Q. I don't have enough saving for a down payment, should I borrow from my 401(k) plan as part of the down payment?
A. It might make sense to do so if you can lock in today's low interest rate, just make sure you know the downsides.
First, the upsides:
When you borrow from your 401K, you pay interest back to yourself. You can borrow up to $50K and most loans have to be paid back within 5 years.
Also, unlike other types of debt, a 401K loan won't be counted in your debt-to-income ratio, because the 401K loan is secured by your money in 401K account. Also, 401K loans won't be reported to the credit bureaus, so won't negatively affect your credit scores.
Now, the downsides:
If you fail to pay back the loan, it will be treated as an early withdrawals and incur income tax as well as 10% penalty if you are under age 59.5.
Also, your retirement fund might be lower than it should be, if your 401K account's growth rate is higher than the interest rate you are paying yourself back.
The worst of all is you repay the 401K loan with your after-tax dollars and when you withdraw that money from 401K later, you will have to pay tax again, that's the double taxation.
The alternatives may be you pay lower down payment by taking a mortgage loan with higher interest rate, or have to pay Private Mortgage Insurance.
Like everything in the investment world, everything has a trade-off.
A. It might make sense to do so if you can lock in today's low interest rate, just make sure you know the downsides.
First, the upsides:
When you borrow from your 401K, you pay interest back to yourself. You can borrow up to $50K and most loans have to be paid back within 5 years.
Also, unlike other types of debt, a 401K loan won't be counted in your debt-to-income ratio, because the 401K loan is secured by your money in 401K account. Also, 401K loans won't be reported to the credit bureaus, so won't negatively affect your credit scores.
Now, the downsides:
If you fail to pay back the loan, it will be treated as an early withdrawals and incur income tax as well as 10% penalty if you are under age 59.5.
Also, your retirement fund might be lower than it should be, if your 401K account's growth rate is higher than the interest rate you are paying yourself back.
The worst of all is you repay the 401K loan with your after-tax dollars and when you withdraw that money from 401K later, you will have to pay tax again, that's the double taxation.
The alternatives may be you pay lower down payment by taking a mortgage loan with higher interest rate, or have to pay Private Mortgage Insurance.
Like everything in the investment world, everything has a trade-off.
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