Loans from retirement fund

[BMEPhDinCO]

I think you get the idea - this isn't the best move.

That said, one other reason to give you, even if you paid off the loan "within 5 months", you/your dad would still have to pay the 10% penalty and taxes on top of what you borrowed...10% of $260k isn't small change!

I understand your desire - my husband and I bought a house, even though we're still in school, and won't necessarly live here past 3-5 years after buying. BUT, we put down 20% (cash we had on hand), we bought a $125k house, and we didn't borrow from family. Plus, we had plenty of cash left and we now have (2.5 years after buying), a 6 mo EF and other savings.

Don't do it your way, but if you can be smart about it, like we did, then consider it.

[ngordonmd]

I am starting to realize that this forum is run on knee jerk reflexes. I think that most people here are fairly conservative and have a set of rules that they set up, and can't think outside of those rules. Here is a fairly simple hypothetical example:

Lets say that I saved 80,000 to buy a house and in this example I am a bachelor. I still have my 6 month emergency money packed away, so the savings is for a down payment only. Now I have a couple of options....I can go find a 2 bedroom/2 bath house for $400,000 and with a 30 year fixed loan at 4.5%, I will pay around $2,000 a month. Now I could also buy a duplex with 2 single bedroom/1 bath for the same price, in which case I would live in half and rent the other half for $1000 per month. So in that scenario, I have sacrificed some luxury by living in a smaller home, but have cut my mortgage in half by renting. These are 2 hypothetical situations, but I believe that on this forum people would urge me to take the first option, because they hear "rental" and freak out. I think sometimes you need to think outside the box and look at the cold hard numbers instead of sticking to some dogma all the time.

I have saved a little over $60,000. Each month that goes by I pack another $3000 away. Why would I put 20% down on a home when I can put 10% and still have good manageable monthly payments and I can use some of that extra money to make improvements to my rental unit that will appreciate the value of the home and bring in more rent each month.

As far as the borrowing from the retirement fund....again another knee jerk reaction. Anyone on this forum hears "take money from retirement" and they automatically dismiss the idea or question. I'm not borrowing the money because I need it. I have already been approved for a loan and have plenty of cash to put down for a required down payment, but the reality is that the market is competitive and every place that I have looked at thus far, has gone to a cash buyer. Why do I think these properties are being bought by cash buyers and not people with FHA loans? Two reasons:
1. buyers will always sell to the cash buyer when the offer is the same.
2. these properties are good investments. Hence the reason they don't stay on the market for more than a week and are being bought by investors.
And yes, ALL OF THEM have gone to cash buyers, or I wouldn't even be entertaining the idea.

Lastly, you are wrong about being taxed on the retirement loan. It is a self directed retirement fund and you can make loans from it to a non immediate family member if it is payed back at an interest rate comparable to the current market. There is no penalty and it is not taxed.

[riverwed070707]

I don't think anyone was dismissing your idea of buying a rental unit. Many people on here are landlords (myself included) and props to you if you can get by living in one of your units.

Borrowing from retirement is a whole other issue -- made 10,000 times worse by the fact that it isn't your retirement to borrow from. Do you really not see any red flags by the fact that you have to involve a third party just to get the money because borrowing it directly from your dad isn't allowed?? If you have to work around the rules, that's your first clue it's a bad idea.

You came here asking for advice on which option to pursue and the answer is none. You're looking for a get rich quick scheme and you're not going to find support for that here -- those who end up well off do so because they are patient and they don't skip any steps along the way.

[skydivingchic]

The problem here isn't the rental aspect. Though I can think of one poster (who hasn't posted to your thread) who would likely discourage being a landlord under any circumstances due to her previous very bad experiences with it, the forum as a whole is not for or against owning rental properties. As riverwed said, there are plenty of landlords on this forum. People here generally will give you the non-rose-colored-glasses stuff to consider before taking this leap, but not flat out discourage the step altogether (assuming the rest of your finances are in order - yours are not).

The problem with your plan is the other stuff. Start with less than 20% down. That's a problem. There are lots and lots of people out there who put less than 20% down on their homes and are now underwater. They are stuck with high interest rates (at least compared to what's currently available) and/or can't sell their homes because of it. You will also have to pay PMI if you have less than 20% down. That is several hundred dollars every month down the drain.

The next HUGE problem with your plan is borrowing from a retirement account to do it. Retirement accounts are for retirement and should not be touched for anything else except under the most dire of circumstances. Call this knee-jerk if you like, but it is good, sound financial management. And this isn't even your retirement you are messing with - its your father's. That is just a bad idea on many levels.

If you have $60k sitting in savings now and can add $3k/month, you are only a few months away from being in a position to put 20% down AND still have adequate emergency funds without touching anyone's retirement. It will just take a little more time and patience.

