House buying and investment questions

[fox two]

First question:

I understand I can take $10k penalty-free from my roth IRA for a first time home buying down payment. Halfway through my twenties, is it smarter to use this or take out the money from a taxed non-ira account? Both accounts are long term 8-10% mutual funds.

Second question:

If I take out the $10k from my roth, which I understand will remove contributions first, what if I can't close on a house and don't end up using it...can I put that money back as if nothing happened? I've maxed out my contributions ever year, so would I be able to put that $10k back as a whole, or am I stuck back with the ~$5k per year limit? According to https://www.wellsfarg...ent/ira/faq.jsp:

Once a distribution is taken from an IRA, you have sixty days from the time you receive the check to replace those funds and avoid any associated penalties or taxes. This type of rollover can be done only once every 365 days.

Is that applicable to what I'm asking?

Third question:

A variable rate mortgage offers the lowest APR and is locked in for the first five years, is this a safe option since we will be moving by then anyways?

Edited January 26, 2013 by fox two

[ThreeHoler]

All your questions are very bad ideas.

[nsplayr]

Man, you even trademarked your response, well played sir.

[fox two]

All your questions are very bad ideas™.

The first question is asking the best method of funding a down payment, and the second question is asking about contribution limits, what does that have to do with bad ideas? Only the third question is actually about a potential idea.

[hispeed7721]

Not endorsing any of your ideas, but if you have a Roth, it's already taxed and you can pull as much out (sts) as you want w/o penalty.

Your original posts makes it seem that you think you are penalized and taxed for withdrawing money, which is not true. Just want to make sure you make a decision with correct information :)

[fox two]

Well let me clarify, I keep all my money in long term mutual funds, some of which are in a roth which has been maxed out every year, so most of my down payment will come from withdrawing investments. Is it a smart decision to utilize the tax-free $10k first home withdrawl from the roth, or better to pull the money from a normal mutual fund and pay the tax on the gains while leaving the roth intact?

[hispeed7721]

IF those are your only two options, take it out of the Roth. Let me be clear that I wouldn't chose either if it was me.

Any Roth withdrawals are ALWAYS tax/penalty free. That's the point of a Roth. You pay taxes on the front end so the gains are non-taxable. I'm not sure where you're getting this idea that you only get a "one time house withdraw" with the Roth

[nsplayr]

If he's talking about earnings from a Roth, or any money from a traditional, then yes, there are different rules is you're a first-time homebuyer. BL: any money in a roth that's been there for 5 years, whether it was contributions or earnings, if fair game for whatever you want. If that's where you keep all your (sorta) liquid assets then go for it with the withdrawal for your down payment.

Read up here.

Edited January 26, 2013 by nsplayr

[F16Rooster]

Interest rates right now are so low (3.25ish) you might do better to leave that money where it's at. Especially if you can avoid the mortgage insurance.

[ThreeHoler]

The first question is asking the best method of funding a down payment, and the second question is asking about contribution limits, what does that have to do with bad ideas? Only the third question is actually about a potential idea.

All your questions have to do with pulling out (sts) retirement money to fund a down payment. Sure, you can do it if you want, but it is not a good idea.

Why are you not looking at a VA loan? You don't need a down payment. The funding fee is rather small. There are even places that will pay a large part of your fees just so they can get your business...

Don't throw away long term investment money to make a down payment.

[Jughead]

BL: any money in a roth that's been there for 5 years, whether it was contributions or earnings, if fair game for whatever you want.

Not true.

Contributions: already taxed, can be withdrawn whenever for whatever reason without tax or penalty. (Though, ThreeHoler is spot on, it's a horrible idea--ask yourself why you contributed to a retirement account in the first place, then try to reconcile that with an early withdrawal....)

Earnings: 5-year rule only applies if there's a "qualifying reason" (which includes reaching age 59½ or first-time home buyers); if one of those "qualifying reasons" exist, then there's no penalty, the only question is whether ordinary income taxes are paid (<5 years) or completely tax-free (>5 years). In the absence of a "qualifying reason," there are a handful of "exceptions" (disabled, high medical expenses, etc.) that will allow you to dodge the 10% penalty tax, but either way it will be taxed as ordinary income in the year withdrawn.

For the OP's point (first-time home purchase), he would get any contributions out tax-free (sounds like what he's talking about) and would pay ordinary income tax on any earnings withdrawn (I'm assuming he has <5 years in based on the context). In general, however, 5 years is not a "free withdrawal at any time" for those under 59½.....

fox two: listen to ThreeHoler; bad, bad idea....

