borrowing thrift for a home.

[SKB]

What is the best thing to do.

I am anxious to purchase a home. It has been called to my attention that I can purchase REO property with cash at a 50% reduction from peak prices in my area. I am wondering what the best course of action is. I have been told that strictly all cash purchases come with deals like this at this time. A home that sold for 360,000 at peak of the market can be had for half of this for cash through the bank.

I realize if we wait longer, we will not have to worry about REO deals as all real state will be priced like this anyways once the market finishes crashing in my area of Florida. The trouble is I am tired of waiting, we have already waited five years to save this amount of money. My lease will be up in November and I want to be moving into a our home instead of signing another year lease.


We have 120,000 cash If we get a mortgage for 50,000 we will lose the benefit of paying cash and will not benefit from the deal prices.

If we get a mortgage we can deduct the interest but how much of a savings is a 50,000 mortgage anyways?

I was thinking of taking out a 50,000 loan from our thrift and paying it back within 3 years. How much would I lose in three years compared to how much I would lose in tax deductions?

Anyone want to try to crunch some numbers on this?

 

[The HalfBreed]

I won't get into 'crunching numbers', however, it would be a bad move, in most cases. Wouldn't it be easier to just get a 50K loan ?

Many people take loans out against their TSP, and, any financial advisor with some smarts would advise against it, if they're smart.

One of the primary reasons is that you'd be double-taxed on it.
If you take the loan from the TSP, your payments would be taxed (after tax), and when you retire, your withdrawals will be taxed as well, and let's not forget the lost earnings power it lost during that time.

I usually suggest that folks stop payments into the TSP, and use that extra $$$ to pay it back, if they decide to raid their funds, or just use it to pay back a bank loan.

However, some folks buy Chevy's, and some buy Escalades, even tho they have the same income and other criteria.

Your choice..........

What's in YOUR wallet ?

 

[Guest2]

If I may be so bold, go figure, I have an opinion to share.
Or, maybe just a war story, what ever, here it goes;

To take a loan from your retirement account (TSP), for any reason,
is NOT a good idea. Not just because I said so, but most financial
advisors do. But, participants do it all the time. Lets say you have
a hardship which requires you to find some money fast (the wife
takes a fall and she can't work). Having "no choice" is one of lifes
little pleasures. Your family can not survive without her income. A
man has got to do, what a man has got to do !

Just remember that there is a price to pay and you'll find no tax
advantage either. Lets say you payoff that Auto loan (8.375% x 3 years).
One could say that your paying yourself 3.375% which will save you (over
the same period of time) close to 5.00% each year on that money. But
in reality, it costing you so much more. When you take "compounding"
into consideration (on both your lower tsp balance & loan amount), you
will quickly see that it cost you soooo much more. Heck, we may be
starting a new "Bull Market" and the loses could be even greater. In
three years you could look back and say; "Damn, I payed myself 3.375%
and the TSP Funds rose at an average of 15% over the same time period.
Oouuuch" !

I did this in the mid 90's for the same reasons stated above. Heck, I paid
myself back 5.25% interest. (nice huh!). But the C-Fund then rose 37%,
then 23%, and then 33% in 1997. I was kicking myself in the booty for
quite awhile, but as I said, A man's got to do, what a man's got to do !

Using such money for a purchase or downpayment on a house becomes
a tax advantage over the coarse of time within the type of mortgage you
get ie...30yr. 15yr. Fixed, Adjustable Rate etc.... The question I would
ask is " will I get enough tax benefit in a three year period, to offset the
loss of earnings I would have had, if I kept it in the TSP. IMO, the answer
will always be no, unless the market tanks for the next three years and
you end up paying yourself 3.375% instead of losing say,,,,, - 3.375%
on average each year.

A simple 3 year loan in 1995 cost me approximately $30,000 on average
when comparing my friends account (same allocations) over the same
period of time. The loss that keeps on losing. Even when you've paid it
all back, the what if's could continue to kick you in the groin!

By the way, I can no longer afford to retire upon eligabilty. I must now
wait until mandatory retire age for Law Enforcement. I can't help but
think, I'd be that much closer if the wife never fell down. You on the
other hand, you have two questions to ask yourself;

Is my impatience overiding sound judgement?
Is the Cost (both present & future) worth it?

