I'm considering buying a house this year to take advantage of low mortgage rates and the first-time buyers' $8000 credit. If I can put together a decent down-payment I can get a great interest rate.

Making the end-of-year deadline might require cashing in my 401K. I have a small sum in my 401K, about $11000. So the question is, would it be better to cash in the 401K early, with all the associated tax penalties, to get the $8000 now, or would it be better to keep saving for the down-payment without the cash injection, and miss out on the credit?

I am 38 years old, so still have a long working life ahead of me.

I believe that you can borrow money from you 401K and pay it back over time. Check it out with a professional.

Don't cash it out, borrow against it. With a 401K loan whatever intwerest you pay is paid to yourself so its just adding to your savings.

It is a close call here, though. The penalites will be approximately somewhere between $3K and $5K depending on your taxable income for the year. So, you will still be getting $3-$5K from the tax credit. But that's a significant reduction.

If you take a loan, you get all the $8K pluse you get to put even more in your 401(k).