The Home Stretch

One thing that didn't change with the Fed's shift on interest rates this summer is the variety of mortgage options for first-time home buyers. The days when you needed a 20 percent down payment and borrowed the rest from the bank down the street are long gone. Mortgage writers offer a number of nontraditional arrangements these days, customizable by type of loan, number of loans and down payment variations. The catch: Most require at least some down payment or the ability to pay closing costs, or both. If all your money is tied up in a business or in other investments, you might be left on the outside looking in.

Enter old reliable, the Individual Retirement Account (IRA). First-time home buyers are allowed to borrow $10,000 apiece—$20,000 per couple—from their IRAs to pay for a house down payment or closing costs. Similarly, if you just need a bridge loan until other money gets freed up, you're allowed to withdraw cash from an IRA for up to 60 days penalty-free. As long as the money is back in your account by the 60th day, the IRS pretends nothing happened. If you need quick money for the closing date but can replace it within two months, this is an alternative.

If you're in the market for a first house and are even considering this line of thought, though, you most likely need the money for more than two months. Borrowing from your IRA can do the trick, but know that there are disadvantages. You might have to take a tax hit, for instance, on any gains built up in the retirement account. That's troubling for many people, since the point of an IRA is to let contributions grow tax-deferred (or in the case of Roth accounts, tax-free) during the years leading to retirement. Similarly, the opportunity cost of taking money out of your retirement account for years at a time could turn out to be much more expensive than coming up with a different mortgage option to begin with.

That said, there's nothing like homeownership to bring stability to your life and your finances. By itself, the annual tax deduction for mortgage interest can make homeownership a home run. The equity you build also creates an asset you can sell later to fund retirement—or to buy a bigger house. So if the only thing standing between you and your first home is a down payment, take a close look at that IRA statement next month. Your house just might be there, hidden behind the account balance.

Scott Bernard Nelson is deputy business editor at The Oregonian and a freelance writer in Portland, Oregon.