Posts Tagged ‘retirement’

A Mortgage Buy Down Program Right For You?

A mortgage buy down program or reverse mortgage may be an acceptable option for someone living on a fixed income who has no other means to earn money to pay for their current expenses.

Many financial experts agree that mortgage buy down programs are a bad investment, but I believe for some it may be an acceptable option. Buy down programs allow you to take advantage of the equity you have built up in your home and provide yourself a steady monthly income. You get a monthly payment sent to you each month until you have no equity left in your home.

The MAJOR downside to this program is in the end the mortgage company will own your home. Typically you will not have to give up your home while you are still living, but when you die the home basically goes back to the mortgage company.

As stated above this type of program can be an acceptable option if you have no other means to generate income and you don’t care what happens to your home when you die. If you have put everything you own into your home over the years and it’s basically all you have then you can view this type of reverse mortgage as something similar to your retirement program.

Again, I tend to lean toward the side stating that mortgage buy down programs are a bad investment and you should never plan to use this type of program as a retirement plan especially if you are young and still working. Take full advantage of your working years and put away plenty of money for your retirement years. Use a mortgage buy down as a last resort option for getting cash!

Borrowing from your 401k for down payment on a home

Should you borrow money from your 401k for a down payment on a home? A home is one of your most valuable assets but is it worth your retirement funds? I’m going to give you several reasons why you SHOULD NOT borrow from your 401k retirement fund to purchase a home.

First, when you contribute to your 401k fund you do so with pre-tax dollars. You are required to pay back the loan and that money will be with after tax money, that money will be taxed again when you decide to take it out at retirement.

Second, if you borrow from your 401k then many lenders will view this as an additional debt, just like a car loan or credit card loan. This could hurt your debt to income ratio, in turn giving you a higher interest rate on your mortgage loan or reducing the amount of money you can borrow for a home.

Third, as mentioned above this will become another monthly debt and you will be obligated to repay the 401k loan, usually over a course of time shorter than the mortgage loan. This payment will be in addition to the mortgage payment, which could put an extra strain on your monthly budget.

Next, you could have to repay the loan early if you lose your job for any reason. There is usually a clause in the 401k loan documents that requires you to repay the loan in full within 30 days if you leave your job for any reason or you are fired. If you don’t repay the loan you will face early withdrawal penalties of 10% as well as having to pay income taxes on the money. This will not only put a strain on you now, but will destroy much needed funds for your future.

Finally, some 401k funds will not allow you to contribute extra funds toward retirement until the loan is paid back in full. Not only does this limit the growth potential of your normal deposit, but you also lose any matching funds from your employer.

If you are going to need to pay money down for a new home there are other alternatives. Cut back spending and save the extra cash, pick up a part time job, look into a piggyback mortgage, etc. Avoid borrowing from your 401k at all costs.