[bjl584]

I am starting to realize that this forum is run on knee jerk reflexes. I think that most people here are fairly conservative and have a set of rules that they set up, and can't think outside of those rules. Here is a fairly simple hypothetical example:

Lets say that I saved 80,000 to buy a house and in this example I am a bachelor. I still have my 6 month emergency money packed away, so the savings is for a down payment only. Now I have a couple of options....I can go find a 2 bedroom/2 bath house for $400,000 and with a 30 year fixed loan at 4.5%, I will pay around $2,000 a month. Now I could also buy a duplex with 2 single bedroom/1 bath for the same price, in which case I would live in half and rent the other half for $1000 per month. So in that scenario, I have sacrificed some luxury by living in a smaller home, but have cut my mortgage in half by renting. These are 2 hypothetical situations, but I believe that on this forum people would urge me to take the first option, because they hear "rental" and freak out. I think sometimes you need to think outside the box and look at the cold hard numbers instead of sticking to some dogma all the time.

I have saved a little over $60,000. Each month that goes by I pack another $3000 away. Why would I put 20% down on a home when I can put 10% and still have good manageable monthly payments and I can use some of that extra money to make improvements to my rental unit that will appreciate the value of the home and bring in more rent each month.

As far as the borrowing from the retirement fund....again another knee jerk reaction. Anyone on this forum hears "take money from retirement" and they automatically dismiss the idea or question. I'm not borrowing the money because I need it. I have already been approved for a loan and have plenty of cash to put down for a required down payment, but the reality is that the market is competitive and every place that I have looked at thus far, has gone to a cash buyer. Why do I think these properties are being bought by cash buyers and not people with FHA loans? Two reasons:
1. buyers will always sell to the cash buyer when the offer is the same.
2. these properties are good investments. Hence the reason they don't stay on the market for more than a week and are being bought by investors.
And yes, ALL OF THEM have gone to cash buyers, or I wouldn't even be entertaining the idea.

Lastly, you are wrong about being taxed on the retirement loan. It is a self directed retirement fund and you can make loans from it to a non immediate family member if it is payed back at an interest rate comparable to the current market. There is no penalty and it is not taxed.

I think your main issue here is lack of patience. You have 60K and are able to add 3K a month to it. You will have your own money to buy a place before too long.

Why do you feel you need to do this right now? You don't have the money to do it right now, but you will if you are just patient and continue to save as you have been.

[ngordonmd]

So here's a good example of the "knee jerk reflex" that I was referring to. I am told not to put less than 20% down because

"There are lots and lots of people out there who put less than 20% down on their homes and are now underwater. They are stuck with high interest rates (at least compared to what's currently available) and/or can't sell their homes because of it."

The interest rate on my loan that I was approved for was 3.75% which was an FHA loan with 10% down and was a LOWER interest rate with the conventional loan (about 4.1%). Also, my monthly payments on the properties that I was looking at (averaging about $275,000) was about $1400 with property tax and PMI included. I will never be "underwater" with a mortgage of $1400 as this is likely close to what I would be paying in rent if I was currently renting. So this holy number of 20% is simply dogma and somewhat arbitrary. People just throw that number out without closely looking at the actual specific numbers.

The PMI is a good point, however its not "hundreds of dollars a month." Its $102 per month in this scenario.

Everyone keeps missing my point here. I am not taking money from my dads retirement because I need it. I can afford exactly what I want right now. I have been approved, I have my down payment ready and I negotiated a great rate. The issue is that I can not be competitive in this market with a financed offer. It wouldn't matter if I saved for another 3 years. If I don't save enough for a full cash offer, I will be beat out by investors every time. That is the reason that I have chosen to go that route, not because I'm inpatient or don't have the money.

[riverwed070707]

So what exactly were you looking for advice on again?

Sounds like you've made up your mind. You don't need us. Good luck!

[riverwed070707]

PS. being underwater on your mortgage doesn't mean you can't afford your mortgage payment, it means the value of your home drops below what you owe on it reindering you unable to sell and often unable to rent at the previous markets value. this isn't a problem if you plan to stay there and wait out the recession; however, should you need to move for any reason and decide to sell you could end up bringing money to the table just to let someone else move into your home. Then and only then will you know whether your investment was truly worth it.

[bjl584]

Everyone keeps missing my point here. I am not taking money from my dads retirement because I need it. I can afford exactly what I want right now. I have been approved, I have my down payment ready and I negotiated a great rate. The issue is that I can not be competitive in this market with a financed offer. It wouldn't matter if I saved for another 3 years. If I don't save enough for a full cash offer, I will be beat out by investors every time. That is the reason that I have chosen to go that route, not because I'm inpatient or don't have the money.

You are contradicting yourself. You DO need your dad's retirement money because you can't pull off what you want to do without it. Your preapproval and down payment don't matter because you are buying an investment property. (An investment property that the pros are paying cash for and not financing through FHA.) If you weren't impatient and you had the money, then you wouldn't have to buy a house this way.

I see your desire to "live for free" by buying a mutli-unit house, but the simple fact is, you can't afford it right now. Rent or buy a traditional single family home and revisit this idea when you are financially ready to do so.