I related to the question you asked and thought I'd share some personal
experiences I had concerning the same topic. I truly hope it helped you
and I wish you all the luck in the world, no matter your decision.

 

[FundSurfer]

I'll just chime in and say that I do not consider it a bad idea under certain conditions.

1. You would have had the money in the G-fund anyway. Otherwise as others have pointed out, you are giving up potiential gains in stock. Younger participant, who are more likely to need the money, should be fully invested in stock not G. Compounding is very important.

2. You are fairly sure that if needed you could immediately repay the loan using some method. An example would be that if you get a TSP loan instead of an equity 2nd mortgage, if needed you could go get the equity loan and pay off the TSP loan. This is needed since if you leave the federal government for some reason, you will have to repay the loan or have it count as an early withdrawl and pay a heavy fine.

3. That you make sure that the money you save in interest is put toward debt or retirement savings. Don't just get a lower payment and spend the difference. This would be a big mistake. A good way to spend the savings would be to up the amount you are putting toward retirement by the difference in what your payment would be.

You are not double taxed. You repay the loan with after tax dollars whether it is to the TSP or to a bank.

 

[Silverbird]

Ok, I admit it. I borrowed against my TSP to help pay for a down payment on a house (and I didn't want an ARM and leg mortgage). I was in a similar situation as you, tired of renting, and getting a ching ching rent increase annually. I also was tired of paying Uncle Sugar extra every year cause the tax laws don't like renters.
Also, it was good that the TSP loan + mortgage in hand put me in a much better position than other buyers who had to sell a house first.

Bad news? Definately I'm paying more per month because I have a mortgage and maintaining a house costs a lot! You learn to defer buying certain things - but at least you can do it. Also, yes, I have less in my retirement account than I like at the moment, and expect I will be adding extra money when I'm allowed to after age 50. But it's nice having a house...excuse me while I pull out the weeds...ok back again. House eats up time, too. I know how to install a faucet now.

But if you are ready...make sure those houses out there are "ready" too:

Do a budget for the house, how much you are willing to pay, how much house you want to buy and stick to it.

Look around before borrowing and see if you like what's on the market at your price point in places where you want to live - not surrounded by for sale signs (or worse, rent a cheap). This is the peak time for buyers and sellers, with the nice weather so the most sell signs will be out now.

I'm not sure when/if weather affects the prices in Florida - where I am it snows and obviously there are less buyers (competition) in the winter (man, that was a cold move in January). This may not matter this year with the crazy market.

 

[The HalfBreed]

FundSurfer:
You are not double taxed. You repay the loan with after tax dollars whether it is to the TSP or to a bank.

Maybe "Double Taxed" is not the best choice of words.
You put the money in TAX FREE. When you repay it, you pay taxes on it. When you take it out, your are taxed on it again.

I guess that's a better description. :blink:

Silverbird:
I also was tired of paying Uncle Sugar extra every year cause the tax laws don't like renters.

That may not be as true as most folks would like to believe. Granted, renters can't deduct Mortgage interest and real estate taxes, HOWEVER, they DO get the standard deduction, which in some cases is even better.

I had a friend who said I should "Leverage" my home and purchase another for tax purposes. He said I could save 25% in taxes. I replied that, in order to "SAVE 25% in Taxes", I'd have to SPEND $10,000.00 to DO IT, so I can SAVE $2,500.00......EVERY YEAR !!!
Go figure..........

Also, My home is paid off, so, towards the end, your Interest and Real Estate Deductions will become smaller and smaller. At this point, I can only use the "Standard Deduction", and that has been the case since I was 45 or 46 years old. I'm 53 now.
Am I happy to "OWN" a home ? Yes. However, the normal bills and maintenance gets expensive. As an investment, it's ok,however, don't discount being a 'Renter'. It really DOES have it's advantages.

I hope to be one, one day in the future.

 

[luv2read]

Maybe "Double Taxed" is not the best choice of words.
You put the money in TAX FREE. When you repay it, you pay taxes on it. When you take it out, your are taxed on it again.

