In a survey released by Century 21 Real Estate, renters said they are willing to contribute less to their 401(k) to buy their dream home. Not a good idea, says Eve Kaplan, a financial adviser with Kaplan Financial Advisors in Berkeley Heights, N.J.
"The problem we often face as planners is convincing folks to postpone the 'here and now,' including enjoyable things, and focusing more on the future," Kaplan says. "It is really difficult to live on Social Security, which never was designed to be the sole source of retirement savings."
Americans are just not saving enough for retirement. According to a recent BlackRock survey, 58 percent of all 401(k) plan participants were not saving the maximum with their plans. The survey also found that eight in 10 retirees regret that they did not save more for retirement through their 401(k) plans.
"Contributing less to one's 401(k) could often mean sidestepping a valuable company match," Kaplan says. "It's OK to sacrifice for a home, but a better sacrifice would be to forgo the dream home -- gourmet kitchen, media room, etc. -- and retain 401(k) deferrals."
Instead of reducing or stopping your 401(k) contributions, Ron Howard, managing principal at Siena Wealth Management in San Jose, Calif., recommends reducing or eliminating some other expenses.
Even if you are buying a house you can afford, Howard says, you will still need to give up certain things that you were used to doing or spending on as a renter. That's because on top of your mortgage, you will have to deal with many unexpected costs as a first-time homeowner.
Sure, you could afford the house, but what about the property taxes, homeowner insurance, carpet replacement, general maintenance of the home and landscaping? To pay for these, Howard says you may have to do away with exotic vacations, expensive technology gadgets, dining out regularly or going to a coffee shop every day. Now might also be a good time to give up smoking and reduce your bar tab.
With soaring demand pushing rents to an all-time high, homebuying is looking more attractive these days. According to the Mortgage Bankers Association, the average rate on a 30-year fixed-rate mortgage fell to a record-low 3.72 percent for the week ending Sept. 14, down from 3.75 percent the previous week.
"Now could be a great time to buy and lock in your housing costs," says Jessie Foster, financial planner at Raskin Planning Group. "If you are in an area where the rental market is booming, you will most likely see your rent increase each year."
To determine if you can afford to buy your dream home, use this rent vs. buy calculator. This tool would show you the fees, taxes and monthly payments to compare with your current rent. Use this mortgage loan calculator to see how much interest you could pay and your estimated principal balances.
"Another cautionary element here is folks buying more house than they can afford with an adjustable-rate mortgage. Interest rates may move much higher in the longer term, pricing some people out of the homes that seem more affordable now," Kaplan warns.
If you truly know that you can afford to buy that dream home, Howard says, go for it. But prepare to make lifestyle changes for the unexpected expenses that come with homeownership.
Just don't touch that 401(k), Kaplan says. "No home is worth jeopardizing future funding goals."
Buying Your Dream House? You Might Have to Give Up Some Things You Shouldn't
Home price as percentage of income: 152% Median home price: $99,000 Median family income: $65,300
Lansing is the first of five (six, if parts of the South Bend region are included) metropolitan areas located in Michigan to make this list. Home prices in the area are expected to rise by an average of 5.8 percent annually between 2012 and 2017, among the top third projected increases in the country. The median home price is just south of $99,000, or $60,000 less than the median home price in the United States.
Home price as percentage of family income: 152% Median home price: $108,000 Median family income: $70,900
The median home price in Appleton of $108,000 is higher than any metro area on this list, but it is still well below the U.S. median home price of $159,000. Home prices have consistently been cheap in the area for years. The median price between 2007 and 2012 only declined by 4.9 percent, far less than the national drop of 33.3 percent.
Home price as percentage of family income: 150% Median home price: $79,000 Median family income: $52,300
The median family income in Battle Creek of $52,300 is the 23rd lowest among all metro areas surveyed. But with home prices the third cheapest of all metro areas, buying a home is quite affordable. Home prices were relatively cheap before the economic downturn, too. Prices fell by 16.1 percent from their peak in the second quarter of 2006 to the first quarter of 2012, a far more modest decline than the nationwide home price drop of about 33 percent.
Home price as % of family income: 150% Median home price: $80,000 Median family income: $53,300
Homes in the Youngstown-Warren-Boardman area are affordable, even for those with modest incomes. While median family income in the region is $9,600 lower than the national median income, median home prices are even lower — the fifth lowest in the country.
Home price as percentage of family income: 139% Median home price: $79,000 Median family income: $56,900
Memphis is the only metropolitan area on this list not located in the Midwest. While home prices of $79,000 are the third lowest of all metropolitan areas measured, home prices are expected to rise at an annual rate of 6 percent between 2012 and 2017, more than 2 percentage points more than the national median. Home prices are expected to rise 8.6 percent next year alone, one of the biggest growth rates in the country.
Home price as percentage of family income: 133% Median home price: $95,000 Median family income: $71,600
In the Warren-Troy-Farmington Hills metro area, the combined factors of high income and low home prices can make paying for a house easy. The median family income of $71,600 is the highest on this list and nearly $20,000 higher than the nearby Detroit metro. Furthermore, the median home price of $95,000, which has fallen 40.9 percent since it reached its peak in the second quarter of 2005, means that homes have become a bargain for those who can afford to buy one in this shaky economy.
Home price as percentage of family income: 132% Median home price: $80,000 Median family income: $60,000
Median home prices in Rockford are only expected to rise by 2.4 percent in 2013, less than the 5 percent price increase expected nationally. However, between 2012 and 2017, home prices are expected to grow at an annualized rate of 4.2 percent, besting the U.S. rate of 3.9 percent.
Home price as percentage of family income: 121% Median home price: $69,000 Median family income: $57,300
The median monthly mortgage payment for a house in South Bend is only 5.52 percent of the median monthly income. This is the only metro area in the United States, besides Detroit, where mortgage payments are less than 6 percent of median income.
Home price as percentage of family income: 79% Median home price: $41,000 Median family income: $51,900
While home prices were already cheap in Detroit before the housing downturn, they became even cheaper after. Home prices between the first quarter of 2007 and the first quarter of 2012 fell a whopping 53.7 percent, or 14.3 percent annually — the 10th-largest drop of all metro areas surveyed. With a median home price that is $28,000 lower than any other metro area reviewed, a median mortgage payment is only 3.6 percent of monthly income.