Posts Tagged ‘borrow from 401k’

Borrowing from your 401k for down payment on a home

Should you borrow money from your 401k for a down payment on a home? A home is one of your most valuable assets but is it worth your retirement funds? I’m going to give you several reasons why you SHOULD NOT borrow from your 401k retirement fund to purchase a home.

First, when you contribute to your 401k fund you do so with pre-tax dollars. You are required to pay back the loan and that money will be with after tax money, that money will be taxed again when you decide to take it out at retirement.

Second, if you borrow from your 401k then many lenders will view this as an additional debt, just like a car loan or credit card loan. This could hurt your debt to income ratio, in turn giving you a higher interest rate on your mortgage loan or reducing the amount of money you can borrow for a home.

Third, as mentioned above this will become another monthly debt and you will be obligated to repay the 401k loan, usually over a course of time shorter than the mortgage loan. This payment will be in addition to the mortgage payment, which could put an extra strain on your monthly budget.

Next, you could have to repay the loan early if you lose your job for any reason. There is usually a clause in the 401k loan documents that requires you to repay the loan in full within 30 days if you leave your job for any reason or you are fired. If you don’t repay the loan you will face early withdrawal penalties of 10% as well as having to pay income taxes on the money. This will not only put a strain on you now, but will destroy much needed funds for your future.

Finally, some 401k funds will not allow you to contribute extra funds toward retirement until the loan is paid back in full. Not only does this limit the growth potential of your normal deposit, but you also lose any matching funds from your employer.

If you are going to need to pay money down for a new home there are other alternatives. Cut back spending and save the extra cash, pick up a part time job, look into a piggyback mortgage, etc. Avoid borrowing from your 401k at all costs.