I guess that's a better description. :blink:


That may not be as true as most folks would like to believe. Granted, renters can't deduct Mortgage interest and real estate taxes, HOWEVER, they DO get the standard deduction, which in some cases is even better.

I had a friend who said I should "Leverage" my home and purchase another for tax purposes. He said I could save 25% in taxes. I replied that, in order to "SAVE 25% in Taxes", I'd have to SPEND $10,000.00 to DO IT, so I can SAVE $2,500.00......EVERY YEAR !!!
Go figure..........

Also, My home is paid off, so, towards the end, your Interest and Real Estate Deductions will become smaller and smaller. At this point, I can only use the "Standard Deduction", and that has been the case since I was 45 or 46 years old. I'm 53 now.
Am I happy to "OWN" a home ? Yes. However, the normal bills and maintenance gets expensive. As an investment, it's ok,however, don't discount being a 'Renter'. It really DOES have it's advantages.

I hope to be one, one day in the future.

If you borrow it for a home and not a general-purpose loan, when you pay it back the interest is deductible. So you get a tax benefit. You're still making your tax-deferred contributions so the money you make payments with was getting taxed anyway. You are not double-taxed. You have to pay taxes on all of your tax-deffered money eventually.

 

[Idaho Dave]

All this talk about taxes and other financial stuff leaves one thing out. Quality of life. If you aren't going to be happy until you're in a house of your own, then it's worth while. As long as you can afford the payments.

Not to mention that a home can be considered an investment as well. It may not accrue value as quickly as the I fund does at times, but it is definitely a safe investment. Probably better returns than the L-Income.

 

[Scout333]

Hello, As one who has used the TSP loan program for a bridge loan (down payment while waiting for the sale of one house to go through) it can be helpful on a short-term basis. Probably not the best choice for a long-term mortgage type loan.

See link for information re pros and cons. http://www.tsp.gov/forms/tspbk04.pdf

Note. on page 4 of the booklet that "A TSP residential loan is not a mortgage. Therefore, the TSP loan interest payments are not deductible, as they might be for a mortgage or home equity loan."

If you think about it makes sense because you are paying yourself back. Hope this helps.

 

[luv2read]

Hello, As one who has used the TSP loan program for a bridge loan (down payment while waiting for the sale of one house to go through) it can be helpful on a short-term basis. Probably not the best choice for a long-term mortgage type loan.

See link for information re pros and cons. http://www.tsp.gov/forms/tspbk04.pdf

Note. on page 4 of the booklet that "A TSP residential loan is not a mortgage. Therefore, the TSP loan interest payments are not deductible, as they might be for a mortgage or home equity loan."

If you think about it makes sense because you are paying yourself back. Hope this helps.

hmmm

 

[The HalfBreed]

If you borrow it for a home and not a general-purpose loan, when you pay it back the interest is deductible. So you get a tax benefit. You're still making your tax-deferred contributions so the money you make payments with was getting taxed anyway. You are not double-taxed. You have to pay taxes on all of your tax-deffered money eventually.

Now, are you referring to the Interest that you pay on the Home Loan being "Deductible" ? (i.e. borrowing 50K from the TSP), so, that when you pay it back to the TSP, you deduct the interest ? and the OTHER $150K (borrowed from a bank) also being deductible for taxes ?

Then, my normal question would be, "If you're required to pay back the 50K into your TSP, is that paid back with after tax dollars?"

I've never taken a loan out against the TSP.....but I watch Suze Orman.

 

[Scout333]

Half, Note the post I sent in yesterday. Interest you pay yourself on a TSP loan is never deductible. The OTHER loan you referred is deductible subject to the normal tax rules re mortgages to purchase and/or remodel, etc.

"Hello, As one who has used the TSP loan program for a bridge loan (down payment while waiting for the sale of one house to go through) it can be helpful on a short-term basis. Probably not the best choice for a long-term mortgage type loan.

See link for information re pros and cons. http://www.tsp.gov/forms/tspbk04.pdf

Note. on page 4 of the booklet that "A TSP residential loan is not a mortgage. Therefore, the TSP loan interest payments are not deductible, as they might be for a mortgage or home equity loan."

