Should I Pay PMI or Borrow From TSP for a Mortgage Down Payment?
A government employee who does not have enough money to make the standard 20 percent down payment on a house may have the option to either borrow money from a federal thrift savings plan or pay for private mortgage insurance. A thrift savings plan allows a federal employee to borrow money to buy a house at a low rate, but there are restrictions on the use of the funds.
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Loan Conditions
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When a government employee uses a thrift savings plan to borrow money to buy a house, the loan repayment period can be as long as 15 years. The employee can borrow a minimum of $1,000 using the thrift savings plan or a maximum of $50,000, minus any funds that the employee borrowed from the plan in the last year, even if the employee already paid off that loan. This may be enough to cover the full 20 percent down payment. If not, the employee has to get private mortgage insurance anyway.
Primary Residence
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A thrift savings plan residential loan can only be used to buy the homebuyer's primary residence, which can include a boat, a recreational vehicle or a mobile home. Private insurance is an option for the purchase of a second residence or on a second mortgage to repair or add improvements to the house.
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Payment Match
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The federal government will match an employee's contributions if the employee participates in the Federal Employees Retirement System and the employee places at least 5 percent of his income in the plan. The loan payments will reduce the employee's total contribution and could make the employee ineligible for these matching funds. The employee can only borrow money that he adds to the thrift savings plan, not matching funds that the government contributes.
Tax Benefits
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Private mortgage insurance premiums that a homebuyer pays on a primary residence are tax deductible. The larger interest payments that the homebuyer makes because of the smaller down payment are also deductible from federal taxes, because of the mortgage interest tax credit. The interest that the employee pays on a thrift savings plan residential loan is not tax deductible.
Repayment
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If a government employee takes out a loan from a thrift savings plan to pay the mortgage, the loan payments will end when the employee repays the loan, and there are no repayment penalties. The mortgage bank may require an appraisal before it allows the buyer to stop paying for private mortgage insurance, and the bank may also charge the buyer a prepayment penalty if the buyer refinances to get a mortgage without private mortgage insurance.
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