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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127815  
Subject: Re: Downpayment Sources Date: 5/10/2013 2:11 PM
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TMFPMarti:

Brewologist: {{{"2. My 401k offers the option to take a loan of up to $50k at 4.25% that our mortgage broker says can be used for part of the 20%. If we chose to do that, we could cover the whole downpayment out of the loan plus liquid savings. Downside is that the withdrawn funds aren't available to appreciate for a while and the loan is due if I lose my job."}}}

<<<You will be paying yourself interest on the 401k loan, so I would suggest that the funds are appreciating at a rate equal to the interest rate. Or perhaps you meant "aren't available [for me to invest in the market] to appreciate [or depreciate] for a while"?>>>

"In the interest of full disclosure, I'm not a fan of 401(k) loans. Yes, "that's retirement money" is surely part of it, but primarily because I've found life rarely proceeds in accordance with the script I've written."

Not sure I would call myslef a fan of 401-k loans, for as we all know, sh!t happens. I only did it once, long ago, and did not suggest that the OP necesarily take the 401-k loan.

"That said, remember that the "earnings" you're paying yourself in the 401(k) loan repayment interest will be taxed twice. You're making the payments with after-tax dollars, and everything that comes out of the 401(k) will be taxed as ordinary income. (This assumes there are no after-tax contributions. Loan repayments, including interest, are not contributions.)"

Which is a true statement, but may not be that significant.

As you write, all funds coming out of the 401k will be taxed; the interest payments on 401-k loans are not singled out.

And as you know, interest paid on any "personal" loan is paid with after-tax money, i.e., not deductible, since 1986; once again the 401-k loan is not signled out.

Your statement does become an issue if the alternative to a 401-k loan is a loan secured by the real estate, for which interest payments would be deductible. If the OP could open an unsecured personal line of credit at 5%, and then borrows 10% of the purchase price, interest payments on that loan are also paid with after-tax money.

Regards, JAFO
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