If you think about it makes sense because you are paying yourself back. Hope this helps. "

 

[The HalfBreed]

Half, Note the post I sent in yesterday. Interest you pay yourself on a TSP loan is never deductible. The OTHER loan you referred is deductible subject to the normal tax rules re mortgages to purchase and/or remodel, etc.

So, basically, my statement above applies. You pay taxes on the amount you put BACK into the TSP to repay it, then you are taxed when you take it out.
Would that not be a true statement then.....since the payback into the TSP is in AFTER TAX dollars.......

 

[Scout333]

Half, This is a little confusing. But , here goes, The money you take out as borrowed funds ( the amount you will be paying back) you have already received a tax deduction for. I.E. No taxes were paid on the amounts you originally put in nor the earnings on those amounts. When you put the money back you are only restoring the funds you have taken out. Money for which no taxes have been paid. You wouldn't get a deduction for the repaid amounts. If you don't repay the loan amounts then you would have to pay taxes on the part you didn't pay back. Same as when you retire and take money out. Is this confusing enough? Hope this helps!

 

[The HalfBreed]

Half, This is a little confusing. But , here goes, The money you take out as borrowed funds ( the amount you will be paying back) you have already received a tax deduction for. I.E. No taxes were paid on the amounts you originally put in nor the earnings on those amounts. When you put the money back you are only restoring the funds you have taken out. Money for which no taxes have been paid. You wouldn't get a deduction for the repaid amounts. If you don't repay the loan amounts then you would have to pay taxes on the part you didn't pay back. Same as when you retire and take money out. Is this confusing enough? Hope this helps!

Sort of......

I'm just going by what the guys at work told me. They said that their "Loan" is paid back After tax. That is separate from their normal contributions which is before taxation.

i.e.
If they contribute 12K/year to their TSP, that's not taxed.
If they pay their loan back, at $500.00/month, that IS taxed. (paid in After Tax dollars)

Am I getting different stories, or am I just confused ???
It appears I"m hearing different stories, as I have no first hand knowledge.

I watch Suze Orman and CNBC, and others to learn, and I thought I remembered her saying the same thing. I looked it up (googled it) and found this:

http://finance.yahoo.com/expert/article/moneymatters/2564

Posted on Saturday, February 11, 2006, 12:00AM


Avoiding costly money mistakes is one of the best ways to make more money -- each penny you avoid throwing away on a senseless move is a penny available for reaching your financial goals.

So if you do nothing else this year, please avoid making any of the following financial blunders.


1. Don't borrow from your 401(k) or 403(b).

It's a horrible deal. For starters, your 401(k) contributions are pre-tax. Your money will get taxed later on, when you withdraw the money from the plan.

But if you take out a loan, you're pulling out pre-tax dollars that you will then have to repay -- with money that has already been taxed. Then when you eventually retire and start making withdrawals, the money is going to be taxed again. So your loan gets taxed twice.

The payback period can also be a problem. You'll have to repay the entire loan in just a few months if you're laid off or take a new job. And if you don't have the money for repayment -- and you're not 55 or older -- the loan will then be treated as a withdrawal. That means a 10 percent early withdrawal penalty and income tax on all the money. Ouch.


Moreover, you're shortchanging your retirement savings. Reducing the money you have growing tax-deferred in a retirement plan is going to translate into having less money when you need it.

 

[Guest2]

Sort of......

I'm just going by what the guys at work told me. They said that their "Loan" is paid back After tax. That is separate from their normal contributions which is before taxation. i.e. If they contribute 12K/year to their TSP, that's not taxed. If they pay their loan back, at $500.00/ month, that IS taxed. (paid in After Tax dollars) Am I getting different stories, or am I just confused ??? It appears I"m hearing different stories, as I have no first hand knowledge. I watch Suze Orman and CNBC, and others to learn, and I thought I remembered her saying the same thing. I looked it up (googled it) and found this:
http://finance.yahoo.com/expert/article/moneymatters/2564

Right On Point Halfbreed. After Tax Dollars will payoff the loan, which will
consist of principal and interest your charging yourself. So your putting
"already been taxed" money back into your TSP. When it comes time to
pull your money out, your taxed on that amount again.

