Buying a home has become more and more expensive over the years. Between mortgage rates, home prices, and upfront costs, affordability remains a top issue for most buyers. One of the biggest hurdles for buyers – especially first-time buyers – is the down payment. Even though some loans allow for down payments as low as 1% to 3%., that’s still thousands of dollars. To finance the upfront costs, younger buyers are planning to tap into retirement savings. Though this could help them purchase a home in the short-term, it could end up hurting them in the long run.
One-third of younger buyers plan to use 401(k) money
According to a recent study conducted by BMO Financial Group, nearly one-third (30%) of hopeful home buyers plan to finance their purchase using money from their 401(k) funds. Millennials (31%) and Gen Zers (34%) are more likely to do this than older workers (16% of Boomers).
Experts recommend against tapping into 401(k)
Though you can technically borrow up to 50% of your 401(k) balance (or $50,000, whichever is less) without penalty (as long as it’s repaid within five years), it’s not something experts recommend. “You really, really, really, really shouldn’t be taking out your retirement for a house,” said Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York City. It’s “much better to have those dollars working for you,” Francis added. There are two main consequences from early withdrawals:
- You make a dent in your retirement savings
A 30-year-old worker who left $10,000 in their 401(k) instead of withdrawing it could end up with nearly $77,000 more for retirement at age 65, assuming average annual returns of 6%.
- You’ll face fees and trigger taxes
Generally, early withdrawals from retirement accounts can trigger taxes and a 10% penalty (aside from certain exceptions). For both individual retirement accounts and 401(k)s, qualifying first-time home buyers may be able to take up to $10,000 penalty-free. With Roth IRAs, owners can withdraw their post-tax contributions at any time without penalty.*
Alternatives to tapping into 401(k)
- HomeFundIt™: HomeFundIt™ allows home buyers to raise money for their down payment through an easy-to-use online campaign. Unlike traditional down payment gifting, ANYONE can give money – not just family. And they do this just by using their credit or debit card. Plus, we offer a $2-to-$1 gifting match of up to $2,000**.
- Down payment assistance programs: there are several DPA programs that can help you buy with little to no money down. Ask us about the DPA programs in your area, about FHA Buyers’ Choice, and about CMG Community ONE!
Source: CNBC
*For tax advice, please contact a tax professional
**Grant is a $2-to-$1 match on regular down payment gifts received on HomeFundIt™, up to the lesser of $2,000 or 1% of purchase price for first time buyers, as defined by Fannie Mae, who complete homebuyer education prior to signing a purchase contract. Talk to your loan officer or visit your HomeFundIt dashboard for next steps, or you can also find a housing counselor near you by visiting https://www.hud.gov/counseling.
Grant funds are applied to nonrecurring closing costs. If closing costs are fully paid by seller or interested party, grant funds can be used to buy down the rate. Grant funds cannot be used towards a down payment. Visit https://www.homefundit.com/Grant for complete terms and conditions.
HomeFundIt™ is a service provided by CMG Home Loans
To learn more, visit nextmortgage.com.