Many people may not realize that you can use your IRAs and 401K to purchase property, UNDER CERTAIN CIRCUMSTANCES.
There exists a special exemption that allows first-time home buyers (defined as buyers who haven't owned a home for at least 2 years) to withdrawl up to $10,000 per person, with no penalties or tax, towards the purchase of a house as long as the money was invested in a Roth IRA that has been open at least 5 years. If the Roth is less than 5 years old, there is no penalty but income tax may have to be paid on the withdrawl amount. The money can be used for any costs relating to buying, building (or rebuilding) a home.
You can also borrow against your 401K for a down payment (or any other closing costs) on a house and pay yourself back at a given interest rate. If you have to borrow money why not pay yourself back? In fact depending upon how well your 401K is performing your loan interest rate may be greater. There is a risk however if you lose or change jobs - you will have to repay the loan in full in a short time (often 60 days and often with a 10% penalty).
Using your retirement funds for a down payment equating to 20% or more of the purchase would eliminate the need for mortgage insurance or a second mortgage, which depending upon these costs may or may not make using your 401K a good risk. As always consult a tax professional and/or financial planner before making any decision to use retirement savings.
One final option exists if you are looking to purchase investment property. If you have a self-directed IRA, you may be able to buy property as an investment within the IRA (not all financial institutions will allow it). The one caveat is all expenses related to the property must come from the IRA and all income generated from the property must go back into the IRA. Still this is a nice way to get into the investment business using money that is just sitting there potentially earning minimal returns.
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