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.
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.
