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Is borrowing against your 401(k) for a home down payment a good idea?
Posted on 12/14/13 at 4:10 pm
Posted on 12/14/13 at 4:10 pm
Anybody do this? What are some pros and cons of doing this? I'd rather pay myself back than some bank.
5
Posted on 12/14/13 at 4:23 pm to saintforlife1
I did this and it worked out perfectly. In fact, they had a specific type of way that's made just for house down payments. Now it's just a small payment automatically taken out of every check. Mines only gonna last two years (although I plan on paying it back in full shortly)
Posted on 12/14/13 at 4:44 pm to Brettesaurus Rex
Thanks for the quick reply. Are the terms of the loan flexible? As in, can I pick period of the loan repayment (2, 3, 5 years etc.) Is there a limit, either in terms of total amount or the percentage of the portfolio, that you can borrow?
My 401(K) is through Fidelity. So if I wanted to borrow against it do I have to go through Fidelity only, or can I use any bank/mortgage lender?
My 401(K) is through Fidelity. So if I wanted to borrow against it do I have to go through Fidelity only, or can I use any bank/mortgage lender?
Posted on 12/14/13 at 4:51 pm to saintforlife1
Not sure if it is still correct, but I think you can only borrow up to half of your 401k balance. Also, if you are let go/want to change employers, loan is due in full.
I financed something small this way, 2k, but I would not risk much more than that. Just me though
I financed something small this way, 2k, but I would not risk much more than that. Just me though
Posted on 12/14/13 at 5:58 pm to GoHoGsGo06
When I took a 401k loan, I could borrow half of the balance but only up to 50k.
Loan term for me was 5 years, and payments were deducted out of each paycheck. If I had left the company, I would have had to pay back the remaining loan balance or pay an early withdrawal penalty for income tax (marginal rate plus 10% penalty).
For me it worked out great to source quick cash for an investment, but I could have covered the shortfall early if I had left the company.
Personally I would not suggest using it for a down payment.
In before :payingbackloanwithaftertaxdollarsderp:
Loan term for me was 5 years, and payments were deducted out of each paycheck. If I had left the company, I would have had to pay back the remaining loan balance or pay an early withdrawal penalty for income tax (marginal rate plus 10% penalty).
For me it worked out great to source quick cash for an investment, but I could have covered the shortfall early if I had left the company.
Personally I would not suggest using it for a down payment.
In before :payingbackloanwithaftertaxdollarsderp:
Posted on 12/14/13 at 8:33 pm to Bayou Tiger
One drawback that people fail to realize when borrowing against a 401k....if your company goes out of business, gets acquired or you get terminated/released....the balance of the loan is due within 30 days or it becomes taxable income!!!
Posted on 12/14/13 at 8:53 pm to lsu2grad
Playing with fire I wouldn't do it.
Posted on 12/15/13 at 12:07 am to saintforlife1
If you have great job security I don't see a problem. Had a good Econ teacher one time who said he did this
This post was edited on 12/15/13 at 12:08 am
Posted on 12/15/13 at 12:43 am to saintforlife1
Terrible idea IMV...it speaks to you either buying too much house or not being in the financial situation to be buying a house.
Posted on 12/15/13 at 1:33 am to cwill
quote:
Terrible idea IMV...it speaks to you either buying too much house or not being in the financial situation to be buying a house.
Not really. I'd like to think I am pretty conservative when it comes to personal finances. Real estate in California is so expensive, it is hard to come up with 20% downpayment for your home. This is our first home and the cheapest condos we can get in good school districts and good areas runs upwards of $600K. The home we are looking at is $590K. Our original budget was $500K and we have about $90K in liquid savings. But after having seen homes for the past 2 months, we have come to the realization that we need to increase our budget, and the homes we like at are in the $590-600K range. This means we are short about ~$30K that I need to be able to put 20% ($120K) down again. I am hoping I can borrow that $30K from my 401(K) instead of getting a HELOC or paying a PMI.
Posted on 12/15/13 at 9:46 am to saintforlife1
Consider the gap this would create in your 401k. You will pay yourself interest, but it will probably be around half of what your 401k returns. That gap could exceed the cost of PMI or whatever other means you have to borrow the $30k.
