The pros and cons of tapping your retirement funds for a down payment

Down payments aren’t cheap. Conventional loan products without the additional cost of private mortgage insurance (PMI) require 20 percent of the purchase price. Even if you decide to pay PMI and go with a lower down payment, you’re still talking an up-front cost of many thousands of dollars.

So, what are your options if your savings account is short? You can invest some of your retirement funds in a down payment.

Many people say you should never touch your retirement money. But if you’re well-qualified to buy a home and itching to act while interest rates are still low, it’s one of the few cases where financial advisors say it’s something to consider.

• Borrowing from your 401k: You can usually borrow up to 50 percent of your account balance, with a maximum of $50,000. You must repay the loan — with interest — but repayment deadlines are usually longer for home purchases. If you’re fired from your job, however, you could be required to pay the entire loan balance within 60 days or pay a penalty to the IRS.
• Withdrawing from your IRA: First-time home buyers of any age can withdraw up to $10,000 from a traditional IRA without penalty to put toward a home purchase. The definition of “first-time buyers” for this purpose is anyone who hasn’t owned a home for the past two years. You’re not subject to any withdrawal penalty, but you’ll pay income taxes on the money.

While it’s good to know that you can use your retirement funds to get you into a home, talk to your lender before you act. He or she may suggest a different mortgage product or loan terms that will enable you to purchase a home without disturbing your nest egg.