As Mr. Jar and I continue our research into buying our first home in the city of Chicago, I’m noticing that even to get a liveable home, you need quite a huge mortgage and in order to get any sort of money at all, you need a huge down payment (between $15,000 and $20,000).
I’ve read a few websites and news articles and have read conflicting opinions regarding borrowing against an IRA in order to have a big downpayment. The idea being that you should live your life NOW, and use money to establish a home and worry about debt and retirement later (especially since the jarbaby family is only in their early thirties) and of course the opposite being…YIKES…that’s your retirement, don’t touch it.
Any economic dopers out there have any thoughts? And I’ve also been searching for help for ‘first time buyers’ but it seems like there’s an income limit on that…you have to make UNDER a certain amount to get any federal aid or whatever you call it.
Anyway, suffice it to say…I am confused and know not how to proceed.
IMHO, right now real estate in certain areas of the country is a much better investment than the stock market. I do not know if Chicago is one of those areas.
If you drop $20K into a house, it doesn’t evaporate. If the housing market stays steady, you’ll get that 20K out of it when you sell, if it rises you’ll get more, if it falls you’ll get less. From an economic standpoint, the question is whether it will rise at a rate that’s greater than or equal to the amount it will rise in your IRA.
You’ll also get a big-ol tax rebate (my tax bill shifted $4000 after buying a house, from owing $2k to getting $2k) after you’ve deducted your interest and closing costs, which you can use to help replenish your IRA.
So, short story, houses can be good investments, good enough to justify taking retirement money to get one.
Duckster, the site didn’t present any facts that I didn’t consider, but I considered facts that the site didn’t consider, like the deductibility of morgage payments compensating for the taxes you’re paying on the money you repay the ballance with, and the increase in property value of a house compensating for the loss of future earnings of the money. Plus the cite was using old-new-economy numbers, 11% returns is a pipe dream in the current stock market.
Even so, and using their out of date numbers, my house’s value rose 20% last year, so I came out 5% ahead with my 401K loan.
In today’s investing climate I’d do it in a heartbeat.
Being only in the 30s,I figure you’ve got about 25 more years or so to invest,and down the road ina more favorable climate.
Mortgage rates have never been lower.And not likely to get much lower,given the prime rate is just abt.zero (1%) now.As soon as the economy inches up,those rates will,too.
There’s a big difference between the cost of a say,200k house at 6% vs.8%.8% mortgages were very common before Bush,they will be again.
That savings plus the tax rebates plus the actual monthly cost of the mortgage, rather than renting for a like home,would be more than enough to get me in.
Here’s where I’m confused. Are we talking about just deducting 10k from my IRA or BORROWING AGAINST IT, which would result in not only having to pay a monthly mortgage but a monthly IRA loan payment?
I’m wondering if I can just deduct it and pay some sort of penalty.
You can’t ‘borrow’ against a real IRA, like you can a 401K. I believe that you can withdraw from it without tax penalty if you use the money to purchase your first home, but IANATL (tax lawyer). this site seems to agree with me, but I have no specific knowledge.
I pay back a 401K loan in addition to my mortage payment.
We just did something very similar to what you propose. Our account was a tax exempt annuity ( 403B) and we withdrew the money for a house remodel. The value of the funds had been declining over the past year and housing here is very costly so we thought this was a better use and we did not incur any long term debt. We will have to pay penalties. I am not certain but I think that you may be able to withdraw the money for a primary first residence without penalty just as LordVor has suggested for an IRA account.
I have no idea about what can or cannot be done with IRS funds.
After you find out:
How stable is your income? Really. Can you sustain a job loss/pay hit and still make the mortgage?
Run the numbers - take last year’s tax return (or current, if you are disgustingly early ) and re-calc as if the mortgage payment was deductible on Sch A. That is free money telling you to buy a house.
If it seems even possible to swing it, DO IT!
The value of whatever you purchase may not go up immediately[sup]*[/sup], but your rent will.
Location, location, location - the reason for the big surge in R.E. prices in the late 70’s - 80’s was we boomers doing the “nesting” thing (that instinct you are currently feeling). In 20 years, we boomers will be dropping like flies, and a lot of real estate will lose its value - we boomers occupy more space than you gen Xer’s will. Choose something that will hold its value and/or be ready to move into a mansion in the boonies in 20 years.
jarby, I just bought my house a little over a year ago, so I have some fresh experience here.
