Which do you think is the response given most often as the primary obstacle to purchasing a new home: finding the right neighborhood school or church; proximity to work and family; or perhaps a bout of “Affordiphobia,” which is the uncanny ability to know beforehand that any home you like will be beyond your ability to afford it?
In all likelihood, it’s none of the above.
I imagine that, if you were to ask any Realtor®, the overwhelming majority would say the No. 1 impediment to purchasing a home, especially for first-time buyers, is cash. More specifically, the ability to come up with enough for a downpayment.
A brief review of previous articles appearing in this column, however, will reveal a steady stream of information on programs that assist buyers. From government grants at the federal, state and local level to nonprofit organizations, a plethora of programs are available to assist first-time buyers, in particular, with purchasing a home.
These programs complement the traditional source from which downpayments are typically funded, such as savings or a gift from a family member. But there might be another vehicle that’s often overlooked but which a lot of you have and simply aren’t aware of.
It’s an additional source of funds you’re setting aside for use at a later date and time that might help you solve your downpayment dilemma. It’s your 401(k), which can under certain circumstances be used toward the purchase of your first home.
The IRS also allows for funds rolled over from a 401(k) into an IRA to qualify for use as a downpayment.
Like any other provision of the IRS code, the rules governing this are less than simple but well worth your time investment. Your 401(k) plan administrator should be able to assist you with the preliminaries on the type of plan you have and provide you with written rules discussing the conditions under which monies may and may not be borrowed.
Because of the potential tax ramifications involved, I’d recommend that anyone considering this option contact the IRS and/or consult with a Certified Public Accountant to learn whether or not tapping your IRA is an appropriate downpayment source. To learn more, you can visit the IRS web site that deals specifically with these questions (http://www.irs.gov/faqs.html)
It just might make you think a little differently about staying where you are by curing that bad case of affordiphobia you’ve been suffering from.
THIS WEEK’S TIP: Beware of Loans That Exceed Your Home’s Value
We’ve all seen those oh-so-enticing flyers: Pay off all your bills! Consolidate your debts! No more high credit card interest rates! What’s being advertised is a way for you to pay off your bills by refinancing your mortgage for more than the value of your home. Some lenders advertise these loans as “125 percent home loans.”
Here’s the way they work: You take out a loan for more than your home’s value. So if your home is worth $100,000, for instance, the loan amount might be $125,000. You use some of the extra $25,000 to pay off your credit card bills and the remaining amount on your boat loan.
Here’s the catch, though: These loans don’t come cheap. Typically, their rates are 14 percent or more, compared with traditional home loans now averaging about 6 percent. They generally can’t be refinanced with traditional lenders at going market rates because they exceed the property’s value.
Moreover, a big part of the interest on these loans may not be deductible, according to tax experts.
The best advice I can give you: Beware of any home loan that exceeds your home’s market value. Because in the course of paying off some nagging old bills, ultimately you could lose the place you live. The risk just isn’t worth it, and you’ll be paying a high price in interest charges on the money besides.
Have questions about a home loan offer that sounds too good to be true? It probably is.
HOME WORK is a weekly column geared tpward residential real estate.
This article appears in Dec 11-17, 2002.