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We know it can feel awkward to hit up a family member for money but sometimes a personal loan can be a good deal for the both of you. The reason for this is that many retirees are now earning very little interest on their money. As a result, the idea of loaning you the money could be a very attractive. proposition. It would get you the money you need for a 20% down payment while assuring your parents or that rich uncle Fred a steady stream of income at a better interest rate than they could get with a savings account. In other words, it should be a win-win proposition.
Naturally, you'll want to write out the terms of the loan, including a schedule for paying it back, and the interest rate. One spoiler alert – the interest rate on the loan needs to be the equivalent of what banks charge to make the loan legitimate with the IRS. One way to determine the interest rate is to take the yield of a 10-year Treasury note and add 2% or 3%. And of course, you will have to disclose that loan to your mortgage lender.
Try for a gift
If you have well-off parents they might be interested in seeing your inheritance money in action while they're still alive. Currently, the gift tax is $14,000 per person. This means your parents could gift the two of you up to $28,000, without triggering any taxes. If your parents were to gift you the money you will need to provide your mortgage company with a letter stating that the money doesn't have to be repaid. Plus, you may need to show your parents' financial statements.
Tap your retirement funds – but carefully
There are 401(k) plans – and yours may be one of them – that allow you to take 50% out of your vested balance up to $50,000 as a tax-free loan. Of course, you will need to repay the money on some timeline, typically five years. However, there is a big caveat here. It’s that if you leave the company before you completely repay the loan you will probably be required to pay back the difference within 60 days. If you can't pay it back the money will be treated as an early withdrawal and you'll be taxed on it at your standard rate, plus a penalty.
If you have a standard IRA and are a qualified first-time buyer you can tap your account up to $10,000 without being hit with a 10% penalty. Of course, you will be required to pay taxes on the amount you withdraw. Do you have a Roth IRA? If it's been open for at least five years you can take a distribution up to $10,000 tax-free. A Roth account also allows you to withdraw your contributions at any time and without incurring a tax liability or penalty.
The loan process has become simpler
If you're buying a home there’s good news. There are now only two forms involved in getting a mortgage versus the four that were formerly required. The first of these is called the Loan Estimate and Closing Disclosure. It provides information including the term of the potential loan, the amount, its interest rate and whether the figures can change after closing. This form will also have a breakdown of your estimated closing costs.
Three days before your closing date, your lender must provide you with a Closing Disclosure Form so you will be able to make sure your terms haven't changed. Its first page mimics the Loan Estimate and Closing disclosure statement so that you can verify that the term of your loan hasn’t changed nor has your interest rate, monthly payment or any other costs – since your initial estimate. Of course, you'll want to make sure that the information on the two forms matches and that you'll be able to afford what you're signing up for because you'll be stuck with that mortgage for many years.