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When is Buying a Home With Your 401(k) or IRA a Good Idea?

By U.S. News & World Report

It’s no secret that home prices are growing. The average sale price for a new home in the U.S. was $379,500 in June, according to the U.S. Census Bureau, compared to $271,800 in the same month in 2012.

The large price tag on a home makes it difficult and, sometimes, seemingly impossible to buy real estate. The down payment, whether its 3 percent, 20 percent or anywhere in between, is a major obstacle for many buyers, and a common reason people don’t buy real estate. But this is because a lot of potential buyers don’t realize the extent of the options available to them.

One of these options is the ability to use your retirement plan — 401(k) or IRA — to help toward the down payment on a home without penalties. The IRS has guidelines for taking out a loan from your retirement plan, including a limit of 50 percent of your account balance, or $50,000, whichever is less — which could be just enough to afford a down payment, depending on the price of the home and your mortgage program. Always consult with an accountant or financial planner to ensure you are doing it correctly.

Retirement plans are all different, and each one is going to have its own specific set of rules and guidelines for taking out a loan. It’s not as difficult as it may seem and you will find it’s pretty general across the board.

[Read: How Technology Plays a Part in Getting a Mortgage Today.]

When does it make sense to take a loan from your retirement savings?

The most common reasons someone would use a loan from their 401(k) or IRA is to help with the down payment or to avoid paying mortgage insurance altogether.

In the first case, the buyer doesn’t have the 3 percent to 5 percent down payment required by conventional and Federal Housing Administration loan programs. Taking a home loan from your retirement plan can make it possible for you to have the down payment money you need to buy a home.

In other scenarios, the buyer doesn’t want to pay the mortgage insurance, which is typically required when your down payment is less than 20 percent. Taking a loan from your retirement plan in this scenario can help you save hundreds of dollars per month on mortgage insurance.

When does it make sense to use a loan from a 401(k) in order to reduce the cost of homeownership?

There is a considerable difference between putting 5 percent down on a home, versus 20 percent down after borrowing from your retirement plan.

Consider a purchase of a $300,000 house with a 4 percent interest rate.

A 5 percent down payment is $15,000, meaning your loan will be $285,000, plus mortgage insurance. Mortgage insurance is typically between 0.5 percent and 1 percent of the entire loan amount on an annual basis. In this example, it’s likely around $120 to $238 extra per month. The total cost for mortgage insurance becomes $11,160 over 93 months, or seven years and nine months.

Your monthly payments to the bank will total $1,480 until the mortgage insurance drops off the loan, which brings it down to $1,360 monthly. Over the course of 30 years, you’ll be paying the total of more than $500,000, assuming a 0.5 percent mortgage insurance amount.

[Read: With Rising Interest Rates, Is Now Still a Good Time to Buy a Home?]

If you have been able to save $90,000 in your 401(k), you’re able to loan yourself up to 50 percent from your retirement savings (or $50,000 if you have more than $100,000 in your retirement). Added to other savings for a 20 percent down payment, your home loan is down to $240,000 and you will not be paying mortgage insurance. At a 4 percent interest rate your monthly payments to the bank drop to $1,145 monthly.

The total loan payment in this example is a little more than $412,000 over the course of 30 years with no mortgage insurance.

The caveat is that you still have to repay the $45,000 loan you took from yourself.

This means that you will owe yourself about $828.74 per month with a 4 percent interest rate over five years. Combined with your mortgage, your monthly payment becomes about $1,974. The benefit is that you are paying the bank $1,145 and yourself $828.74, instead of paying the bank the monthly total of $1,480.

So while you may be saving $335 per month you are also raising the total monthly payment from $1,480 to $1,974 over the five-year repayment plan. While this may seem like a considerable difference, remember you are paying yourself instead of the bank.

As you pay off loans, you build equity in your house over time. The historical average of real estate appreciation is 4.3 percent. This means that buying a $300,000 home with a 4 percent average annual appreciation will be worth nearly $1 million after 30 years.

[Read: 6 Ways to Boost Your Chances of Getting a Mortgage.]

When should you not to borrow from your 401(k)?

Borrowing from your 401(k) should be a last resort. If it’s the only way you can afford to buy a house, it may make sense since real estate is also an effective form of saving for retirement.

Loan defaults are the No. 1 reason it may not make sense to borrow from your 401(k). If you quit your job or want to change careers you must pay the 401(k) loan back in full within 60 days of termination of employment. If you can’t pay the loan back in full within 60 days and you’re under the age of 59 and six months, you will be taxed on the amount withdrawn as well as an early withdrawal penalty.

When it comes to borrowing from your retirement plan, you are taking more than a loan from yourself — you’re also taking a risk. In many cases, the risk of being unable to pay back the loan will outweigh the benefits, so make sure you consult a professional before taking a loan from your retirement savings.

More from U.S. News

The 25 Best Places People Are Moving to in the U.S. in 2017

The 25 Best Affordable Places to Live in the U.S. in 2017

Credit, Mortgages and Your Ability to Buy a Home: It Doesn’t Have to Be Scary

When is Buying a Home With Your 401(k) or IRA a Good Idea? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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