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Buying a home using retirement savings? Financial expert weighs in

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Nearly 1 in 10 American homeowners say they pulled money from their retirement savings to cover the down payment and closing costs associated with buying their house.

A recent survey by Bankrate found that 9% of homeowners withdrew from their 401(k) or other retirement account to make the purchase, and younger generations were most likely to do so. 

For sale sign in front of home in show

The Washington Post published a new report detailing how the nation’s top home builders are opting to build smaller homes than previously to account for the current housing crisis. (Reuters Photos)

Sixteen percent of Gen Z respondents (ages 18-27) and 12% of millennials (ages 28-43) reported taking money out of retirement savings to fund their down payment, compared to 7% of Gen Xers (ages 44-59) and 8% of baby boomers (ages 60-78). 

FED LEAVES RATES UNCHANGED, SAYS THREE CUTS STILL PLANNED

But is it a smart financial move?

David Ragland, CEO of IRC Wealth and a certified financial planner, says “the 401(k) — or any retirement program — is the most powerful wealth building tool out there,” and he does not recommend withdrawing from those funds to buy a home.

He points to two major reasons for not pulling money from retirement funds. 

The first is that the saver will lose out on the growth they would have had if they kept the money in the fund over the long term, which would hurt young people much more than older generations.

A “For Rent” sign outside an apartment building in the East Village neighborhood of New York City on July 12, 2022. (Gabby Jones/Bloomberg via Getty Images / Getty Images)

The second-biggest downside is that the government takes a big chunk of the funds withdrawn from a retirement account.

Between federal and state taxes and a 10% penalty for a withdrawal, a person is looking at paying 40% on every dollar they take out, Ragland explained.

TO RENT OR TO BUY? WHAT TO CONSIDER WHEN DECIDING BETWEEN A HOUSE OR APARTMENT

To spell out the impact, he provided a hypothetical scenario of a 30-year-old who needs a $20,000 down payment and wants to take it from their retirement fund. Because of the penalties, an individual in that scenario would actually need to withdraw $33,000 from their retirement funds in order to cover the hit from the government.

However, if that 30-year-old left the $33,000 in their 401(k) rather than pulling it out, by the time that person is 85 years old, that amount of money would grow to $1.2 million, assuming the typical 7% rate of return.

“You’re not making a $30,000 decision, you’re making a $1.2 million decision,” Ragland said. “That’s why you don’t do it.”

Data table showing existing home-sales and other figures

A data table showing existing home sales, prices, mortgage rates and mortgage payments in January and February for the years 2019-2024. (Fox News / Fox News)

However, for those who have a retirement fund and do not have other means to come up with a down payment, Ragland offered an alternative option.

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He noted that those with a 401(k) are able to take a loan against those funds up to $50,000. That allows people to keep their funds in their retirement account while getting the down payment money they need, and avoiding any taxes or penalties.

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India may have fastest growing e-commerce sector

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India: the "perfect" emerging market

Investors may want to consider adding exposure to the world’s second-largest emerging market.

According to EMQQ Global founder Kevin Carter, India’s technology sector is extremely attractive right now.

“It’s the tip of the spear of growth [in e-commerce] … not just in emerging markets, but on the planet,” Carter told CNBC’s “ETF Edge” this week. 

His firm is behind the INQQ The India Internet ETF, which was launched in 2022. The India Internet ETF is up almost 21% so far this year, as of Friday’s close.

‘DoorDash of India’

One of Carter’s top plays is Zomato, which he calls “the DoorDash of India.” Zomato stock is up 128% this year.

“One of the reasons Zomato has done so well this year is because the quick commerce business blanket has exceeded expectations,” Carter said. “It now looks like it’s going to be the biggest business at Zomato.”

Carter noted his bullishness comes from a population that is just starting to go online.

“They’re getting their first-ever computer today basically,” he said, “You’re giving billions of people super computers in their pocket internet access.”

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How the Federal Reserve’s rate policy affects mortgages

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The Federal Reserve lowered its interest rate target three times in 2024.

This has many Americans waiting for mortgage rates to fall. But that may not happen for some time.

“I think the best case scenario is we’re going to continue to see mortgage rates hover around six and a half to 7%,” said Jordan Jackson, a global market strategist at J.P. Morgan Asset Management. “So unfortunately for those homeowners who are looking for a bit of a reprieve on the mortgage rate side, that may not come to fruition,” Jordan said in an interview with CNBC.

Mortgage rates can be influenced by Fed policy. But the rates are more closely tied to long-term borrowing rates for government debt. The 10-year Treasury note yield has been increasing in recent months as investors consider more expansionary fiscal policies that may come from Washington in 2025. This, combined with signals sent from the market for mortgage-backed securities, determine the rates issued within new mortgages.

Economists at Fannie Mae say the Fed’s management of its mortgage-backed securities portfolio may contribute to today’s mortgage rates.

In the pandemic, the Fed bought huge amounts of assets, including mortgage-backed securities, to adjust demand and supply dynamics within the bond market. Economists also refer to the technique as “quantitative easing.”

Quantitative easing can reduce the spread between mortgage rates and Treasury yields, which leads to cheaper loan terms for home buyers. It can also provide opportunities for owners looking to refinance their mortgages. The Fed’s use of this technique in the pandemic brought mortgages rates to record lows in 2021.

“They were extra aggressive in 2021 with buying mortgage-backed securities. So, the [quantitative easing] was probably ill-advised at the time.” said Matthew Graham, COO of Mortgage News Daily.

In 2022, the Federal Reserve kicked off plans to reduce the balance of its holdings, primarily by allowing those assets to mature and “roll-off” of its balance sheet. This process is known as “quantitative tightening,” and it may add upward pressure on the spread between mortgage rates and Treasury yields.

“I think that’s one of the reasons the mortgage rates are still going in the wrong direction from the Federal Reserve’s standpoint,” said George Calhoun, director of the Hanlon Financial Systems Center at Stevens Institute of Technology.

Watch the video above to learn how the Fed’s decisions affect mortgage rates.

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