Posted on 12/15/13 at 12:37 pm to saintforlife1
Can you borrow from your parents? This is the only situation where I find that acceptable.
Posted on 12/15/13 at 1:30 pm to lsu711
quote:
Consider the gap this would create in your 401k. You will pay yourself interest, but it will probably be around half of what your 401k returns. That gap could exceed the cost of PMI or whatever other means you have to borrow the $30k.
Not all 401k plans are set up this way. In my plan, you just borrow the money with the funds in the plan as collateral. The money you borrow still sees the same growth as it would if you didn't borrow against it. If his 401k is setup this way, I don't see any issue with it.
Posted on 12/15/13 at 2:53 pm to JonTheTigerFan
quote:
you just borrow the money with the funds in the plan as collateral.
I don't see how a 401k can be used as collateral. With some restrictions, the plan manager can allow you to take money out of the stock market and invest it in a private loan. So in this case the $30k would remain in his 401k balance, but $30k would now be invested in a loan at ~4.5% rather than the stock market at ~10%.
Another consideration is that you pay back the loan with after-tax dollars which will then be taxed a second time when you go to withdraw at retirement. You lose the advantage of a 401k on the amount borrowed.
Posted on 12/15/13 at 3:31 pm to lsu711
quote:
I don't see how a 401k can be used as collateral. With some restrictions, the plan manager can allow you to take money out of the stock market and invest it in a private loan. So in this case the $30k would remain in his 401k balance, but $30k would now be invested in a loan at ~4.5% rather than the stock market at ~10%.
Well, I'm just telling you how my plan works. In mine, you also pay the 3.75% interest back into the "Common Assets" portion of your plan. This is from my plan's website:
When you borrow money from the Savings Plan, the assets in your Savings Plan Account serve as collateral for the loan. When you have an outstanding loan, withdrawals/distributions that will reduce the collateral value below the amount of your outstanding loan balance will be restricted.
Posted on 12/15/13 at 6:06 pm to saintforlife1
quote:
quote:
Terrible idea IMV...it speaks to you either buying too much house or not being in the financial situation to be buying a house.
Not really. I'd like to think I am pretty conservative when it comes to personal finances. Real estate in California is so expensive, it is hard to come up with 20% downpayment for your home.
It sounds like you've already made up your mind and you're going to do it regardless of what anyone here has to say. For what its worth, I wouldn't do it. You're playing with snakes.
Posted on 12/16/13 at 5:51 pm to JonTheTigerFan
quote:
In my plan, you just borrow the money with the funds in the plan as collateral.
In that case you neither "borrowed from yourself" not "paid yourself interest." Rather, you took a bank loan and posted exempt assets as collateral and added serious tax consequences to the list of your problems in the event of a default. Why not just take a bank loan?
Posted on 12/16/13 at 7:41 pm to JonTheTigerFan
quote:
Well, I'm just telling you how my plan works. In mine, you also pay the 3.75% interest back into the "Common Assets" portion of your plan. This is from my plan's website: When you borrow money from the Savings Plan, the assets in your Savings Plan Account serve as collateral for the loan. When you have an outstanding loan, withdrawals/distributions that will reduce the collateral value below the amount of your outstanding loan balance will be restricted.
Exactly how mine works. In fact, I'd be willing to bet we work for the same company. People on this board don't understand how it works because it's not typical. That said, as it doesn't reduce your 401k balance, it's an excellent way to finance purchases or significant events.
Posted on 12/16/13 at 8:42 pm to Putty
quote:
In that case you neither "borrowed from yourself" not "paid yourself interest." Rather, you took a bank loan and posted exempt assets as collateral and added serious tax consequences to the list of your problems in the event of a default. Why not just take a bank loan?
serious tax consequences? You clearly have no clue what you're talking about. Posted on 12/16/13 at 9:09 pm to saintforlife1
quote:
Anybody do this? What are some pros and cons of doing this? I'd rather pay myself back than some bank.
Its messed up that you have to "borrow" it - they should allow straight up withdrawals for 1st time home buyers/
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