401K for Down Payment Understood

401K for Down Payment Understood

Why is your 401(k) an attractive source for short-term loans? Because it can be the quickest, simplest, lowest-cost way to get the cash you need. Receiving a loan is not a taxable event unless the loan limits and repayment rules are violated, and it has no impact on your credit rating. Assuming you pay back a short-term loan on schedule, it usually will have little effect on your retirement savings progress.  Since you are borrowing from yourself, your 401K plans traditionally allow you to borrow up to $50K or half the vested value on your 401K (whichever is less). 

Borrowing your down payment funds from your 401K can be a very good investment.  The benefits of buying a home (equity appreciation, forced retirement, tax benefits) greatly outweigh the small expense of a 401K loan.
Borrowing against your 401K can potentially allow you to obtain a better loan as well.  Down payment assistance programs are a great option for those that don’t have any other resources for the down payment, but they are costly with higher interest rates and fees than traditional loans. 

Most lenders, including Sierra Pacific, do not count 401K payments against your debt to income ratio, allowing you to borrow more on your home.  If you are borrowing at the maximum of your qualifications, however, it may not be a good idea to take on additional debt.

A recent article by a very reputable online magazine described borrowing against your 401K as “sabotaging your retirement”.  Ahem…your home is your most important retirement vehicle.

A word of caution though – using your 401K for acquiring a depreciable asset (big screen TV, jetskis, you get the picture) can be damaging to your retirement plan. It can also lead to serial use of your 401K as a checkbook, which your 401K was never designed to do.

Don't be scared away from a valuable liquidity option embedded in your 401(k) plan. When you lend yourself appropriate amounts of money for the right short-term reasons, these transactions can be the simplest, most convenient and lowest cost source of cash available. Before taking any loan, you should always have a clear plan in mind for repaying these amounts on schedule or earlier.

401K Today

Driving Your Retirement Vehicle Home

A 401K should be on the radar of any W-2 employee that wants to have a comfortable retirement.  A 401K builds and earns interest tax free for retirement years.  Taxes are paid on withdrawals in retirement years when income and taxes are lower.  But a 401K has some other benefits that many people are not aware of.

Having a nest egg is like having a safety net.  Most 401K plans allow for a hardship withdrawal before 59 and a half.  With the security of knowing that there is money set aside in case of emergency, there is less fear in asking for a raise or taking a chance on a good opportunity that presents itself. 

The number one hidden benefit to having a 401K is that it can be borrowed against.  The 401K is still earning interest when borrowed against.  Most plans allow the interest paid to go back into the retirement account – which actually benefits the retirement account.  For more information about borrowing against a 401K, CLICK HERE.

The average 401K balance is just under $100K.  Most 401K plans will allow a loan of up to $50K or 50% of the vested balance – whichever is less.  The loan does not affect credit, nor is it taxable.  From a lending standpoint, the payments on the loan do not count against a borrower’s debt to income ratio. 

Borrowing against a 401K can often be the difference between home ownership and renting.  A larger down payment using a 401K loan could also be the difference between paying a higher rate of interest or higher mortgage insurance rate on a home. Considering the rate at which housing increases, borrowers can leverage and maximize the benefits of their retirement savings to live the American Dream of home ownership.  Call the Easterbrook Team today for more information.

Down Payment Savings

New Study on Down Payment Savings

 

Hanley Wood’s Data Studio recently assessed Metrostudy and Census data to determine how long it would take each generation to save for a 10% down payment. (Results were based on the median household income and median home price for each age group.)

The study found that Millennials and retirees generally take the most time to save for a down payment. Meanwhile, Americans ages 45 to 54 need the least. Here are the complete results:

• Ages 18 to 24: 8.77 years
• Ages 25 to 34: 7.34 years
• Ages 35 to 44: 5.45 years
• Ages 45 to 54: 3.54 years
• Ages 55 to 64: 3.72 years
• Ages 65 and over: 7.37 years

Setting aside enough money for a down payment is one of the most challenging steps in the home buying process. However, on the Easterbrook Team, we have some very helpful strategies can be utilized to make saving easier. We’ve also got an arsenal of strategies to create down payment funds, from 401K’s to the Bank of Mom and Dad. If you know anyone who could benefit from a savings discussion, count on us to help.

To make your dreams come true, Call The Easterbrook Team for your refinance and purchase needs.

916.850.6050 easterbrookteam@spmc.com 

John Easterbrook NMLS#226555

Patty Aguon NMLS#994635