401(k) Situation a Chance to Boost Savings for a Home

Question: I want to buy a home in the $210,000 price range before the end of the year. I’ve saved approximately $30,000 in a money market account and designated half of it as my emergency fund, with the other half for a down payment. I’m thinking that because the stock market is not doing that well, it might make sense to decrease my 401(k) contributions to 1% for the next six months so I can save more for a home. I should mention that my employer will continue to match 5% of my base salary regardless of whether I contribute the maximum. The reduction would allow me to have an additional $10,000 or so to put down on my home. What are the consequences of such an action? I’d like to have my monthly mortgage payments as low as possible.

Answer: Normally, it makes little sense to reduce a 401(k) contribution to 1%, because you miss out on the company match. You also shouldn’t make your contribution decision based on current market conditions. The only conditions that should concern you are those 30 to 40 years in the future, when you’re actually going to need this money.

You, however, have the rather unusual situation of being able to eat your cake and have it too.

Because your employer contributes 5% of your salary regardless of what you contribute, you can scale back temporarily without giving up what’s essentially free money.

Note that word “temporarily.” Not taking full advantage of your 401(k) can cost you hundreds of thousands of dollars down the road, because the money you don’t contribute can’t earn all those nice tax-deferred returns over time. You’re talking about a six-month hiatus, however, so the damage you do from not contributing as much can easily be made up by restoring your contributions to the maximum once you purchase the house.

Saving a bit more for a down payment also will help you land a better deal on a mortgage. You can generally qualify for decent rates once you have a payment equal to at least 10% of the purchase price. If you can manage to put down 20%, you also can avoid private mortgage insurance, a cost that can increase the cost of your monthly payments.

You’re smart not to devote all your cash to a down payment, by the way. Having an emergency fund is especially important when you’re a homeowner and facing sole responsibility for replacing a roof that may spring leaks, a furnace that dies and plumbing that rebels in the middle of the night.

You’ll also need some cash to cover closing costs once you’ve found the home you wish to buy.

Credit Card Deal

May Have Some Traps

Q: I’m considering transferring my $11,000 student loan debt, which carries an 8.25% interest rate, to one of my credit cards that’s offering a 3.9% balance-transfer deal. The rate is supposed to last until the transferred debt is paid off, with no other time limits. I’ve examined the fine print and the deal seems to have no strings attached. I can’t see any reason I shouldn’t exploit this opportunity. Unless I’m missing something, it seems like more people should investigate this kind of opportunity while rates are low.

A: There are a few traps here.

The first is that this must be a card you don’t use for any other purpose. As soon as you charge something else to this card, a higher rate will apply to the purchase. Meanwhile, your payments will be applied to the lower-rate portion of your balance, which means you wind up carrying the high-rate balance longer. That’s how credit card companies make money on these deals.

Another pitfall is that your rate will go up if you miss any payments. Some companies jack up the rate if you’re even a few days late.

You typically will pay a fee for this transaction, usually 2% to 3%. Although that won’t offset all the benefits of the lower rate in your case, such balance-transfer fees are an annoying cost that should be factored into the equation.

You’re also giving up a lot of flexibility. You can generally get a deferral or forbearance on paying your student loans if you lose your job or have other financial difficulties. Credit card companies aren’t nearly so accommodating.

You’re losing a potential tax deduction as well. Credit card interest generally is not deductible, but student loan interest of as much as $2,500 a year can be.

Finally, many people have the opportunity to lock in extremely low student loan rates right now. If you haven’t already consolidated your federally guaranteed student loans, you can consolidate now and may get rates of about 4%. People who just graduated and who are in their six-month grace period can qualify for even lower rates. Most student lenders have information, or you can check out what’s posted on the subject at www.salliemae.com.

Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at askliz weston@hotmail.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.