Although traditional home loans may be the most common way people secure financing for their home purchase, some consider tapping into their retirement savings. If you are considering borrowing money from your Individual Retirement Accounts (IRAs) or 401(k) plans to fund your home purchase, it is important to be aware of and weigh the advantages and drawbacks.
Pros
Convenience
Traditional mortgages often involve lengthy application processes, whereas borrowing from your retirement account can be much quicker and more straightforward. As long as you meet the eligibility criteria, you can promptly access the funds necessary to seize opportunities in the competitive housing market.
No Credit Check
Have a less-than-ideal credit score or a limited credit history? You do not need to worry about credit checks or meeting specific credit requirements to secure funds from your retirement account. The availability of funds is based on your existing account balance.
Interest Payments to Yourself
Unlike traditional mortgages where you pay interest to a lender, borrowing from your IRA or 401(k) allows you to pay interest to yourself. Those interest payments go back into your retirement account, potentially boosting your future savings.
Cons
Early Withdrawal Penalties and Taxes
If you are under the age of 59 ½ and withdraw from your IRA or 401(k), you may be subject to early withdrawal penalties and income taxes. There may be some exceptions, such as a first-time home purchase, but you will want to consult with your financial advisor to understand the implications before proceeding. Early withdrawals from traditional IRAs are typically subject to a 10% penalty, and the withdrawn amount is taxed as ordinary income.
Depleting Savings
Withdrawing funds from your retirement accounts means depleting your nest egg that you have likely spent years building up and saving for your future. The potential impact on your long-term savings is no small thing to consider before making this decision.
Lost Opportunity for Investment Growth
When you “cash out” a portion of your IRA or 401k plan to fund your home purchase, the funds you withdraw will no longer be invested in assets that could generate returns over time. This lost opportunity for investment growth could significantly impact the overall value of your retirement accounts in the long run.
As you explore different options to secure financing for your home purchase, we highly recommend you consult with a financial advisor to assess your specific situation and provide guidance tailored to your needs. As an attorney-owned title agency, we have all the expertise and resources necessary to ensure that all legal and regulatory requirements are met so that your transaction is executed properly. Contact us today for more information.