Rock-bottom mortgage rates, affordable home prices and rising rents are enticing renters into homeownership. Some first-time buyers who lack the cash for a down payment and closing costs are turning to their retirement savings accounts for money to buy a house.
There are two ways you can leverage your retirement savings to buy a house:
-- Borrow or withdraw from a 401(k) or individual retirement account.
-- Reduce or eliminate your retirement savings contributions temporarily to save for a down payment.
"Right now, affordable prices and low interest rates offer an unusual opportunity to buy a home, so we do sometimes recommend that our clients borrow against their retirement," says Ben Barzideh, a wealth adviser at Piershale Financial Group Inc. in Crystal Lake, Ill. "Owning a home is an important way to build financial security."
Timothy Johnson, chief investment strategist with Lincoln Financial Advisors in Nashville, Tenn., says withdrawing money from retirement savings should be approached with caution. "While owning a house is a good idea, you should make sure you can reach your other objectives, too," he says. "A younger person will hopefully have a long time to rebuild retirement savings, so borrowing or withdrawing some of it isn't necessarily wrong, but they shouldn't take unnecessary risks, either."
Doug Benner, a senior loan officer with Embrace Home Loans in Rockville, Md., says borrowing from your retirement is much better than withdrawing money because you can repay yourself.
The rules about how you can leverage your retirement savings vary according to the type of investment.
"If you have a 401(k), you can borrow up to $50,000 or half of your vested balance, whichever is less," Barzideh says. "You are required to pay back the loan with interest, though, so you'll have another debt to pay that digs into your cash flow. Some 401(k) accounts require repayment within five years."
Johnson says borrowing from your 401(k) can be a better option than a traditional IRA withdrawal because you won't have to pay taxes on the income.
Johnson says if you don't repay your 401(k) loan in the allotted time, it will become an early withdrawal, triggering a 10 percent penalty and income tax payments on the loan amount.
If you have a traditional IRA, Barzideh says you can borrow up to $10,000 for a down payment without paying a tax penalty if you are a first-time homebuyer, although you will have to pay income tax on the loan. If you are married, each spouse can borrow up to $10,000 for a total of $20,000.
Johnson says withdrawing money from a traditional IRA is the least advantageous way to access your retirement savings because of taxes. He says withdrawing funds from a Roth IRA is the most advantageous because the withdrawal of any contributions to the account is tax-free and penalty-free.
Any withdrawal from retirement savings must be documented. "While you can wait until you have a home under contract to request a withdrawal or a loan, it's better to check out the rules of your particular account ahead of time, and get an estimate of what your repayment requirements will be," Benner says. "It can take three weeks to get the money from a 401(k) loan, plus you want it to be in your account for at least a week before closing, to make sure the funds are available."
Reducing or eliminating retirement savings can be an alternative to withdrawing or borrowing from your accounts, but you'll be missing out on tax advantages and, often, an employer match with a 401(k) plan.
"You should at least try to save up to the employer match while you are saving for a down payment because otherwise you are throwing money away," Johnson says. "It's natural, especially for young people, to have to make compromises in their finances, but if you can't at least save a little toward retirement, then maybe you shouldn't be buying a house right now."
Mortgage rates were mixed in what was generally a slow week.
The 30-year fixed-rate mortgage stayed steady at 3.57 percent.
However, the 15-year fixed-rate mortgage fell 1 basis point to 2.88 percent. A basis point is one-hundredth of 1 percentage point.
The average rate for 30-year jumbo mortgages, or generally for those of more than $417,000, also fell, losing 2 basis points to 4.09 percent.
The 5/1 adjustable-rate mortgage was unchanged at 2.72 percent. With a 5/1 ARM, the rate is fixed for five years and adjusted annually thereafter.
Distributed by Scripps Howard News Service. Reach Michele Lerner at email@example.com