A real estate sign advertises a home for sale in Vienna, Va. (Larry Downing/Reuters)

The housing market is expected to be busier than usual this winter as some home buyers rush to act before the Federal Reserve raises interest rates — which some analysts say could happen as early as December.

Some consumers who haven’t yet been able to save the money for a down payment may be tempted to raid their retirement accounts for the cash. Indeed, first-time home buyers have several options for tapping their nest eggs before retirement without having to pay the 10 percent penalty charged for early withdrawals.

For people with decent retirement savings, borrowing or withdrawing from a retirement account can be a way to diversify investments by buying an asset that can add to their total net worth. But people considering the move should take into account all of the costs they might face, including interest, lost investment growth and potential penalties if plans fall apart.

Here’s what you need to know:

In most cases, the home in question doesn’t actually have to be a person’s first home. Generally, the IRS requires that a person using retirement funds to buy a home must not have owned a home in the past two years. (That restriction also applies to spouses.) The house must be the person’s main home.

The specific requirements for dipping into savings vary depending on the type of retirement account. Savers using 401(k) plans can take loans of up to 50 percent of their vested account balance, with a maximum of $50,000, to help pay for a main home. Borrowers generally have up to 10 years to pay back the loan, with interest — though the interest goes right back into their savings.

Savers can also withdraw up to $10,000 from a traditional IRA or a Roth IRA penalty-free to buy a first home for themselves, their spouse or their children. Withdrawals taken from a traditional IRA would be subject to income taxes, and the money must be spent within 120 days of being withdrawn in order to avoid the 10 percent penalty tax charged on early distributions. People can withdraw money they’ve contributed to a Roth IRA at any time. Up to $10,000 of earnings can be withdrawn tax-free and penalty-free to purchase a first home as long as the account has been open five years or more.

Unlike with an IRA, where the money is simply being withdrawn, people borrowing from their 401(k) loans to buy a house must eventually replenish their savings. But they may face a sudden bill if they lost their jobs or changed employers. In that case, the remaining balance on the loan would be due within 60 days. Any money not paid back in time would be considered an early withdrawal, which would be subject to income taxes and a 10 percent early-withdrawal penalty.


(Courtesy of Fidelity Investments )

For most savers using retirement funds to buy a home, one of the biggest downsides is that the move cuts down on the amount of time their savings are invested in stocks and other markets. While borrowers are using the money to make an investment, the growth potential for the property may not be as large as the potential growth the cash might have seen had it stayed invested, says Meghan Murphy, a director with Fidelity Investments.

People who withdraw $10,000 from an IRA to buy a home with plans that they will replenish their account later will need to add much more than $10,000 to make up for lost investment growth, says Colleen Jaconetti, a senior investment strategist at Vanguard. Even people who pay back their 401(k) loans in full would miss out on time that the money could be growing.


(Courtesy of Fidelity Investments )

Only about 3 percent of 401(k) savers took out home loans in 2014, according to Fidelity, but that number is rising as the economy improves. In 2011, only 2 percent of people took out home loans. People who borrow from their 401(k) accounts to buy a house also tend to take out bigger loans than people borrowing for other reasons.

Borrowers may face other financial strains once they start paying back 401(k) loans, which may cause them to reduce their retirement contributions, Murphy says. Payments are typically deducted automatically from a person’s paycheck, so some borrowers may feel overwhelmed starting their mortgage payments with less disposable income, she says. Also, 40 percent of people who took 401(k) loans between 2007 and 2013 reduced their savings rate within five years of taking out the loan, according to a study by Fidelity. Some 15 percent stopped saving completely.

People who borrow from their retirement accounts one time may also be tempted to borrow again, Murphy says, creating a dangerous habit of serial borrowing. Plus, people who have taken loans from their 401(k)s are also more likely to take hardship withdrawals, which are allowed to help pay for emergencies and which are subject to taxes and a 10 percent penalty.

At the end of the day, what’s best will depend on a person’s situation. Taking away $10,000 from a retirement account won’t necessarily make or break a person’s retirement, Jaconetti says. But savers should understand the full consequences of the move before they decide.

Read more:

How to save a down payment for a home

Why it got way harder to buy a house over the past year

How to buy a home in a seller’s market

Rent vs. Buy: The three questions Boomers should be asking themselves