If you are one of the millions of Americans with a 401(k) or other employer-sponsored retirement plan, you may soon be able to finance your next--or first--house with no down payment whatsoever.
Using a novel mortgage lending concept available solely to workers in firms that provide retirement plans, employees will be able to obtain 100 percent loans of up to $350,000. They will not have to borrow against or pledge their retirement fund balances as collateral for the home mortgage.
Known as MAP100, or Mortgage Acceptance Plan, the new funding concept is aimed primarily at workers who can afford the monthly payments on a house but either are unable to come up with the minimum down payment required for a conventional home mortgage or choose not to.
The program is expected to become available to participants in many of the 320,000 company 401(k) plans nationwide during the first half of 2000. Some corporate retirement-plan sponsors working with the Boston-based investment management firm Scudder Kemper Retirement Services are expected to introduce the plan during the coming few weeks. Your employer or the company that manages your 401(k) should be able to tell you whether it plans to participate.
The new loan concept won't appeal to everyone. For starters, it will cost more than a conventional loan with a down payment of 10 percent to 20 percent. As of Dec. 15, fixed-rate, 30-year MAP loans were priced at 8.5 percent with one point, or 1 percent of the mortgage amount. Conventional loans of up to $252,700, by comparison, were at 8 percent and 0.84 of a point, according to HSH Associates, a national service that monitors the rates of more than 2,000 mortgage lenders.
MAP loan underwriting also is slightly tougher than underwriting for some conventional loans. The program looks for marginally higher credit quality than do lenders selling loans to Fannie Mae or Freddie Mac, the two largest providers of mortgage money.
A final restriction: Your company-sponsored 401(k) or other retirement plan must permit you to borrow money from your plan--an estimated 80 percent of all 401(k) plans do--for you to be eligible for a MAP100 loan.
Why target a nothing-down mortgage solely to 401(k) plans if, as MAP sponsors insist, they will have no right to go after borrowers' retirement balances in the event of a foreclosure? The answer to that question lays bare what makes the MAP concept intriguing.
On the one hand, MAP100 is intended to produce large volumes of profitable home loans at premium rates and relatively high credit quality. Barry Kaye, MAP product manager for Chambers, Dunhill, Rubin & Co., the California-based investment bank that designed the plan, estimates that more than a half-billion dollars' worth of MAP100 mortgages will be originated in the first 12 months alone.
But a more subtle purpose of the program serves the interests of the people who will be directly marketing it--corporate employers and the big money-management firms who invest 401(k) dollars in stocks and mutual funds.
Neither of them benefits when employees borrow from their 401(k) funds to buy a house. The investment company earns less on the funds it's managing for the employer, and the employer has to spend staff time and money tracking the loans--and repayments--from employee 401(k) borrowing.
Even the employee doesn't do well when he or she taps a retirement plan to help buy a home. If the fund is earning 20 percent to 30 percent annually from its stock holdings, for example, an employee who pulls out money stops earning those big returns. Instead, he or she usually is required to pay back the money at an interest rate that doesn't come close to the forgone stock market rate of return. Moreover, the repayments to the plan are with after-tax dollars. When the employee later withdraws the funds at retirement, he or she will be taxed again--creating effectively a double federal tax on the loan.
There's still another drawback to 401(k) borrowings for home purchases: If you leave the company for any reason, the retirement plan typically requires you to pay back what you borrowed within 30 to 90 days of departure--very difficult for most workers.
Stripped to its core, MAP100 is a concept designed not only to encourage home buying but also to discourage borrowing from 401(k) plans. The program creates an alternative intended to cost less than borrowing from a 401(k) but considerably more than a typical low-down-payment mortgage.
Does it make sense for you, assuming your 401(k) plan is eligible? Only if you have a compelling financial reason to borrow 100 percent of the cost of the house. Hocking your primary home to the hilt carries inherent dangers: You have zero equity and no cushion against a market downturn.
On the other hand, if you can't afford to buy a house with a standard down payment, feel confident about your job tenure and are tempted to borrow from your 401(k) plan, then take a hard look. It just might add up.