401(k) Loan To Buy A House?

401(k) loan to buy a house? Is it a good idea to borrow against your 401(k) to get the down payment to buy a home? If your employer allows you to borrow from your 401(k) plan, and most do, you can take the lesser of 50% of your vested balance or $50,000. The typical repayment term is five to fifteen years.

Is there a big cost?

The interest you pay on the loan is not an issue since you are borrowing from yourself. You would simply be paying interest back to yourself. A downside to borrowing against your 401(k) is that you are borrowing pre-tax dollars and paying the loan back with after-tax dollars. Hence, the interest cost is meaningless since you are paying interest to yourself. But there is a cost since you are taking out gross dollars and paying them back with net dollars. But that cost may not be as much as you think. Read a detailed article on Investopedia that talks more about this topic. It is best to discuss all of this with a tax or financial advisor before making a final decision.

If borrowing from your 401(k) keeps you from making your normal contributions, you will miss out on employer matching contributions, and you will miss out on growing your 401(k) for those years you are repaying your 401(k) loan.

If you lose your job

Note: If you lose your job or get laid off at the employer where the 401(k) loan is based, you will have to pay the loan off quickly. This usually has to happen within 60 to possibly 90 days. Otherwise, it is treated as an early withdrawal and subjected to the tax on ordinary income plus a 10 percent penalty.

Is it less costly than other alternatives?

The upside is that it may make your dream of home ownership come true. Or you may have some cash saved for a 10% down payment, but a 401(k) loan may give you extra cash to reach to a 20% down payment. And 20% down means avoiding mortgage insurance. Mortgage insurance can be incredibly expensive, and a 401(k) loan may come out as the cheaper alternative. And a 401k loan, even given the downsides, can be the cheapest forms of borrowing right now. It is cheaper than credit cards. Borrowing from family may even be more expensive, unless your family will give you a gift with no repayment expected). Borrowing more on an existing mortgage would also likely be more expensive.

Conclusion

Again, you should consult an accountant or financial planner to carefully weigh options if you are considering a 401(k) loan.

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Read more blogs about getting a mortgage loan:

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