, 2011 at 0:52
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    Agreed, falling in love with a place, or feeling like something is a once in a lifetime deal (when you have not had enough time in the market to really know if that's the case or not) is a great way to spend too much on too little. And especially right now, with all the foreclosures, short-sales and what not, for a patient buyer with their ducks already in a row, and no need to sell something else to make the deal work, there are some REALLY great deals to be had (although typically not on 'new' properties) Although you may need to FIND them yerself if there's no broker commission to be had.
    – Chuck van der Linden
    Commented Jun 17, 2011 at 19:56
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For me there are two issues.

  1. Borrowing against 401K is never a good idea. See this article for an overview of key concerns. Note the mention of it being a sign of financial distress.
  2. The room-mate @700 per month is meaningless - you must work your numbers on the assumption that you do NOT have anyone in the condo paying you rent. If you can't make it work without the rent, you're stretching yourself too thin.

So, what to do? You have the basics of a very strong position coming together. A good salary in a good city. I'd be patient and work on consolidating my position for another year to 18 months (including building a rainy day fund) and look to buy then.

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    Thanks, the article has definitely turned me off on the 401k loan. What would be a more preferable option, though, paying the minimum down payment (3.5% for an FHA), and living with PMI for quite some time, or trying to maximize the down payment in hopes of escaping the PMI and lower monthly payments?
    – Charlie
    Commented Jun 16, 2011 at 19:06
  • That's a good question. On a regular mortgage, your PMI, with a 3.5% down payment, looks like being around 200 per month. Not inconsiderable. Getting the 20% to avoid PMI will take time and you could miss the buy opportunity. I'm conservative and would wait it out til I had the 20%. If I was more headstrong the split mortgage is sounding attractive.
    – gef05
    Commented Jun 16, 2011 at 22:07
  • I went the less conservative route. :) Now, I don't think the rental income is meaningless. I was able to get 4 months rent in advance, and the roommate has already agreed to a 1-year lease. That's guaranteed money right there. Also, given the attractive location of the property (literally 5 minutes from campus, as well), this will not be a difficult room to keep filled.
    – Charlie
    Commented Dec 19, 2011 at 5:58
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    @gef05 - I can go point by point over the article you linked and dismiss most of them. The author assumes no deposits are permitted when a loan is outstanding. I've never heard of such a provision, it might be out there, but I don't believe it's common. That would actually be a deal killer, I agree. The cash allocation in one's 401(k) is going to earn less than 2%. The loan will be paid back at closer to 5%. In the end, the account itself is better off after the loan. Last, if this can eliminate PMI, the overall effect is a huge savings. Me, I'd never say never.
    – JTP - Apologise to Monica ♦
    Commented Nov 28, 2013 at 14:26
  • 200 a month!? That's crazy. I know this is an old thread, but when I got my first mortgage a couple years ago, I got PMI at $25 a month. I know that was crazy low (I wasn't complaining), but still, seemed like most places were offering more around 70-80 a month, which is still way less than 200.
    – neminem
    Commented Feb 20, 2015 at 17:19
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My primary concerns.

  1. you might be able to afford the payments, but I think a downpayment is the real issue.
  2. borrowing from 401k for this is NOT good (see many examples of why in other answers)
  3. You'd exhaust cash reserves and be living hand-to-mouth for a good while, with no ability to deal with any financial emergency. (relying on the 401K for 'emergency money' is also not good.)
  4. With no reserve, any financial hardship could very rapidly place you in a position of having to sell with little to no equity, into what is presently very much a buyers market.
  5. Without 20% down you'll have to pay PMI which is a substantial waste of money for you.

There seems to still be a fair bit of distressed property (forclosures etc) on the market at current, which might well keep prices down for the next year or so that it takes to finish flushing that stuff out of the market. The gist I get from most experts/pundits is that There will be good deals around for while to come still

I'd advise you wait. Go ahead and do the math to figure out what total you WOULD be paying would be, and charge yourself that much a mohth for rent in your current place, pocketing the difference in a savings account. You'll be able to get a feeling for what it's like to live with that kind of house payment, and if you can do it sans any room-mate (something you can't always count on) If you can manage it, then you have a much more realistic idea of what you can afford, AND you'll have saved up a bunch of money to help with a down-payment in the process.

If for example your Mortgage plus taxes and insurance ends up running around say $1450 a month, plus another $150 for the HOA, well then, that's charging yourself $1600 a month for your 'rent' which means $1000 per month going into the bank, in two years that's nearly the same as what you have now in the $401K, and you'd have a really good idea if you can afford that much per month in housing costs.

If you are bound and determined to do this now, then here's a few other things to consider.

