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Should I consider buying a house and using money from my Roth IRA as a down payment?

I am a 26-year-old working full-time with a Roth IRA that sits at about $18,000. I am currently spending about $800 a month in rent and have been considering using the exception to make a withdrawal for a house down payment. I feel like I am throwing away the money every month by renting when I could be getting a return on it, and based on some early research I could find a reasonable house in my area and keep the mortgage payment amount roughly the same as the rent. I have my student loans paid a couple years ahead and pay off my credit cards every month. Should I consider buying a house and using money from my Roth IRA as a down payment?

Estate Planning, IRAs, Real Estate
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February 2019

Thank you for your question. I have two key thoughts. First, it seems counter-intuitive to save for retirement, then use the money for another purpose. I realize such things are allowed, but really, what is your comittment to saving for retirement? It must be firm. And you ARE hopefully getting a return on this money, tax-advantaged besides, while it is in the Roth IRA. It also seems like you may not have an emergency fund or any other savings. Both of those should be priorities before going into debt and additional unknown expenses with home ownership. You should have at least six months expenses in an emergency fund, then save for a downpayment on a house.

Second, do not feel that you are "throwing away" rent money. It costs money to live under all circumstances and that money is gone forever. If you own a house, especially with a minimal downpayment, you will be throwing away money on interest each month. And, there are additional expenses of owning a house beyond the mortgage payment. Taxes, insurance and maintenance are significant costs that are not recovered. Maintenance costs simply preserve, and add nothing, to a house's value. Also, your estimated $800 mortgage payment seems very low as if it might not include property taxes, insurance, or the Private Mortgage Insurance that would be required with less than 20% downpayment. If an all-inclusive payment is really that low, then I would question the condition of any house that you could buy for that amount and what the likely maintenance and repair bills will be like. I do not see a person's residence as an investment. An investment is something, like a mutual fund, that can be easily liquidated to harvest returns or curb your losses. A house is a place to live and cannot be easily liquidated. Even if you experience appreciation in a rising market, and you sold it "at a profit,"  you would still need to buy another at the same appreciated values just to have a place to live. 

I stronly suggest that you contimue to rent until you have an emergency fund in place and a downpayment saved, so as to leave your Roth IRA, which really is an investment, intact and hopefully add to it. Take great comfort in knowing, month to month, exactly how much it will cost you for housing. Defer home ownership until you have the financial flexibility to better meet unexpected expenses in addition to routine maintenance which can easily run up to 4% of the value of the home. That's an average of about $333 per month for every $100,000 in home value.

I wish you well.

February 2019
February 2019