If you are buying an apartment in NYC, in many cases you will need to put down 20 percent of the purchase price, especially if you want to avoid the additional cost of private mortgage insurance (PMI), which is required if you don’t meet that threshold.
Your savings will be an important part of your down payment but if you have to borrow, you'll want to avoid creating problems for yourself further down the road. Brick Underground spoke to NYC financial advisors to establish what you should avoid when you are scraping together your down payment.
Don’t take money out of your retirement plan (with caveats)
An individual retirement account (IRA) is “tax-advantaged,” says Simon Brady, a certified financial planner and founder of Anglia Advisors. That means it’s either exempt from taxation, tax-deferred or offers other types of tax benefits. Brady says raiding your retirement plan for your down payment makes no sense.
“You are putting your retirement at risk just to put your name on a deed,” he says.
He cites research by Bank of the West which found nearly 70 percent of millennials who had bought property now regretted it. A big reason for this was that one in three had dipped into their retirement savings to fund their down payment.
Of course, there will always be exceptions to this rule. You can take $10,000 from a Roth IRA and there's no penalty because you've already paid tax on it, says Randy Breidbart, a financial planner with Park Avenue Financial Advisors. The "trick," says Kristen Euretig, a financial planner with Brooklyn Plans, is only to take out what you put in. "If you put in $1,000 and it grows to $2,000, you can only access the first $1,000 without penalties," she says.
The other exception is borrowing against your 401(k). This employer pension plan functions differently from an IRA and Breidbart points out “in a 401(k) the interest rate on borrowing goes back into to your account.”
One downside of borrowing against your 401(k) is that your paycheck will likely to shrink as the interest on the loan is paid back to your plan. Euretig says if you then want to leave your employer, "they have a right to request the payment," which can make it harder to quit your job.
Don’t borrow on your credit card
It’s possible to get a cash advance on your credit card but Breidbart says “that could be a disaster because you are paying a very, very, high interest rate.”
He acknowledges there are some large transactions that take place on credit cards, but funding a down payment shouldn’t be one of them. “That would be an absolute last resort,” he says.
Don’t raid the kids' college fund
This will be a personal decision but Breidbart says that's money that "should be set aside for the kids."
Euretig says if you've saved into a dedicated 529 plan (or qualified tuition plan) it is similar to a Roth IRA and you can take money out without penalties although you would be taxed on gains and face a penalty for not spending the money on higher education. Euretig says a quick look at the rates will show you the numbers don't stack up.
"Leave the funds for college because rates for student loans are currently higher than a mortgage," she says.
Think carefully about borrowing from a relative
If you have money coming in, it's not unreasonable to borrow from a relative but you shouldn't borrow what you can't afford. "That’s a recipe for disaster," says Breidbart.
Euretig says some clients know that gifts come with "strings attached" and are fine with it, others resist this approach. For some it works, for others it's a "minefield," she says.
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