TSP for House Down Payment

[Berimbauone]

Perhaps some of you more experienced TSP users can give me some guidance. I'm a new fed employee and have been diligently contributing to TSP for about a year now.

My short-term goal is to buy a house for wife, baby and I. How exactly can TSP funds be used for buying a home? What are some of the pors/cons I may want to consider in using the TSP for this?

I apreciate any and all the help.

Cheers

 

[weatherweenie]

Perhaps some of you more experienced TSP users can give me some guidance. I'm a new fed employee and have been diligently contributing to TSP for about a year now.

My short-term goal is to buy a house for wife, baby and I. How exactly can TSP funds be used for buying a home? What are some of the pors/cons I may want to consider in using the TSP for this?

I apreciate any and all the help.

Cheers

TSP loan info
http://www.tsp.gov/features/chapter11.html

 

[Birchtree]

Don't do it - get a part-time job and save the money from that for your down payment. We are in the early stages of a mega trend secular bull market and you should let this market help you save for another rainy day. It does take money to make money and it takes time to earn your money so you can invest.

 

[BeaverState]

I say get a nice place for your family to live. Too many of my co-workers have kept their families living in junky houses for years and years.

A major pro of borrowing from the TSP is the interest rate, and you can adjust the payments up or down with a click of the mouse.

A major con would be it can take several years to build your TSP account back up to where it was when you first took out the loan.

If the market tanks when you have the loan out you'll be looking pretty smart. If it goes way up you'll be kicking yourself.

 

[lmorgan]

You know your situation best . Upside = all interest on the TSP loan goes back in your account. Downside the amount taken out for the loan is not helping your nest egg. Just remember anytime you borrow from the TSP you're borrowing from yourself.

 

[Show-me]

I like parts of Birch's answer. Don't borrow against TSP, but you NEED a nice down payment with the lending standard tightening.

Alway ask if there is a penalty for paying off the loan early. This is not a new thing, but a lot of subprime folk are stuck because of the early pay off penalty.

Good luck!

 

[Gilligan]

IMO it is fine to borrow from your TSP account to buy a house. TSP has two types of loans, General and Residential. With the residential it will require paperwork and a copy of the Real Estate contract. The General loan application is a one page simple form. The payments can be carried out for 5 years for the General or 15 years for the Residential. You can use a General loan for a home purchase. A $10,000 for 5 years should be less than $100 per pay period. The interest that you pay on the loan will go back into your TSP account.


The real estate market is busting in certain regions, there are deals out there. There are also a lot of overpriced homes, so shop around. I’m always looking at real estate, less that 1% of properties are doable for me. Don’t be afraid to offer less than the asking price, I offered 75k for a 110k last year and after 2 months the seller came down to my offer. In 20 years you could have your house paid for and it could be worth a least twice what you paid for it!

 

[Gilligan]

Don't do it - get a part-time job and save the money from that for your down payment. We are in the early stages of a mega trend secular bull market and you should let this market help you save for another rainy day. It does take money to make money and it takes time to earn your money so you can invest.

Birch,
Correct me if I’m wrong, but didn’t I read in one of the other threads that you were going to sell some shares of stock to buy an ocean front home? If so, what’s the difference from selling some TSP shares to get a loan that will be for a real estate investment?

 

[Show-me]

Birch,
Correct me if I’m wrong, but didn’t I read in one of the other threads that you were going to sell some shares of stock to buy an ocean front home? If so, what’s the difference from selling some TSP shares to get a loan that will be for a real estate investment?

Point - lil buddy.

 

[ChemEng]

Not to mention the idea of having to repay pre-tax dollars with post-tax dollars... Paying my good uncle once is enough! Having to pay him twice though is stretching my generosity quite a bit.

 

[FundSurfer]

IF you would have money in your TSP invested in the G-fund then taking out a loan to yourself is a good way to get a low interest loan. Remember that if you leave the federal government you will have to repay the loan or you could get an early withdrawl penalty.

If you would not have money invested in the G-fund, then you will be missing the difference in interest between what is in the G-fund ~ 4% and the fund you would be invested in ~6-10% long term in stocks. This will make a big difference to the value of your account long term especially if you are young.

If you are early in your career, I'd really suggest that you would be better off not doing the loan and being fully invested in stock funds. Better to wait on the house and not impact your retirement. Check out the impact for yourself using the tool on the site below.

http://hr.er.usgs.gov/calculators/tsp/tsp.pl

 

[FundSurfer]

Not to mention the idea of having to repay pre-tax dollars with post-tax dollars... Paying my good uncle once is enough! Having to pay him twice though is stretching my generosity quite a bit.

Two scenarios: 1 you get a loan from TSP and 2 you get a loan from your bank. Both interest rates are the same. How is there any tax consequence from using your TSP rather than your Bank? In the case of the TSP loan you are paying the interest to yourself into your account. The account balance at the end of the loan would be the same if you had the money invested in the g-fund (assuming interest in G fund stays the same which it won't - could go up or down) or had given yourself a loan.

