Owning a home is still the American dream. If you are struggling to come up with a down payment to purchase your first home, you may have given some thought to borrowing from your 401(k) retirement plan. There are a few things to consider before making this decision.
Can you borrow from your 401(k) to make a down payment on a house? Will you have to pay a penalty/fee for doing so, and what rules should you be aware of? And most importantly, is this a wise course of action, or are there other sources of down-payment cash that should be explored first?
If you borrow from your 401(k) to use toward a down payment on a house, the money is not subject to income tax or a withdrawal penalty. Your monthly payments on the 401(k) loan are often low and at a lower interest rate than you may be able to get on a traditional bank loan. The amount of your 401(k) loan monthly payment will of course vary depending on how large your loan is and how long your repayment terms are.
Typically, you are allowed to borrow up to 50% of your 401(k) account balance. Check with your company’s employee benefits director for all the details on 401(k) loans. Most companies allow you to take up to five years to pay back a 401(k) loan.
Another thing to consider is your credit score. Borrowing from your 401(k) will not affect your credit score. If you are concerned about the potential loss of interest income from your retirement account, perhaps it is a good idea to consider other options for financing a home down payment. For Veterans, a VA Loan can often be obtained at a low interest rate and could be an option to consider as an alternative to borrowing from a 401(k) plan.
A 401(k) loan to finance a home down payment may potentially affect your ability to be approved for a mortgage as the loan officer will add the amount of your 401(k) loan to your debit ratio. All things considered, there are some good reasons why using a loan from your 401(k) retirement loan makes sense. Only you can decide if it is the right option for your family.