[kari0827]

Hello! Hoping a pro can help us with this one... we are purchasing a primary residence for 400k. We are trying to figure out if we should put 5% down and take a mortgage for 380k and pay PMI (since we can't put the cash down). The PMI looks to be $250/month. OR Borrow 60k from our 401k (which is available to us to repay over 15 years @ 5%) plus the 20k cash we have to make the 20% down payment(80k), to avoid paying the PMI and take the mortgage for 320k. It sounds like borrowing from the 401k would be more cost effective, but are we missing something that may hurt us by borrowing from our 401k? Are we losing funds that may grow to a rate more than we would be saving in the home payment? Would this affect anything with our income taxes besides not being able to deduct the 401k loan as we are able to deduct a mortgage or home equity? Thanks so much for your time and help!

[XxRoosterXx]

I am no expert but have had experience borrowing from my 401k. For me I borrowed the money plus continued to keep my contributions the same. In the end I will actually have more money than if I hadn't borrowed. I would have only been penalized if I didn't pay it back since I contribute pre-tax. That was for our first home. We refinanced to build a barn and do some major home improvements which would have forced us to carry PMI. Instead we secured two loans to eliminate the PMI. I pay extra on the second so as to pay it off early. And it is at a higher interest rate. But if we continue we will be better off in the long run. I would definitely talk to your broker about all your options before you decide. They should even be able to calculate the different options to see which way is best. Good luck to you! :)

[ebaines]

I am surprised that your 401(k) plan lets you pay back over a period of 15 years - most require pay back within 3 - 5 years. Please double check this. But yes, borrowing form your 401(k) can be a good alternative, especially considering that the 5% interest is being paid to yourself, not to some bank. The down sides are that (a) the interest is not tax-deductible (since you are paying yourself), (b) you won't be contributing to your 401(k) while you're paying the loan back, so you run the risk of falling behind on your retirement savings, and (c) if you leave your employer the entire amount of the loan becomes due, with typically a 90 day payment requirement. If you are unable to repay within the required time frame then the loan gets reclassified as an early distribution from your 401(k), which means you suddenly owe income taxes plus a 10% penalty on the outstanding amount. So the risk with the 401(k) loan is that you will need to come up with a big repayment at precisely the tie when you are least likely to have it (i.e. if you lost your job).

[kikcmongwi]

I used my 401k money to put a down payment on my house. I have an FHA government loan that only required 3% down. My house was 350K. I unfortunately had to borrow half of my down payment because while I was going for a different loan before I got the FHA I was advised to prove income in my bank account. So instead of taking it all out at once I borrowed half of the money and am paying it back now. If I had a choice then I would have not borrowed and just withdrew the whole amount. Taking money from retirement is not always the best thing to do. But buying a house can be hard so if your going to do it might as well get the most from it while you have the opportunity. Most 401ks don't allow you to take money out unless you can claim a hardship and for my experience, buying a first home was considered a hardship and I was able to do it. Good Luck