Monday, October 24, 2016 / by David Veenstra
Kalamazoo real estate: Saving for a down payment for a home is considered by most people to be a wise investment plan. A home usually appreciates in value and is often the major cornerstone of wealth building for people. There are many different kinds of loans and some of them are available to people with a very low down payment. For example, a veteran can often get a VA loan with no or almost no down payment. There are "rural development loans" which are no down payment loans (and the qualifying areas are NOT all that rural in Kalamazoo. Connect with us to use a unique tool we personally programmed to find all homes that qualify.) There are also loans that are available with 3.5% of the purchase price down, 5% of the purchase price down, 10% down 20% down and more. Recognize that the best interest rates and the lowest long term price of a house will be reached by those who have the most money saved.
There ARE other ways to get a down payment though, and these can be appealing for first time Kalamazoo home buyers. Each of these methods comes with some consequences which should be thoroughly studied and understood before you move in that direction. We do want our home buyers to have all the information they can get so they make the best, most informed decision possible for their future.
The National Association of REALTORS (NAR) Profile of Home Buyers and Sellers reports that 81% of first-time buyers got all or part of their down payment from savings. Less than 4% said that all or part of the down payment came from a withdrawal in their IRA and 8% from their 401(k) or pension fund. So you can see that, by far, the majority of home buyers save money to purchase.
There are a few other options. Traditional IRAs have a provision for first-time buyers . This includes anyone who hasn’t owned a home in the previous two years. A person and their spouse, if married, can each withdraw up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. Please note that they will have to report the withdrawal as income for that tax year. For more information, go toIRS.gov.
The allowable withdrawals from traditional IRAs can be from yourself and your spouse; your or your spouse’s child; your or your spouse’s grandchild or your or your spouse’s parent or ancestor.
Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.
Up to half of the balance of a 401(k) or $50,000, whichever is less, can be borrowed by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from a 401(k) that would determine the repayment; interest is usually charged but goes back into the owner’s account. You can consult with your HR department to find out the specifics.
You should be sure to note that a risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also. The other important impact that you need to consider with borrowing money from any of the retirement income vehicles that you may have is that you are reducing the growth of your retirement income significantly. So, be sure to consider the long term implications of borrowing money from a retirement vehicle to buy a house.
Your Kalamazoo area tax professional can provide you specific information on how making a withdrawal from your retirement program to purchase a Kalamazoo area house or second home might affect you. Additional information can be found on www.IRS.gov. We definitely recommend that you seek professional advice from your tax accountant before making any decisions.
Contact the Veenstra Team at 269-350-5514 if you would like us to walk you step by step through the home buying process. We are eager to help you meet your real estate goals.