Note: TSP stands for Thrift Savings Plan. If you found this article and are not a Federal employee the TSP is the equivalent to a 401K.
One day I was searching the internet to get an idea of home prices, so I would know how much more money I needed to save to have 20% down. A coworker saw me and asked where I was looking to buy a house? I told him I was still a couple years away from buying because I wanted to save more money to avoid PMI. Here’s how the rest of the conversation went:
One day I was searching the internet to get an idea of home prices, so I would know how much more money I needed to save to have 20% down. A coworker saw me and asked where I was looking to buy a house? I told him I was still a couple years away from buying because I wanted to save more money to avoid PMI. Here’s how the rest of the conversation went:
Coworker: Why do you want save more money it’s a buyers’ market?
You should buy now and borrow from your TSP.
Ms. Smart: Why would I borrow money from my TSP? That isn’t
a savings account that money is for retirement.
Coworker: You pay yourself back at 3%. I did it and I was
able to buy a house at a great price. If I waited the house would have cost me
much more.
Ms. Smart: Let me show you something.
So I proceeded to log into my TSP and clicked to view my 12
month Personal Investment Performance, which at the time showed just shy of 13%
gain. So our conversation continued.
Ms. Smart: Over the last 12 months I’ve made almost 13% on
my money. So why would I want to borrow from my TSP and lose the 13% growth to
pay myself back at 3%?
Coworker: Oh I never thought of that.
Well needless to say this got me thinking. How much growth
on the money did you lose by borrowing?
According to TSP website:
Let’s say a person who borrowed $20,000 for a down payment
on a house but took 5 or 10 years to pay back. In the chart below you will see
what that $20,000 would be if left alone to grow at 8% interest over 5 years
and then over 10 years.
Years
|
Interest Amount Earned
|
Maturity Value
|
5
|
$9,796.91
|
$29,796.91
|
10
|
$24,392.80
|
$44,392.80
|
$20,000 at 3% (what you will be paying yourself back)
Years
|
Monthly Payment
|
Total Interest
|
Total Payment
|
5
|
$359.37
|
$1,562.20
|
$21,562.20
|
10
|
$193.12
|
$3174.40
|
$23,174.40
|
Well there you have it. I gave you the numbers, now it is up
to you to decide which path is best for you.
Ms. Smart
Ms. Smart
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