 

[ChemEng]

Two scenarios: 1 you get a loan from TSP and 2 you get a loan from your bank. Both interest rates are the same. How is there any tax consequence from using your TSP rather than your Bank? In the case of the TSP loan you are paying the interest to yourself into your account. The account balance at the end of the loan would be the same if you had the money invested in the g-fund (assuming interest in G fund stays the same which it won't - could go up or down) or had given yourself a loan.

Youre right. I have always made the comparison between taking the loan from TSP versus not taking the loan. In that case, the tax issue is important. But if the end state is definately a loan and its a question of who will fund it, then its probably a wash.

(I say probably because I dont know if the interest paid to repay a TSP residence loan is tax deductible. I would assume that it is since it would be funding a residence, but I dont know if that changes at all since you are repaying yourself that interest.)

The other downside (although not tax related) is that if you take a 15 year TSP loan out, it keeps you tied to government work for those next 15 years. That can be a big issue depending on levels of work satisfaction, health, et al.

 

[FundSurfer]

Yeah, I'd not want that 15 year loan unless I was taking it to buy a retirement home the year before I retire. The I'd expect to be substantially in safer G fund anyway and I'd not have to worry about repayment if I left the government. Repayment could be done by just getting another more expensive loan and would be a speed bump and not a deal breaker.

 

[Birchtree]

Gilligan,

I'm only interested in waterfront mountain lots or waterfront mountain homes. I bought 5.23 acres here in the Gator Nation without the benefit of interest cost deductions - I don't have to do that again. I will use a home equity line of credit as well as stock sales to help defray the interest rate costs. The benefit of having access to a stock portfolio is that you have immediate liquidity. My New Hampshire brother-in-law wants to park his RV on my land during the winter months. I have no plans to sell the land - but if the right price came along I could be tempted, otherwise it becomes part of my legacy. I didn't plan for the land to be an investment but it make work out that way. There are several deer that have a trail on it leading to a water hole. Because of land comprehensive zoning these five acre tracts are hard to own. My TSP will remain intact until I retire and then I'll start the process of automatic withdrawal into a Roth IRA via a regular IRA.

 

[BeaverState]

Say you're making max contributions of 15 percent. Now you take out a TSP loan at say 5 percent interest. Aren't you now able to contribute more than the 15 percent max contribution per year? 15 percent contribution plus the 5 percent interest = ??? Am I correct in this line of thinking?

 

[GGal]

Hey, 15% max is way old news.

Max this year is $15,500 plus $5,000 catch up.

But your train of thought may be correct, hard to tell exactly what you mean.

Let's say you have an outstanding loan that requires principal and interest payment of $100 per pay period.

You are still allowed to make the max contribution of $15,500, and all the while, you are paying back $100 per pay period, some of which is principal, and some interest.

Luckily the interest payment will help make up for some of that you lost by not having the principal in the account.

The loan repayment is just that, a repayment of what you took out. So it has no effect on the max contribution you are allowed to make.

GGAL

 

[BeaverState]

One way to look at TSP loans is you don't pay any interest to the bank. So if you would have had a 8 percent second mortgage, and your new TSP loan charges 5 percent, you in effect come out 13 percent ahead. (8 percent you would have paid to the bank plus [+] 5 percent you pay yourself equals 13 percent.) Not a bad return on your money.

Not a financial strategy you want to do, but better than giving it all to the bank.

 

[Gilligan]

Birchtree,
I apologize for getting your water front property confused with an ocean front property.

BeaverState,
Good point!

Berimbauone,
The main thing is to stop paying rent, your just making your landlord rich (I know because I am a landlord). A home is one of the best investments you can have. Just don’t go overboard and get a mortgage that you can’t afford. Property taxes and insurance add up and they do tend to increase.

I see too many of my fellow employees renting a nice house or apartment and lease their vehicle because its convenient or they have to keep up with the Joneses’. By the time they retire, they will have $0 net worth or even a negative net worth. Many of these folks will keep on renting until they pass away. IMO everyone should have their home paid for before they retire. I have a humble home but it’s paid for, all of my vehicles are paid for and I’m building a new house with cash. Financial freedom is a good feeling, if I can increase my cash flow some more, I will retire early!

 

[Berimbauone]

The main thing is to stop paying rent, your just making your landlord rich (I know because I am a landlord). A home is one of the best investments you can have. Just don’t go overboard and get a mortgage that you can’t afford.

Wow, this is all very good information. Thank you all for the great input.

My wife and I have no problem in living within our means; we keep our debt low and drive a modest and efficient car.

We do want to stop paying rent and feel we're going to be able to afford a home pretty soon. Fortunately I'm in a career program where I will be able to step up two gs levels by the end of FY 2008, and my wife is ready and itching to get back to work, so there's better (financial) times ahead.. We would actually be looking to buy a smaller house, just something that would be nice and cozy and we can call our own.

Once the time comes that we have enough in our TSP to make a decision this is all going to be very helpful. I'll keep reading this thread for more good info. thx