Cashing In Q&A columns

Pros and cons of various sources of down payments


Down payments are once again a must to qualify for a mortgage. There are many sources, each with its own advantages and drawbacks.

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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
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
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
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Cons: Up to 50 percent of amount withdrawn will go to taxes and penalties for early withdrawal, loss of funds for retirement.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
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

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