Add the additional tax to what you lost in compounded earnings potential
and then subtract the $ for $ tax benefit you get from home appreciation
(or depreciation) and you'll find that your paying a hefty price for touching
your TSP money.

 

[Scout333]

Sort of......


"1. Don't borrow from your 401(k) or 403(b).

It's a horrible deal. For starters, your 401(k) contributions are pre-tax. Your money will get taxed later on, when you withdraw the money from the plan.

But if you take out a loan, you're pulling out pre-tax dollars that you will then have to repay -- with money that has already been taxed. Then when you eventually retire and start making withdrawals, the money is going to be taxed again. So your loan gets taxed twice."

Half, I don't disagree that the amounts you pay back are after-tax dollars. The statement Suzy makes is correct except for the part where the loan gets taxed twice. You really have to follow the transaction all the way through. 1. You put money in pre-tax (no tax paid on it) i.e. 50,000 in
2. When you take money out(normally you pay tax on it & if early withdrawal possibly penalties also)
3. If you take out a loan you don't have to pay tax on it (unless you don't pay it back)
4. The repayment just puts your money back where it was (pre-tax dollars in your TSP account).
5. When you eventually take the 50,000 plus interest out upon retirement you are taking out pre-tax dollars which will be taxed just like all the other pre-tax dollars in your TSP account.
I believe it is taxed only once. However, this is really more of an investment decision than a tax one. You lose the money your 50,000 would have earned if in the market and the earnings on the earnings (assuming your money wasn't parked in the G Fund). I don't disagree that this can be a bad idea especially for a long-term loan from your TSP. GGal help us out here! You usually do a really good job of explaining the tax side of things!

 

[pyriel]

Hmmm... borrowing from tsp to put money for house downpayment? Pretty much this is what I summed up with this discussion. We are so focus on how the 50k would affect the TSP but we didn't look at the RE benefit of this deal. Someone who is buying a 150k home will now only owe 100k at the onset of purchasing a home. If one would quantify the interest one will pay between 150k vs. 100k in a 6% loan amortized in lets say 30 years, I think we will be able to see that it makes sense to take out 50k from TSP to be able to use it for house downpayment. Additionally, the tax break one will receive from the interest payment is definitely much more beneficial than those who are renting and not getting any tax breaks. Remember, we shouldn't only be looking at the tax breaks that the homeowners get but also the equity and appreciation that people usually don't see. If done correctly and with proper planning, the benefits will definitely outweighs the cons.

Pyriel

 

[GGal]

I like Suzie, but let's face it, she's a drama queen.

You do not pay tax on the loan money twice.

When you repay the loan with after tax dollars, all you are doing is replacing the pre-tax dollars that you took out. Forget after tax/pre tax. Just look at it as the same dollars that
were already there.

Further, if owning a home is what you want to do, and if your interest paid is enough to kick your itemized deductions over and above the standard deduction, then the tax savings
each month should be viewed as a reduced payment.

The fact that I can itemize rather than take standard kicks up my deduction another $10,000 or more over standard, because now I get to deduct state, and property tax too. So my federal and state tax savings of approx. $300 a month, I view as reduced payment.

I didn't go back and read the original question, so I don't know the facts.

If I wanted to buy a house and tsp was only place I could get down payment, by goodness I'd do it, unless I was too close to retirement to pay it back.

I would do without whatever I could and get that tsp loan paid back as quickly as possible, I wouldn't take the 15 years or whatever is allowed.

I agree with Suzie that we really should not borrow from tsp, as a general rule.

But so many young people have a hard time coming up with a down payment on a house where their only savings have been the tsp.....so what choice do they have, really?

Moreover, it seems there should be a bunch of good deals on houses out there now.

Only fiscally responsible people, however, should buy real estate. We need to be disciplined, and make sure we pay all bills on time, and have savings for emergencies, and don't run up credit cards, and don't take out home equity loans that we could do without....the goal is to be debt free at retirement and not to have to pay rent.

JMHO

 

[XL-entLady]

If a loan from your TSP allows you to make a big enough down payment that you have an 80/20 loan to value, you'll also save paying mortgage insurance. So that's another variable to consider.

Lady