[nsplayr]

Yea, I was specifically talking about the OP's situation where he was proposing to use it for a qualified reason.

[Smokin]

Pulling money from an IRA of any type should be a last resort. I just refinanced my VA loan at 3.25%. That is .25% above historical inflation. Average for the stock market is ~10%. That means that you're pissing away 6.75% per year of whatever you withdrew from your IRA for the down payment. An adjustable rate will be the best right now, but if you're planning on selling when you move, you'll probably lose money anyway after realtor fees, taxes, etc anyway and would likely be better off renting.

If you need to pull money out of your IRA to buy a house, maybe you should re-evaluate why you are buying a house, especially if you're going to sell it in three years (that's generally not a good investment). Rent now, save up your money, and buy a house at the next base when you can afford it.

[Champ Kind]

If you need to pull money out of your IRA to buy a house, maybe you should re-evaluate why you are buying a house....Rent now, save up your money, and buy a house at the next base when you can afford it.

Sage advice. Thanks for saving me the typing.

If you have to cash in retirement accts to fund a mortgage down payment, you're doing it wrong.

[LoneStar]

Also - according to the Rule of 7's, your money is going to benefit you better long term in the Roth, as opposed to a gain for a 3 year house purchase that you might not be able to sell off when you move. Also - with no data to back this statement up - I don't think people are making ~10% return on homes annually.

[Mark1]

Also - according to the Rule of 7's, your money is going to benefit you better long term in the Roth, as opposed to a gain for a 3 year house purchase that you might not be able to sell off when you move. Also - with no data to back this statement up - I don't think people are making ~10% return on homes annually.

Nope, not even close to 10%. Historically homes don't appreciate at a rate much more than inflation. You'll find plenty of people out there that will tell you different, but their perception is based on the 15yr period prior to 2008 which was artifical. There have been 3 periods of abnormally high appreciation rates in the housing market over the last 100yrs, and all three of them have crashed back to right about where they should have been all along. The one decent thing about using real estate as an 'investment' is that you're not likely to lose money as long as you don't buy at the height of a bubble, but it's certainly not a large growth opportunity.

People who use real estate as an investment rent their properties and make their money from their tenants, not from property appreciation. Index funds on one of the large markets will outperform (by a large margin) real estate appreciation over the long run.

[Whitman]

People who use real estate as an investment rent their properties and make their money from their tenants, not from property appreciation. Index funds on one of the large markets will outperform (by a large margin) real estate appreciation over the long run.

This. Also it's important to consider liquidity...you could sell a stock/mutual instantly, while it may take 6-9 months to sell a property.

Also - according to the Rule of 7's, your money is going to benefit you better long term in the Roth, as opposed to a gain for a 3 year house purchase that you might not be able to sell off when you move. Also - with no data to back this statement up - I don't think people are making ~10% return on homes annually.

Do you mean the rule of 72 (72 / annual interest rate = years to double money) or are you trying to sell us something with the rule of 7's?

[LoneStar]

Yeah...let me get back to you with something witty.

[fox two]

All your questions have to do with pulling out (sts) retirement money to fund a down payment. Sure, you can do it if you want, but it is not a good idea.

Why are you not looking at a VA loan? You don't need a down payment. The funding fee is rather small. There are even places that will pay a large part of your fees just so they can get your business...

Don't throw away long term investment money to make a down payment.

Pulling money from an IRA of any type should be a last resort. I just refinanced my VA loan at 3.25%. That is .25% above historical inflation. Average for the stock market is ~10%. That means that you're pissing away 6.75% per year of whatever you withdrew from your IRA for the down payment. An adjustable rate will be the best right now, but if you're planning on selling when you move, you'll probably lose money anyway after realtor fees, taxes, etc anyway and would likely be better off renting.

If you need to pull money out of your IRA to buy a house, maybe you should re-evaluate why you are buying a house, especially if you're going to sell it in three years (that's generally not a good investment). Rent now, save up your money, and buy a house at the next base when you can afford it.

I've plugged everything into https://www.nytimes.c...calculator.html and every way I look at it, I'm saving MUCH more money buying instead of renting over the time we are going to be here. I don't NEED to pull money out of an IRA, as I stated before, I was just unsure whether it is a good idea to take advantage of the tax-free house payment withdrawal feature that is frequently touted about everywhere you read about Roths, or better to pull the money out of my non-IRA funds (which are still long-term mutual funds). I don't keep a down-payment worth of money in my checking account as that would be stupid.

