Most people think buying a home automatically involves taking on a 30-year mortgage. But these days, homebuyers are increasingly opting for an alternative route—using their investments to bypass a home loan altogether.
Mortgages have traditionally been considered a “good” type of debt because of their relatively low interest rates, compared to personal loans.
Yet, with interest hovering around 7%, people are looking for low- or no-interest ways to pay for a home and choosing to liquidate their investment funds instead.
So, should you use investment funds to purchase a home and forgo a mortgage? It all depends on your investment portfolio and your appetite for risk.
The case for skipping a mortgage
Cashing out investments “can be a strategic move, driven by unique market dynamics,” says Kris Mullins, CMO of investment firm Capital Max. Mullins says using investment funds can save money in the long run, especially if you’re facing high interest rates like we see now.
Buying real estate with your investments “circumvents the immediate financial strain of a mortgage and strategically positions the investor to benefit from both real estate appreciation and the liquidity of their remaining portfolio,” adds Mullins.
This approach leverages the advantages of real estate investment without tying up capital in mortgage payments—and can save a ton in interest payments to boot.
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The biggest factors to consider
Your age, employment status, and holdings size will all factor into whether using investment funds for a home purchase makes sense. You should ensure you’re meeting your retirement goals “or have enough cash flow after you buy a house to make up for the lost savings,” says certified financial planner R.J. Weiss.
He says that if you have enough cash flow to replenish your investment accounts after buying the home, using your investments for the purchase is not irresponsible.
However, Mullins stresses that you should also consider your “investment time horizon” as you decide whether to use investment money. An investment time horizon is the length of time you can keep cash in investments without dipping into it for major expenses.
“If your investment horizon lines up with your home purchase timeline and other financial goals, you can ride out market ups and downs without having to sell off your investments in a hurry,” he says. “So, as that homebuying date approaches, make sure your investments are set up to minimize risk. That way, market dips won’t ruin your homebuying plans.”
Other reasons investment funds are an attractive option
Using investment funds to pay for a home gives homebuyers flexibility, says Andrew Hall, vice president and wealth advisor at Farther.
“Clients can sell investments and have cash quickly,” he explains, which “can be the difference in writing the winning offer in a tight housing market.”
Thanks to new SEC rulings, money from selling investments is usually available the day after you sell the funds, which gives homebuyers an edge in competitive markets.
Hall also recommends looking into portfolio loans. These loans are when the custodian of the client’s account offers a loan against the balance, similar to a home equity line of credit.
“Different security types receive a different percentage of leverage,” says Hall. “This loan has payment flexibility, can be secured in much less time than traditional mortgages, and can avoid some very high capital gains.”
The lowdown on taxes
Any time you take money out of an investment account, you’ll pay a capital gains tax, which is a tax on the profit your investments have made. Factor those tax dollars into the overall “cost” of using investment funds.
Including the cost of capital gains tax in your calculations gives you a clear picture of the total monetary picture of using your investment funds.
Neglecting to account for capital gains taxes could lead to unexpected financial shortfalls, potentially jeopardizing your overall investment strategy and long-term financial goals.
Beware of using retirement funds
If your only investments are your retirement funds, proceed carefully before using them to buy a home.
There are specific rules and penalties regarding retirement accounts. The IRS assesses a 10% tax on money taken out of a 401(k) before the age of 59.5, in addition to the income tax you’ll pay on those funds.
Some investment advisors allow clients to take out loans of up to $50,000 against their 401(k) for a certain amount of time without incurring penalties. For instance, if you can’t be approved for a mortgage or the only other options are high-interest loans, this might be an attractive option. If you pay off the money on schedule, it won’t impact your credit score.
The IRS also has a program that allows first-time homebuyers to withdraw up to $10,000 penalty-free from an IRA to use as a down payment.
Whatever decision you make around using your investments, Mullins and the other financial experts we spoke with recommend that you consult a financial advisor before making any decisions.
“We advise clients to weigh the benefits of immediate homeownership against the opportunity costs of liquidating investments,” says Mullins. “In many cases, a well-timed divestment can lead to greater long-term financial health.”
However, he warns, “Each decision should be tailored to individual financial goals and market conditions in order to ensure a balanced and forward-thinking strategy.”
