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When it's time to come up with the down payment on a home purchase, many people turn to their retirement savings.
In 1999, nearly one out of every three 401(k) participants who were eligible to borrow from their plans had outstanding loans, up from just 20 percent in 1994. Nearly half of those loans were for buying a home.
It may be tempting to draw from the resources you have already accumulated, but is it wise? According to the General Accounting Office, people who borrow from their plan will retire with 30 percent less than those who keep their assets in their plan. Don't shrink balanceNow a new loan product may be able to help you buy a house without shrinking your 401(k) balance. Plan participants whose employers offer the Mortgage Acceptance Program (MAP10) can obtain no-down-payment mortgages from outside lenders. The investment-banking firm that developed the program, Chambers, Dunhill, Rubin & Co., says the MAP100 is really a reward for being a good saver. The advantage to employers is a reduction in the number of 401(k) loans, which cost money to administer. The advantage to plan participants is being able to leave their funds intact while still obtaining a competitive home loan.
One of the problems with borrowing from a 401(k) plan is the double-tax dilemma. Sure, borrowers are paying themselves interest on the amount they repay to the plan, but they are making the payments with "after- tax" dollars, and those dollars will be taxed again at retirement when withdrawn. Contributions, on the other hand, are made with "pre-tax" dollars.
And the interest gain may not be as significant as anticipated. Instead of earning 8 percent on a lot of money that's sitting in the plan and then allowing those gains to compound, borrowers are earning 8 percent on small amounts as payments trickle in, probably in monthly installments stretched out over years. Reality hurtsAnd the reality is that many 401(k) borrowers reduce their retirement contributions in order to make the loan payments.
The MAP100 may be a useful alternative to those thinking about tapping into retirement savings. Interest rates on a MAP100 loan will be about half a percentage point higher than on loans with a 5 percent or 10 percent down payment, and about one point higher than a 20 percent-down loan.
Talk to your employer to see if they offer the MAP100. For more information, call 1-877-707-6618, or check out www.map100.com. The site includes a handy calculator to help you figure your savings.
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