You might to shop around a bit to see how typical those HOA fees are. Yeah you don't have the expense and hassle of needing to mow the lawn, paint the place etc but still, 150 a month translates to around another 1.5 mortgage payments a year.

You might be able to get around PMI by splitting the mortgage into two pieces and doing a 'purchase money second' of around 15-20% and 75-70% of the value for the main mortgage. That way the LoanToValue on your primary loan is under 80%, which could be worthwhile even if the interest rate on that second loan is a little higher (at least it's deductible, paying PMI is just money lost to you) although trying to do any kind of creative financing these days is a lot trickier

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  • Thanks for the suggestions. I am determined to become a homeowner of some sort this year, I think I just underestimated the wide variety of costs that are involved (i.e., it's not just the mortgage to worry about).
    – Charlie
    Commented Jun 16, 2011 at 18:59
  • The big question I'd ask myself in your situation is where's your money currently going, and why don't you have more for a downpayment? If you can realistically afford around $1600 a month in PITI (Principle, Interest, Taxes, Insurance) plus HOA, and your rent is only $600 at present, you SHOULD have a positive cashflow of nearly a grand a month flowing into savings.. If you don't, then where is the money currently going and can you really give up ALL of what that money is currently going to.
    – Chuck van der Linden
    Commented Jun 17, 2011 at 6:32
  • I'm glad you asked. I mentioned it (albeit briefly) in my original post: "family troubles combined with paying off my student loans ate up most of my savings." I don't have any trouble saving a grand a month, my issue was that I was promptly dumping that into student loans. About 5 months ago I finished paying my student loans and began saving for a down payment. Then, family issues ate up a bit of that savings, which admittedly wasn't that high (5 months is probably not enough time to save up a real down payment).
    – Charlie
    Commented Jun 17, 2011 at 16:21
  • Ok well that's a great point then, you are used to the money going to other things than just general spending, and I think paying off the loans first is a really good thing to have done, and should one would hope be reflected in your credit score (speaking which, if there is anything iffy in your credit history, now's the time to get it cleaned up, could make a difference in interest rates etc. My only other big concern at this point would then be after doing this deal what sort of 'emergency fund' will you have left, or how long to establish savings worth 6 months of expenses in the bank.
    – Chuck van der Linden
    Commented Jun 17, 2011 at 19:52
  • Fortunately my credit is pretty solid now, I had it evaluated and it came back just over 740. That puts me in the "excellent" bracket, and talking to a few other banks I might be able to get my interest rate down to 4.25%. As for the "emergency fund" and re-establishing some kind of savings, this is definitely a concern. To address it, I've talked to some tax professionals and found out that I can bump my tax withholding allowances up to 2 or 3 (it is currently 0). In this manner, my paycheck will see a boost, and I should be able to build up some savings faster.
    – Charlie
    Commented Jun 17, 2011 at 20:21
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If you are not planning on living in your condo for at least 10 years don't do it. For about 5 years your mortgage will be more then rent, after 5 years you start to break even and may start paying less. On the other hand, if you plan to be there for 10 years or more it might be a great savings tool,

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  • I am set up for a long-term career, but even if I do move before the 10 year mark, I think I would try to keep the property and rent it out.
    – Charlie
    Commented Jun 16, 2011 at 18:55
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$260k mortgage is pretty high for $80k salary alone -- if you have expensive tastes, be prepared to tune them down. The make or break for you will be taxes and other recurring fees. If property taxes are trending higher than inflation in your area, you'll have trouble down the line.

Decisions like this are really market driven, and I don't know much about Salt Lake City. In general, condo values get punished relative to single-family homes during bad market conditions. So if this is a really nice condo in a good building in a desirable part of the city you're probably going to see the value of the property increase as the general economy improves.

If the property is good, go for it.

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  • According to my realtor (not the seller, this one is a family friend), it is an excellent property that could increase in value if the market rebounds. It is also a brand new remodel, so it has a top of the line finish.
    – Charlie
    Commented Jun 16, 2011 at 18:56
  • I know this is old but ALL properties can increase in value if the "market" rebounds. That sentence is meaningless.
    – NotMe
    Commented Aug 13, 2014 at 0:06
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Plugging the numbers into this mortgage calculator (screenshot below), we can see that your payments will amount to around $2,000/month including principal, interest, taxes, insurance, PMI, and HOA dues. This represents about 25% of your salary, which is approaching the upper limit of what banks will allow you to take on. Such a high payment may make it difficult to replenish your emergency savings or save for other things like your 401k or future home renovations.

I'd advise against borrowing from your 401k as the drawbacks almost always outweigh the benefits.

Plugging the numbers

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