If you've been working at your job for a long time and still do not have enough money to use for a down payment on a house, you may be considering taking a pension advance so that you can buy a house. Before you do this, you may want to discuss this subject with a financial planner, like Duff & Associates, to find out if it would be a wise decision.
What is a pension advance?
A pension is a retirement fund that is usually comprised of money a person's employer contributes. The amount of money in the pension builds over time, and the person is able to begin taking monthly payments from the fund when he or she retires.
A pension advance is a loan on this money. If you take a pension advance, you will receive a lump sum payment. The amount will depend on how much is in the fund and on how much you want to borrow from it.
When you take a pension advance, the company that gives you the cash will receive rights to your pension payments when you retire. They will take a certain number of payments, and this number will be disclosed to you when you take the advance.
Is this a good idea to buy a house?
Loans.org reports that the average interest rate on a pension loan is 27% to 106%. Because of this high rate of interest, your financial advisor might tell you that this would not be a wise financial move. In addition, taking this loan out now will mean that you will have less money when you retire. If you do not have other retirement accounts, you may run short of money when you retire.
Your financial advisor might instead recommend looking into a mortgage that requires very little money down. The downside to borrowing the full value of a house is that it will result in paying principle mortgage insurance (PMI) each month until the loan balance is under 80% of the value of the house.
PMI payments are calculated by multiplying the balance of the loan by roughly 0.5% to 1%. This amount is then divided between your monthly mortgage payments. Paying PMI is not typically something financial advisors recommend; however, PMI charges will be less than the fees you would pay if you took a pension advance.
There are times when this might be a good idea, and other times when it might not. To learn more about your options, talk to a financial advisor today.