Is Using Your 401(k) for a Down Payment on a House Wise?

Oftentimes, one of the main things that can hold a family back from purchasing a home of their own is the down payment needed. Although times have changed a little and some mortgage companies are accepting smaller down payments such as 5% over the old 20%, coming up with many thousands of dollars may still be hard to manage with all the other family expenses. Does this mean that this dream can never become a reality? There are ways you can still come up with some money for your down payment.

What is a 401(k) plan?

A 401(k) is a retirement plan that is sponsored by a company or employer. This plan allows workers to take out a portion of money from each weekly paycheck, put it into a retirement plan account and earn interest that does not incur taxes until the employee reaches 65 years old.

Details of how it works: a fixed percentage of earnings go into 401(k) account and the employer makes profit-sharing contributions into the 401(k) plan. The employer, as an incentive, puts extra money into the employee's retirement account. Even if you leave the employer, the 401(k) plan account stays active and is transferred to a banking institution for the rest of your life, although it is changed to an IRA account.

Should you dip into your 401(k) to withdraw a down payment amount?

Using the funds from a 401(k) for a down payment is only a good idea if other alternatives such as paying for mortgage insurance or a second mortgage are more costly. Check with your financial institution to see what your options are and how they may help you find the money you need for a down payment. Every situation is different so you need to sit down go over your finances and see what can be done.

What options do I have in using my 401(k) towards a down payment?

There is one option you can use towards securing your down payment with the help of your 401(k) plan. It is called a "hardship withdrawal". This gives you the ability to withdraw the needed amount if you abide by certain specifications. You must know though that a withdrawal is very costly. You forgo the earnings on the money withdrawn, plus taxes and penalties on the amount withdrawn which must be paid in the same year you withdraw. Since the taxes and penalties are so severe, you should avoid withdrawal at all possible.

Another option is to borrow against your account with the permission of your employer. You do pay interest on the loan but it will go back into your account as an offset to the earnings you are giving up. As long as you pay back the money, you do not pay taxes on it. The danger of this option is if for any reason you lose your job or change employers, you must pay back the loan often within as short as 60 days or be slammed with the taxes as penalties as if you were to withdraw it.

After considering all of the pros and cons of what options you have available to you for getting help with your down payment, you may just end up thinking it is easier to just go get a second job!


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Answers about the $8000 First Time Home Buyer Tax Credit

The new First Time Home Buyer tax credit has generated a lot of interest among home buyers and real estate professionals. In typical IRS fashion, the guidelines and answers to commonly asked questions leaves a lot to be desired. Quite often the regulations aren't precisely clear about who will qualify and what the exceptions are. Many brand new and potential homeowners don't know where to turn for answers. Also, many are confused about the new credit versus the prior deduction from 2008.

After some exhaustive research and a few phone calls, here are some answers to some of the most commonly asked questions:

Q: Can I claim both the 2008 credit since its basically a loan and the 2009 credit?

A: Yes per the IRS. Both credits require that you had purchased your home in a specific time period in order to be eligible. In order to do so, you would have had to have bought your home in January of 2009.

Q: How long does it take to receive tax credit refund check?

A: According to the IRS, it takes anywhere from 8 to 10 weeks to receive your refund check. However, that should be considered just a general guideline. I've talked to people that have been waiting longer and a few that actually received their check in just under 6 weeks.

Q: Can I help my child who has never owned a home, buy a house and have them claim the tax credit?

A: This is probably one of the most commonly asked questions. If you are not eligbile but help your child buy a house by cosigning on the loan, your child may claim the full amount if that home will be their primary residence and they meet the rest of the requirements. They will also need to reside in the home for three years or they will have to repay the credit.

Q: I bought my house in 2008 but it needed some repairs before I was able to live in it. I actually moved into the home in January of 2009. Can I claim the 2009 tax credit instead?

A: Sadly the answer to that question per the IRS is no. The tax credit qualifications are based on when you purchased the home, not when you started to occupy it (unless it is being built). So if a residence was bought at the end of 2008 but you didn't move in until next year, you would still only be eligible for the $7,500 tax credit of 2008.

Bottom line, if you are unsure whether you qualify for the tax credit, seek an accredited tax professional to prepare your return. IRS form 5405 does give some specific examples of what you need to do to be able to claim the credit. Thanks for stopping by.

About the Author:

Charles Richey is the webmaster for a comprehensive Las Vegas real estate site. The site also offers the latest Las Vegas real estate market news and a free MLS search.

Real Estate Finance Terms: What Exactly Does PITI Mean?

Regardless of whether you are dealing with the purchase or sale of real property, there are many terms that come up. You might say the language of finance and lending is an art in itself. There are hundreds of these special terms and it's not reasonable for a seller or buyer to learn all of them. However, there are some words or abbreviations that it's especially good to become familiar with for your own benefit, and PITI is one. Following is an explanation of the term and of each letter.

Principal
The principal is the actual amount of money that you are borrowing from the lender in order to buy the home. This figure differs all the time at the same home price depending on how large a down payment you make on the home and how much money you actually borrow from the lender. The principal is generally the biggest portion of the PITI equation.

Interest
Whenever you borrow money or pay on credit, you pay interest. This is the amount the lender earns from you as the price of loaning you the money you need, based on the cost of keeping the money from being invested anywhere else. It's calculated in percentages. Depending on the terms you agree on, the interest rate can stay fixed throughout the life of the loan or it can be variable, meaning it is subject to adjustment based on stated rates or factors.

Taxes
Even when buying real estate, you can't avoid paying taxes to Uncle Sam. Taxes on property, though, go to governments at the local level like the city or county to help schools and infrastructure operate. The tax revenues from homeowners help emergency facilities, rec centers, schools and other such facilities serve local residents. The tax assessments are typically added in with your monthly mortgage payment and are prorated each month. The lender pays the tax to the appropriate local government.

Insurance
It would be foolish to have a home without having being insured, and if you buy the home with borrowed money the lender will insist that you are properly insured. A home is your largest investment and a homeowners insurance policy is vital for your family's protection against disaster. There are many kinds of homeowner insurance policies from which you can select, which is more than we can cover in this article. Your insurance options also depend on how much of a down payment you make on the property. If you make a down payment of less than 20% percent, lenders will require you to carry a certain policy that assures they will get their money if you the home is lost to foreclosure. Any required insurance payments are normally rolled into your monthly payment.

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