Hello,Let me just first say that I think borrowing from ones 401k is a bad idea. However,...My DH and I find ourselves looking for a house about 6 months earlier than planned. We cannot stay in our current place, because the owner has sold it.We have enough money saved to put 5% down on a house. We had planned to save for another 6 months and put 10% down. The larger down payment makes the monthly bill much more manageable.We can scrape up the 10% plus closing costs by borrowing from the Bank of Dad and borrowing a small amount from my 401k. My plan allows for loans, and the plan also allows for continued contributions while I make payments on the loan. I would continue to contribute enough to get the full company match. I realize that my money will be taxed twice (repay with after tax dollars and taxed again when I withdraw at retirement), but should I think about taking this loan? I'd appreciate any perspective the Fool community could provide.Phoebesnow
I think you've got most of the issues down. I have a question though. Borrowing from the 401k will help you put more down, but how does that reduce the total monthly payments. Is the 401k loan plus reduced mortgage rally less than the mortgage without the loan?Also, consider that if you lose your job, the 401k loan probably becomes immediately due. Consider all those and decide. I'd really try to wait, if it's only six months.
My DH and I find ourselves looking for a house about 6 months earlier than planned.Personally, I regard the 401k loan option as a last resort when there is no other option. If your choice is between a 401k loan and homelessness, I'd take the 401k loan. If your choice is between a 401k loan and a somewhat bigger mortgage, I'd go for the bigger mortgage. Or find another rental and wait until you're happy with the downpayment you have saved up.You might want to swing on over to the Buying a Home board here at the Fool...there is a lot of useful information about low-down options.Good Luck,JDOyster
You've gotten some good advice above and you have thought through some of the issues. I think you do need to consider all of those things.I have an additional comment that will only make this a tougher decision. When it comes to buying a house borrowing from a 401(k) INSTEAD of borrowing elsewhere MAY be a good deal from a tax perspective.You will reduce the returns in your 401(k) plan, but, you'll increase the equity you'll have in your home. That money will not be taxed and, most likely, the income (in the form of increased value in your house) will not be taxed either (if you meet the requirements for the $500,000 exclusion by living there for at least two years) . So, even though the repayment is taxed twice, you're in the same place on the principal (because otherwise you would have had to use after-tax funds for the down payment and the borrowing did not cause a taxable event) and the income will never be taxed (but it would in a 401(k) distribution). Despite that strong tax reason to borrow for the purchase, you still have all the downside (this is intended for retirement, you'll have to pay it back if you leave this employer, mortgage interest is deductible but interest on the loan from the 401(k) is not, etc.)
Mailman9, you lost me. You will reduce the returns in your 401(k) plan, but, you'll increase the equity you'll have in your home.But her net worth will still be the same. She'll have more "home equity" and less "401k equity." In either case, she buys a house and takes on a debt that has to be repaid.That money will not be taxedIt depends on what you mean by that...her loan principal (not the interest) will be paid will after-tax dollars whether she borrows from her 401k or from a mortgage lender. and, most likely, the income (in the form of increased value in your house) will not be taxed either (if you meet the requirements for the $500,000 exclusion by living there for at least two years) It doesn't matter whether phoebesnow finances 0% or 100% of the purchase price of her home. She is entitled to all of the profit and walks off with the exact same amount of tax-free gain (sales price minus acquisition costs) when she sells her house in either case. Making your mortgage smaller doesn't earn you one extra penny when you sell. You are investing in "having a smaller mortgage" rather than investing somewhere else...whether that's a worthwhile investment is up to you. JDOyster
I think we agree. My point, although inartfully stated, is that if there is no other way to get into the house (which is probably not the case here based on the orignal post) then borrowing from the 401(k) is not necessarily a bad option. You have all the usual caveats. However, if the borrowing permits the person to buy a house they should financially be at least no worse off and they'll have the comfort of living in their own house.It may be that investing in a smaller mortgage can be a better deal than other investments (like the last couple of years) although I agree with your implicit point that doing so long term may not get people the best returns.
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