Submitted by tomsen12 t3_11ee5ya in personalfinance
We are in the process of buying a new home. I’d need an additional $25k to meet the 20% down payment. I plan to take it from my 401k as the lender asked not to open another debt line from any other bank. My 401k allows up to $50k loan. Should I take more than $25k and put that as down payment, as the interest rates for the home loan are high now? TIA!
No, you should not rob your retirement to finance your wants now. You will put yourself behind in multiple ways.
Zero
Pay PMI for a couple years rather than robbing your 401k
How much can you put down without the 401k money?
How much will PMI cost?
how much interest will you pay the 401k in loan servicing?
And... how much are you losing on average by "selling" good mutual funds in your 401k?
We did not put down 20% our 6.625% interest rate back in the early 90s. 6.625 seemed like a great rate back then. A few years later, the value of our home went up. By paying for a formal appraisal of our house, we were able to prove that we exceeded 20% equity-to-value and the lender removed PMI. This worked for us because we had a conventional loan. My understanding is that it also works for most VA loans but that PMI cannot be removed from most FHA loans.
This can’t be upvoted enough. Don’t withdraw 401k funds so you don’t have to pay PMI. PMI can get removed once you hit the 75% LTV mark and it’s not permanent.
Edit: assuming conventional loan and not FHA
Usually 78% LTV
I was paying $26 a month in PMI. It's often a very modest amount, if you have decent credit score and didn't buy a high priced house
Sorry, I don’t have answers to all the questions now. I’ll check with the lender.
401k loan interest is 7.5%. Currently, the conventional loan interest rates are above 7%. My interest rate lock will happen around mid March. The property is in Dallas where property prices have gone up 200% in the 2-3years, so I don’t expect any appreciation after purchasing the property.
Does the fact that I can’t put 20% down increases the lending interest rates? This is a conventional loan.
it can. depends on the lender and the specifics of the loan
still likely to be better than raiding your 401k
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Don't take a loan from your 401k.
And if you must, don't take more than you absolutely need.
I would take the PMI option at lower down payment.
Lot of 401k loans also prohibit you from contributing to the account until the loan is fully paid. This effectively means you also lose any employer matches, IIRC.
How long will it take you to pay back the 401k? If you could pay it back quickly, I don’t see it has harmful as others might. I took 10K from 401k but it was paid back in like a year and my retirement is still well ahead of the typical markers.
But if it can’t be paid back quickly, I would not touch my retirement. If your house appreciates or once you get to 20% you can get it taken off most mortgages.
A 401k loan is somewhat better than actually “raiding” it but if the market recovers while the loan is out that is obviously a terrible idea.
If OP could pay it back very quickly it wouldn’t automatically be a terrible idea especially if they can get a better interest rate that way.
Yes this is not cashing out, but I'm always hesitant to suggest a 401k loan because IMO it encourages bad behavior. If you can't afford the stuff without taking a loan out of your retirement...you can't afford it
I believe 401k loans can be optimal when three conditions are met:
You’re not required to pay it back at once should you lose your job.
You still get your normal contributions and employer match.
You take it right before a market downturn.
I would add your monthly 401k loan repay amount to your monthly mortgage bill and compare that to your mortgage alone under PMI.
You obviously can’t time the market, but if a 401k loan will secure you a net monthly savings compared to a mortgage without a big down payment, it’s definitely an option. The maximum payback time on a 401k loan is five years, and that’s just not a significant dent in your retirement potential, and could even be a boon if the market timing happens to work out.
You are trading one investment for another, after all, stocks for equity. My house has done much better than my 401k over the last five years.
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