You can, in fact, withdraw money from an IRA if you’re going to use it for the downpayment on a house. You’ll still have to pay taxes on the money withdrawn, so plan for that. However, there is not that additional 10% penalty for early withdrawal that you’d get if you just withdrew the money for hardship. There are some rules that go along with this (limits to how much you can take, etc.), it’s a good idea to speak to a customer service person at your IRA to make sure that what you want to do is within the allowances.
Something else you may want to consider is that FHA has a program for first-time home buyers that allows both a very good rate as well as a low downpayment (approximately 3%). I actually wound up getting a combination FHA and PHFA (FHA is federal, PHFA is specific to Pennsylvania) that got me a rate of 5.625%, which is about as good as you’ll find anywhere.
Your post doesn’t say, but it wouldn’t hurt to speak to a mortgage broker, who will have a much better idea of what mortgage options are out there for you. There are tons of programs available, so don’t feel like you need to go with a conventional mortgage just because that’s what most people do.
Feel free to email me if you have more specific questions.
Nothing much new to add besides endorsements, but what the hey…
happyheathen, Jadis and others nailed it, IMO.
It’s a lot of math (bleech) but really the issue is balancing short-term vs. long-term investments. I don’t mean to be patronizing, but one thing this doofus overlooked for way too long, just as a given, was the obscene amount I was sinking into rent. Familiar costs are still costs. Unless you’re investing very cannily indeed (and I wasn’t) the only thing you’ll have to show for years of renting is a pile of rent receipts.
Given the market right now, I’d invest in real estate in a skinny minute. You still have to live somewhere, so those costs are a wash. As far as long-term investment goes, be picky about what you buy. Location, location–or better yet, an eagle-eyed perspective on locations on the verge of upswing. Most of all, look for a house and neighborhood that says, “home”. A house/home can be a terrific investment financially, but if it doesn’t fit you, it won’t work. Being tough-minded and idealistic is tricky, but the rewards can be great.
This is very true; your premise of $15-$20,000 down may prove false. My wife and I bought a condo in Chicago a year and a half ago on a special program conventional loan with no money down. Nothing. There was an upper limit on how much we could borrow and we needed a credit score of maybe 700 or higher to qualify which is pretty high.
FHA, as noted, can go as low as 3% down (which can be 100% gifts) but also has an upper borrowing limit. I’m guessing your $15-20,000 down payment represents the minimum 5% down for most conventioal loans which would represent a $300-400,000 home, not hard to find in Chicago but unfortunately too much nut for a FHA or no money down loan. Please advise if my guess is incorrect, which would change the recommendations.
If the $15-20,000 represents the 20% down needed to avoid the dreaded private mortgage insurance, well, there are worse things than paying PMI. If the house appreciates rapidly, you may be paying PMI for less time than you think. We should be PMI free with no money down within two years of occupancy here.
Is this a first time buy? No equity in your present home?
Depending on your tax bracket, you may have to take more than $30,000 out of your IRA in order to have $20,000 after taxes.
I would also agree that your home, if in a good location, location, location and kept up will be a better investment in the near term than your IRA. YMMV All else equal, your IRA may do better in the long run.
For you Chicago folks, where do you find out about these programs? I searched the City of Chicago website and it said something about having to make less than 50k to qualify for federal aid. Am I searching under the wrong terms? Or for the wrong thing?
Our mortgage broker gave us all the info. I’d suggest you get one.
Some time ago in Chicago, some of the larger banks were accused of not making mortgages for middle income folks with good credit but little or no money down. I believe the term is “red-lining.” One of the penalties these banks must pay is to lend a small percentage of their portfolio to folks with excellent credit but little or no money down. The programs with the strictest income upper limits offer the lowest rates. We were making too much, so we got a higher rate. You can make quite a bit more than $50k if your credit is excellent and are willing to pay a higher rate.
Our neighborhood is appreciating and we were able to show enough equity without any of our own money within a year and refinance at a better rate.
“Redlining” refers to the refusal to loan on property in certain neighborhoods (think a red line around the “bad” neighborhoods on a map), not to buyers.
Oddly, though, the folks excluded by redlining are almost always black (no, not in Chicago!).
) and re-calc as if the mortgage payment was deductible on Sch A. That is free money telling you to buy a house.