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Use Roth IRA for home mortgage down payment

128 53 September 2, 2018 at 08:20 AM in Finance
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Hello - I am planning on upgrading to a bigger house and contemplating on whether I should use my Roth IRA to hit the 20% down payment to avoid PMI.

Also, since I am not a first time home buyer I don't know if I could even use my Roth for down payment. I have been putting money into my Roth for last 10 years which takes care of the 5 year minimum before I can start pulling money out.

Any suggestions, thoughts I need to be aware of?

Thanks in advance!

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#2
i suggest you save more before purchasing instead. You are risking retirement because you dont have the money to make this happen.
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#3
Quote from dhodson
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i suggest you save more before purchasing instead. You are risking retirement because you dont have the money to make this happen.
Agree.
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disgruntled caveman
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#4
Quote from slicbrat
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Hello - I am planning on upgrading to a bigger house and contemplating on whether I should use my Roth IRA to hit the 20% down payment to avoid PMI.

Also, since I am not a first time home buyer I don't know if I could even use my Roth for down payment. I have been putting money into my Roth for last 10 years which takes care of the 5 year minimum before I can start pulling money out.

Any suggestions, thoughts I need to be aware of?

Thanks in advance!
You can withdraw earnings without taxes only if it's a 1st home purchase. You're not. So you could withdraw contributions without tax/penalty but no earnings.

That said, I would advise against it. Better to pay PMI than to mess with retirement accounts imo. You can either save money and risk losing the house you want or get the house, save money over the next few months while paying PMI, and then make a big payment that gets you over the 20%.

BTW, if you start paying PMI, you need to contact the mortgage company directly and explicitly tell them to stop your PMI once you hit 20%.

So it really comes down to how secure you are in retirement funds, what your other finances are, when you plan to retire, and the feasibility of paying PMI early. If you're withdrawing 5k from retirement to save 3k in PMI payments, it may be worth it. But in general, taking from your retirement accounts is bad news. You don't want to make that a habit at all.
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Last edited by bonkman September 3, 2018 at 06:12 PM.
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#5
Quote from bonkman
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You can withdraw earnings without taxes only if it's a 1st home purchase. You're not. So you could withdraw contributions without tax/penalty but no earnings.

That said, I would advise against it. Better to pay PMI than to mess with retirement accounts imo. You can either save money and risk losing the house you want or get the house, save money over the next few months while paying PMI, and then make a big payment that gets you over the 20%.

BTW, if you start paying PMI, you need to contact the mortgage company directly and explicitly tell them to stop your PMI once you hit 20%.

So it really comes down to how secure you are in retirement funds, what your other finances are, when you plan to retire, and the feasibility of paying PMI early. If you're withdrawing 5k from retirement to save 3k in PMI payments, it may be worth it. But in general, taking from your retirement accounts is bad news. You don't want to make that a habit at all.
Thanks All! What are your thoughts on doing piggyback loan to cover 20%?
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#6
Quote from slicbrat
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Thanks All! What are your thoughts on doing piggyback loan to cover 20%?
I once had a lender that rolled pmi payments into the loan itself. Which defeats the entire point but whatever. It let me pay the low mortgage rate for pmi.

The sense of a loan to get a loan depends on the amount and rate
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#7
Quote from bonkman
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You can withdraw earnings without taxes only if it's a 1st home purchase. You're not. So you could withdraw contributions without tax/penalty but no earnings.

That said, I would advise against it. Better to pay PMI than to mess with retirement accounts imo. You can either save money and risk losing the house you want or get the house, save money over the next few months while paying PMI, and then make a big payment that gets you over the 20%.

BTW, if you start paying PMI, you need to contact the mortgage company directly and explicitly tell them to stop your PMI once you hit 20%.

So it really comes down to how secure you are in retirement funds, what your other finances are, when you plan to retire, and the feasibility of paying PMI early. If you're withdrawing 5k from retirement to save 3k in PMI payments, it may be worth it. But in general, taking from your retirement accounts is bad news. You don't want to make that a habit at all.
Your mortgage reaches 78% loan to value [nerdwallet.com]. The federal Homeowners Protection Act of 1998 requires lenders to terminate PMI, free of charge, at that loan to value ratio.

Technically once you reach 80% LTV you can ask for the lender to remove it but they may request an additional appraisal, which will cost about $400, and there's no guarantee you'll get the value number you're looking for.
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Quote from Dr. J
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Your mortgage reaches 78% loan to value [nerdwallet.com]. The federal Homeowners Protection Act of 1998 requires lenders to terminate PMI, free of charge, at that loan to value ratio.

Technically once you reach 80% LTV you can ask for the lender to remove it but they may request an additional appraisal, which will cost about $400, and there's no guarantee you'll get the value number you're looking for.
I'm aware of the auto-stop. That's 2% more where you're still paying PMI, hence why I said you need to contact the mortgage company.

Haven't heard of anyone charging for an additional appraisal, but I suppose that's possible. They sure love to squeeze consumers, huh?
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Quote from bonkman
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I'm aware of the auto-stop. That's 2% more where you're still paying PMI, hence why I said you need to contact the mortgage company.

Haven't heard of anyone charging for an additional appraisal, but I suppose that's possible. They sure love to squeeze consumers, huh?
Without an appraisal, the only valuation they have is the original appraisal at purchase time. They calculate it out with standard payments and find the point where the LTV hits the appropriate mark, based on the data they have.

If you believe the value has gone up, they can't just take your word for it, though there are apparently other things they can reference; when I did my refi (mainly to remove PMI), the appraisal was waived based on the value I requested. I don't know what they were looking at, and maybe it would have been different if I wanted to pull cash out, but I've seen it with and without needing an appraisal, though mine was a refi with a new rate, not just a PMI removal request.
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