Should I withdraw money from my IRA for a down payment on a new home? The stock market's been underperforming, but I'm optimistic about long-term home values.
In the first place, the question of whether the stock market's been flat while real estate has growth potential is irrelevant unless you're planning to buy this home for investment purposes. This is an issue you need to think through very carefully. An investment is something you make for one of two purposes: either you expect it to generate income, or you hope that it will appreciate in value so that you'll be able to sell it for a profit. Generally speaking, people don't buy homes for either of these reasons – they buy them because they want to live in them. If this is your situation – and we're assuming it is – then you'd be wise to avoid jumping into a purchase of this magnitude simply because of the supposed investment advantages.
In the second place, you need to know that withdrawing money from an IRA account for a down payment is likely to have a couple of very serious economic results. For one thing, you will lose the almost "magical" benefit of compounding interest on a tax-deferred basis. For another, there may be significant tax consequences that might offset the benefit of borrowing from yourself. It would be far better to leave the money in the IRA and find some other way to come up with a down payment.
As you begin moving in this direction, remember that lenders have historically required a down payment of at least 20 percent of the purchase price of a home. In recent years, as housing prices increased and lenders became more aggressive, many financiers began accepting down payments of as little as 3 to 5 percent. We now know that this was a disastrous policy. The best plan is to put down as much money as possible toward the total cost of the house at the beginning of the buying process. This will reduce your monthly payments and shorten the term of your home loan. Of course, it may also mean disciplining yourself to save until you have enough cash on hand to take such a decisive step – but then we're of the opinion that saving is always a good idea.
For additional help and information on this topic, we'd encourage you to consult the resources and referrals highlighted below. Or if you have relationship concerns and challenges associated with this situation, please don't hesitate to give our Counseling department a call.
Is Your Home Really an Investment?: Ron Blue discusses the myths and realities of residential real estate as an investment.
Family and Personal Finances (resource list)
Crown Financial Ministries
Money and Finances