[MonkeyMama]

The irony I have stated many times in these forums is this mindset is all the same no matter what the market. When the market was hot everyone was jumping off a cliff because "they could never afford a home if they had to wait until they could afford it." For reference, the foreclosure rate on this group runs about 100%. Now that the market is in the toilet it is the same old story. You know how many people I know rushing into homes and rental investments that they couldn't possibly afford, because "prices will never be this low again?" BTW, where I live, prices aren't "low" unless you forget that you could buy a home for half as much in the year 1999. Or the same price in 2002 or 2003. This is hardly some "once in a lifetime rock bottom home price" scneario, and I would think the same holds true for many regions. I just don't get the insanity.

Anyway, have some people made risky investments and done well with that? Sure. The problem is that everyone thinks they are the exception and I'd guess that at least 90% will fall flat on their face.

Can you find a third party to finance the loan for you? Of course if you find someone willing to lend you the money - there is no issue with that. They would probably want the duplex as colatteral though, so I think it would be a pretty tough sell to get the cash up front in the sense of a true cash purchase. Unless you have some rich/foolish relative with cash to spare. Should you? That's a whole other story. (As others stated, the retirement cash out is a HORRIBLE idea).

*Knee jerk reactions* comes, from me, watching almost every person I know completely financially screwed by their home and rental purchases this past decade. But hey, what the hell do I know? You are the exception? Like I haven't heard that one thousand times before.

What you will get in this forum is basic common sense.

You need cash and you don't have it. It's that simple. Time to come up with a Plan B that doesn't involve raiding your parent's retirement funds (which comes with steep penalties, taxes, and of course risk - risk that maybe you can not get loan after all, etc.) - I couldn't imagine doing that to my parents - seems there would be many other options, that simply involve a little patience.

[ngordonmd]

Ok I'd like to propose a different scenario and you can tell me what you think:

I have $60,000 saved, and have decided that I want to buy 2 bedroom/2 bath house. I can put 20% down on a $200,000 house using $40,000 and have $20,000 left in savings, which meets the 6 month emergency fund for me. This would give me mortgage of about $1000 per month with an interest rate of 3.75% (which is what I was already approved for.) Would this be a good move for me at this point?

[disneysteve]

Ok I'd like to propose a different scenario and you can tell me what you think:

I have $60,000 saved, and have decided that I want to buy 2 bedroom/2 bath house. I can put 20% down on a $200,000 house using $40,000 and have $20,000 left in savings, which meets the 6 month emergency fund for me. This would give me mortgage of about $1000 per month with an interest rate of 3.75% (which is what I was already approved for.) Would this be a good move for me at this point?

How much do you earn? What percentage of income would the monthly payment represent? How long are you sure you will remain in the immediate area? What % of income are you currently saving for retirement and how would buying the house impact that? Do you have any debt?

[ngordonmd]

I earn about $50,000 a year. The mortgage would be a little less than 1/3 of my monthly income. I have about $200,000 in student loans for which I am participating in a program called income based repayment, so I pay about $200/month on the loans. Right now I'm putting the bare minimum into retirement (I don't remember the exact percentage.) And I plan on staying in this area indefinitely.

[disneysteve]

$200,000 house

I earn about $50,000 a year.

I have about $200,000 in student loans

I do not think you should be buying a 200K house on a 50K income. I realize, however, that you are a resident and your income will rise significantly when you finish your training, so that makes the line a little fuzzier.

The loans are a major factor, though. Here's where I was when we bought. I finished residency in June 1993 and my first year in practice earned 65K. My wife earned 20K. I had 102K in loans. In April 1994 we bought a house for 142K. So my student loan debt was half of yours. Our combined income was 35K more than yours and we bought a house costing 58K less than you are considering. So you can see where my thinking is that this house is too much for your situation.

[ngordonmd]

In terms of the student loans....why does the total amount matter? It seems to me that the monthly payments should be most important. The program that I am doing right now called income based repayment calculates my payments based upon my yearly income. So at $50,000 a year, my payments are about $200 per month. When I'm making closer to 60K or 70K in fellowship, they will go up accordingly to probably around $300/month. This program has several advantages including: my payments go to covering most of the interest and what amount I fall short, the federal government covers, and after being in repayment for 25 years, the loans are forgiven no matter what the balance.

I understand what you are saying, but your advice seems rather arbitrary. If you look at the simple numbers month to month, why would this be a bad move for me? My payments on a 200K home would likely be slightly less than what I would pay in rent in this area. So if you make the argument that a monthly payment of $1000/month is too much, then how could I afford to live in an apartment? I think most people would agree that on a 50K salary, $1000 per month of rent is not unreasonable. There are many residents that are forced to pay more than that.

I hear a lot of general statements on these forums like "you shouldn't buy a house for x amount of money if you are making y amount per year" but those statements are often made without looking at the details and it seems that details are the most important when making financial decisions.