Pros and cons of various sources of down payments

Credit card cash advances are the only one that can disqualify you

By Pat Curry

The vast majority of homebuyers will need to come up with cash for a down payment. Here are the most common sources that borrowers use, and pros and cons of each.

Savings plan
Pros: Teaches discipline and delayed gratification, no debt to be repaid.
Cons: Ties up funds that might be used for other purposes.

Gift from family member
Pros: Family members often are happy to help a loved one purchase a home.
Cons: Family member might construe their gift as a debt that needs to be repaid, in cash or in a lifetime of lording it over the borrower.

Selling an asset, such as a car or stocks
Pros: A responsible use of personal property, less things to pack and move.
Cons: Possible capital gains tax to be paid, asset is no longer available for personal use.

Borrowing against retirement funds
Pros: Borrowing against a 401(k) is tax-free and you're paying yourself back instead of paying someone else.
Cons: If you lose your job, the loan needs to be repaid immediately to avoid taxes and early withdrawal penalties.

Withdrawing money from retirement funds
Pros: Fast source of cash.
Cons: Up to 50 percent of amount withdrawn will go to taxes and penalties for early withdrawal, loss of funds for retirement.

Credit card cash advances
Pros: Fast source of cash.
Cons: High interest rate on loan, can throw off debt to income ratios enough to disqualify borrower for the loan.

See related: Credit card cash advance for a down payment not wise, Pay mortgage by credit card? New programs encourage it, Poll: Mortgage is first payment priority, credit cards last

Published: November 20, 2008

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