I decided to go with a conventional mortgage over VA because in the market I'm trying to buy in, I've found that I'm competing with 5-6 offers per house, and conventional always wins over VA. Also USAA got me an insanely low APR on my conventional pre-approval (lower than VA).

Edited January 31, 2013 by fox two

[ThreeHoler]

I wish you the best of luck with USAA. Not many people have had good experiences with their home loan branch.

Where in the US is there a seller's market with that kind of competition? (Serious question)

[Buenos Diaz]

I decided to go with a conventional mortgage over VA because in the market I'm trying to buy in, I've found that I'm competing with 5-6 offers per house, and conventional always wins over VA. Also USAA got me an insanely low APR on my conventional pre-approval (lower than VA).

Check out the VA loan thread in General Discussion. I bet Dave Devine from NBOKC can beat USAA's rate and I know he can beat their closing date and level of customer service. I speak from experience. You will be dissapointed if you use USAA. Trust me, It is worth it to lose your deposit and go with another bank. Do yourself a favor and shop around.

If you are only going to keep the house for three years, you might want to reconsider putting that much money down. The VA funding fee is very low for first time buyers and you can finance 100% plus closing costs. If you still believe that the seller would prefer a conventional loan, you can put less down and pay PMI, which may not be that much.

Good Luck,

Buenos

[Whitman]

Check out the VA loan thread in General Discussion. I bet Dave Devine from NBOKC can beat USAA's rate and I know he can beat their closing date and level of customer service. I speak from experience. You will be dissapointed if you use USAA. Trust me, It is worth it to lose your deposit and go with another bank. Do yourself a favor and shop around.

If you are only going to keep the house for three years, you might want to reconsider putting that much money down. The VA funding fee is very low for first time buyers and you can finance 100% plus closing costs. If you still believe that the seller would prefer a conventional loan, you can put less down and pay PMI, which may not be that much.

Good Luck,

Buenos

2.25% funding fee is a waste of money IMHO. That's $4500 on a 200K house that doesn't go towards equity even if it is rolled into the loan. Put 5% down and it drops to 1.5% ($3000 on a 200K home) saving you a bit more...with that said, still not a fan of any funding fee.

[Buenos Diaz]

2.25% funding fee is a waste of money IMHO. That's $4500 on a 200K house that doesn't go towards equity even if it is rolled into the loan. Put 5% down and it drops to 1.5% ($3000 on a 200K home) saving you a bit more...with that said, still not a fan of any funding fee.

The fees, for a first time buyer, are slightly lower than what you state but close enough for government work. Split that one time fee up over the three years he may keep it and then add in the interest rate (3.25% to 3.5%) and you come up with a rate around 4%. I bet he is making more than 4% on his money right now. IMO, it doesn't make sense to move money from a fund in order to save less money than you are making in the fund.

[LUGNUT]

Variable rate is safe assuming you can sell the house. Don't forget to figure into your assumptions that the realtors will take 6-7% of the house when you sell it. Assuming a 200k house, that won't appreciate in 3 years - $14000 is a crapload for a house you lived in for only 3 years. USAA not impressed with either, as a single, 20 year Major with no bills they wouldn't sign off on my loan request because I had no credit (zero debt, pay cash for everything). So I told them to eff-off and paid cash for my house in Vegas.

[Jughead]

2.25% funding fee is a waste of money IMHO. That's $4500 on a 200K house that doesn't go towards equity even if it is rolled into the loan. Put 5% down and it drops to 1.5% ($3000 on a 200K home) saving you a bit more...with that said, still not a fan of any funding fee.

Agreed in principle, but if you can't come up with 20%, you need to compare the funding fee to the cost of PMI to get an apples-to-apples look. If you can't qualify for a conventional at all, then VA may be your best/only option (assuming you're set on buying vs renting).

However... talk to the right lender (hint: not USAA), because no one's paying funding fees out of pocket right now (see the VA thread that Buenos Diaz referenced). Rates are essentially as low as they can go right now, which has had the effect that the lenders have extra money on the table. Prior to the mortgage melt-down, that could be returned to the borrower as cash ("negative" points); can't do that directly any more, but that money can be used to cover closing costs--to include VA funding fees....