According to a recent article in USA Today, many millennials are feeling compelled to stretch financially to buy homes.

How so?

Members of this burgeoning homebuying segment are considering what some may deem ‘risky’ financial behavior when trying to come up with a down payment to buy a home. In fact, according to a new survey from Bank of the West, about 29 percent – or as many as 1 in 3 – millennials have tapped their 401(k) or IRA or borrowed against their retirement accounts.

What Millennials Say

As millennials enter the real estate market, many view home ownership – to the tune of 56 percent – as the cornerstone of their investment portfolio. According to the same Bank of the West’s 2018 Millennial Study, being debt-free ranked a close second at 51 percent and retiring comfortably came in third at 49 percent.

And while the survey reports that 40 percent of millennials think owning a home is a good financial investment, 68 percent of millennial homeowners had regrets or buyer’s remorse after their purchase, citing issues with the cost of maintaining a home.

What The Experts Say

According to an article in the Huffington Post, there are several ways to use retirement funds to put a down payment on a home – and pros and cons to making that decision.

Here are the basic options for tapping into your retirement savings:

401(k) loan. You can borrow up to the lesser of $50,000 or half of your vested account balance. You don’t have to pay taxes on the money, but you do have to repay the loan on time.

Traditional IRA. You can withdraw up to $10,000 from a traditional IRA to buy a home for the first time without paying a tax penalty, though you will have to pay income tax on the amount withdrawn. Caveat: If both spouses tap into their individual accounts, you can double this amount.

Roth IRA. You can withdraw up to $10,000 for a first-time home purchase without triggering penalties at any time but if you withdraw investment earnings within five years of opening your account, you may have to pay penalties on those earnings and you may have to pay income tax on any portion of the withdrawal that comes from investment earnings.

The Pros & Cons

But just because you can tap your retirement account doesn’t necessarily mean you should. Here are some things to consider according to an article in U.S. News & World Report:

Pros:

1. Pay interest to yourself. With a 401(k) loan, the administrators are required to set a reasonable interest rate – but you pay that interest to yourself to help make up for some of the value you’ll lose by taking money out.

2. Avoid paying PMI. If you put less than 20 percent down, you’ll likely get stuck with private mortgage insurance – so bolstering your down payment with retirement savings could help you avoid costly PMI.

3. Make a good investment. Be sure to consider whether you’ll get more long-term value from your retirement accounts or out of homeownership.

Cons:

1. Reduced retirement earning potential. The real power of tax-deferred retirement accounts isn’t in the money you put into them; it’s their compounding interest. The more money in, the more that money earns you.

2. Tough catch up. Reducing your retirement account’s overall earning potential means you’ll have to invest more later to catch back up and with a mortgage payment, that may prove difficult.

Sometimes, becoming a homeowner – especially in this white-hot market – can feel like a game of inches, with razor-thin inventory and financial margins. But buying a home is an important decision, and one that requires careful consideration and responsible financial strategy for the long-term stability of your investment.

So whether you’re ready to buy today, tomorrow or a year from now, let the experienced professionals at DeLeon Sheffield Company guide you every step of the way.

Because at DeLeon Sheffield Company, ‘We’re More Than Realty; We’re Family.’