Borrowing from 401K for home purchase?
I am questioning whether is is wise or not to borrow from my company's 401K for a downpayment for a first time home purchase. I normally would never touch my 401K for any reason including this, but the facts that this year's government incentives for FTHBs are better than any previous year plus interest rates are very low plus it is (in most areas) a buyers market to me seems like this would be a great time to get into the housing market.
I have heard that there aren't as many penalties on a withdrawl for this reason and the payments to repay the 401K account are spread out more than usual, but I really don't know any specifics.
I have been told I could be pre-approved for a 0 downpayment mortgage but I am hesitant do take this offer as it would mean taking on an ARM loan. I would feel much more secure with a fixed rate mortgage but would need $5000 more to cover the 10% they are requesting. I currently have just over $11,000 in the 401K.
If anyone could advise me (maybe give both pros and cons) if this would be a wise choice I would very much appreciate it.
Thank you in advance.
- Anonymous1 decade agoFavorite Answer
First of all, the $7500 nonrefundable credit for FTHB expires June 30th, so you'd have to be acting pretty fast to take advantage. Second of all, the main benefit to borrowing from your 401K is that you'll be paying interest to yourself on that amount, instead of a bank. It will be treated as any other loan- you'll have a monthly payment at a market interest rate- but that interest is going into your account, and depending on what the market does in the next few years, you could end up with a higher 401K balance than if you had left it in there.
If you withdraw the money, instead of take a loan from your 401K, you will be hit with a 10% withdrawal penalty and have to pay taxes on the withdrawn amount (if it was a pre-tax contribution). The exception to an early withdrawal penalty for FTHB applies to IRAs, not 401Ks. So there's no way to get around that- much better idea to take a loan against your 401K, assuming you'll be able to pay that back on top of your new mortgage payments.
One thing to keep in mind is if you're ready to buy this house. If you're needing to borrow funds from your retirement, maybe its not a great time for you. Think about why we're in this mess- people got excited about the potential to make money in real estate or thought they NEEDED to get a home, they took out mortgages they couldn't afford, and foreclosed. Government incentives encourage people to buy homes when they probably shouldn't be, because there's a feeling that home ownership promotoes stronger communities and more responsible citizens. Its proven just the opposite. If you are ready to buy a home because you would like to live there for many many years, and are ready for paying homeowners insurance, property tax, mortgage interest, trash and HOA fees, repairs and maintenance, etc., then by all means buy. But as an investment- not such a hot idea. Homes historically return between 1-4% annually, while stocks historically return 8-10%. And stocks are also priced very attractively right now. I'd think long and hard about why you're looking to buy, how long you're planning on living there, if you can handle the extra costs in addition to the mortgage payment and 401K loan payment, etc. If you're doing this solely for investment purposes, you're probably better off just leaving that money where it is.
- Anonymous1 decade ago
at this point in time its a very good idea. interest on the 401 loan will be very low. stay away from arms. thats what got us into this mess. i believe you can borrow 50% of whats in your 401. when you get that 8k from the gov. use it to pay down the balance on the house.