Loan from 401K to complete 20% down payment

S

Silver_fox

New member
We have 13-14% down payment for new house, wondering would it make sense to take loan from 401K and complete 20% down payment?

By comparing loan with PMI and lender paid PMI options, it seems that maybe borrowing from 401K would be a good idea for short term.

I know we have to re-pay 401K loan, but we can stop our contribution for next couple of years and start paying 401K, this way it wont hurt our paycheck. I am 32 years old, retirement seems little far away for now at least.

Any thoughts on both ideas

Monthly payments on 20% down payments are lot less than 10% down payment, and with 20% there is much better interest rates.
And if we stop our 401K contribution for next 2 years, we may loose much, as my company matches 100% contribution for 3%.
 
I think it's good to get away from PMI. However, if you plan to move jobs then don't do it. Also, if your stuck in a position with no growth opportunity, I wouldn't do it because you can get another job higher pay and position. (Unless you are okay with that)

 
don't touch that 401K.. just save more.  Housing prices have softened.
 
If you have means to pay loan back (i.e. bonus coming next year) and have fortitude and intent to pay it back, I would do it.
 
Also I look at 401k loan as a hedge to the 401k investment. Like taking out a chunk to invest in housing equity. It's not as bad as most make it out to be.
 
A Co-Worker of mine is 56.  She is going to take out $8,000 from her 401K to go on vacation with her mother.  Is this a bad idea?  She says it's better than borrowing from the bank.
 
if you switch jobs you will have to pay the 401k loan balance at once. it sounds like you may not be in a position to do that, at which point you will owe taxes on money you dont have as well as a 10% penalty.  and if your employer matches 100% of your first 3% then i would still contribute 3% to maximize the employer match.

i personally would not borrow against the 401K, the opportunity cost is probably too high (the power of compounding returns). prices are softening so perhaps consider saving for another year to get to your 20% down. 
 
What about just buying a cheaper house?  You didn't give us a complete picture so I'm just making assumptions but if you are stretching for the down payment - what about the other house buying costs?  House upgrades/maintenance/repair?  6 months rainy day fund?  Real estate taxes? 
 
It depends on your situation.

We actually had to do that, not to make up the 20% but because the bank wanted to see more reserves and they didn't recognize 401k as liquid funds.

So we did the loan, and then put it back after we closed.

I'm not sure why people are against borrowing against your 401k vs getting a 2nd from a bank. The interest is usually lower than a second and the interest you pay back goes to you (well... to your 401k balance).

A friend of mine did that for his kid's college costs... and then he switched jobs, but his 401k allowed him to do that as long as he continued to pay monthly (so changing jobs may not be that big of an issue).

The one big con is that you can't default as it would be your own money. :)
 
At 13-14%, you can do a piggyback loan.  The variable second is not great but since Europe is floundering, the LIBOR rate is not going anywhere for awhile.

A 2nd will allow you to avoid PMI and the interest is potentially tax deductible.
 
LPMI, or 80/10. No real reason to use a 401k when that kind of loan has more issues than the alternative real estate mortgage loans. If you tie up your 401k, then run into a problem, there isn't a resource to tap into. Most 401k's limit you to one loan, or a cap of X dollars and if you've reached X already who knows what happens next....

Lenders used to urge buyers to tap into retirement plans because at that point in the real estate cycle, 90%, LPMI, and 80/10's were very restrictive. Not so much today relatively speaking.

Bottom line: I'd sleep better with a larger 1st or 1st/2nd, knowing I still have access to funds in the retirement plan should something happen.

My 02c
 
zubs said:
A Co-Worker of mine is 56.  She is going to take out $8,000 from her 401K to go on vacation with her mother.  Is this a bad idea?  She says it's better than borrowing from the bank.
Click to expand...

8K is something you can pay back kind of quick.. hopefully.. but hassle.  However, my thought is.. if you want to take out money to vacation.. you shouldn't be vacationing.  I guess if it's for her mother.. it's okay.
 
I understand SGIP's point, but one other consideration is it's much easier to get a loan from your 401k.

I don't think it goes on your credit either.

But there is also that qwertitude of spending $1 to save 50 cents since your 401k is only making 3.5% off a loan when the return is like 15-20%.
 
irvinehomeowner said:
I understand SGIP's point, but one other consideration is it's much easier to get a loan from your 401k.

I don't think it goes on your credit either.

But there is also that qwertitude of spending $1 to save 50 cents since your 401k is only making 3.5% off a loan when the return is like 15-20%.
Click to expand...

Q - is correct regarding not getting return, BUT in this market condition you are losing money you put in. #201k
 
If at 56, she has to go to her 401K for $8000, that probably means the rest of her finances aren't good either. 

If she called in to the Suze Orman show, you know what Suzy will say...DENIED!

I'm sure her mom did nice things for her during her life but I'm sure her mom will understand if the daughter's finances won't allow it.

jmoney74 said:
zubs said:
A Co-Worker of mine is 56.  She is going to take out $8,000 from her 401K to go on vacation with her mother.  Is this a bad idea?  She says it's better than borrowing from the bank.
Click to expand...

8K is something you can pay back kind of quick.. hopefully.. but hassle.  However, my thought is.. if you want to take out money to vacation.. you shouldn't be vacationing.  I guess if it's for her mother.. it's okay.
Click to expand...
 
I wouldn't take a loan from your 401k because with the penalties you pay to do it and the double taxation you set yourself up for, it's not worth it. You pay back the loan with after tax $$ and then at retirement when you take it out you pay taxes again. Do you really want to pay the govn't twice? I shudder at the thought.

Can you just wait it out a little and save a bit more? Or sell something else or even get a 2nd personal loan if you can pay it off quicker?

And don't stop your 401k contributions!
1. If your employer matches a % of your contribution you're just passing up free $$$

2. The power of compounding interest in your retirement accounts is amazing. If you sat down with a advisor and just looked at how much you would short your retirement account by just stopping contributions for 1 year (in your early 30s when that $$ still have 35yrs to compound on itself) you wouldn't do it.

 
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