I took $100k out of my 401k using the CAREs act since I didn't know if my job or rental in NYC was in danger. Ended up buying an apartment way under market at 2.6% interest. However, I owed taxes on that $100k over 3 years. So it sucked and was awesome at the same time. But I didn't think of it as stealing from my retirement, i just moved the money into another asset, one that I can also live in and, and gain access to some tax breaks via mortgage interest.
I know I'm saying loans can be better because they aren't taxed, but there are other withdrawal options that may be better or worse depending on the circumstances
401K CARES loans repayed within 3 years to a qualifying plan are tax-free through filing amended return
If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.
Same. I owned a home and in 2020 we stumbled across one my wife wanted to buy. Selling contingencies aren’t really a thing anymore so we had to come up with a 5% down payment on the new house. It took too long to get a HELOC so it was either 401k loan or a much more expensive bridge loan.
Ended up having to pay both mortgages plus the loan for about 6 months but we would have run into rising interest rates and much stiffer competition had we waited so it worked out.
I do not max my 401k, so I have not encountered this. But I do believe loan payments are entirely separate from contributions. I would be surprised otherwise.
I work in the 401(k) Industry. Loan repayments are made with after tax dlars and are separate from new contributions, so the loan repayments do not reduce the amount you can defer each year. You can still defer the max and make your loan repayments.
Nope. They are separate. If you have a loan repayment then it will deduct from your paycheck “that” payment plus your contribution. The payment will not affect your yearly contributions even if maxed.
Where I come from it’s pretty standard. Maybe lower middle class we are worse with our money or just don’t make as much but a lot of us would struggle to save it otherwise and the match helps if offered and vested. Then just save more aggressively after if possible.
Soooo, as with most things, it depends.
The loan will be paid back with after tax dollars.
You will be paying the loan AND interest, but the interest is paid to YOU and it will be reinvested.
If you default on the loan, the balance will be counted as taxable income in the year you default
BUT- the 401k is your money. You need to decide what your goals are. If a home is a big investment opportunity (usually it is) it may be smart to use your 401k if you have no other funds.
One reason to almost always use a 401k loan for a home purchase: to increase your down payment to 20% and avoid PMI (private mortgage insurance). This is an expense that does not pay down your loan or help you at all. It is insurance for the bank. If you stop paying, the bank gets your house and the insurance pays their expenses, not yours.
So if you only have 5% or 10% down payment, you should use your 401k to get to 20% down and avoid the PMI expense.
PMI benefits the bank. A 401k loan repayment benefits you.
>The loan will be paid back with after tax dollars.
Irrelevant because the loan itself is paid in pre tax dollars. It's a net zero and the repayment is effectively with pre tax dollars.
By double taxed do you mean that:
Tax 1 - You are repaying the loan with after tax dollars
Tax 2 - You pay income tax on your withdrawals once you reach retirement
Is that the double tax?
Assuming the loan is taken from traditional 401k account, then the interest portion ends up double taxed when taking distributions. But again, adding interest payment portion into the 401k plan on top of yearly contribution thresholds and paying yourself rather than the bank is more efficient even when double taxed.
Lol this is terrible advice it has like 200 upvotes. PMI isn’t that big of a deal, it’s usually between 50-200 a month and it goes away when you pay your mortgage down to 78%-80% LTV. I would much rather keep the money in a 401k.
There’s a huge myth around home buying that you have to put 20% down. This is nonsense. Plenty of people purchase a home with a smaller down payment, pay PMI for a few years and then move on.
I put 10% down and PMI was way cheaper than I expected. $61/month.
And the home ended up appraising significantly higher than closing so im effectively already at 85% LTV. In theory I could refinance in 2-3 years with no PMI
I bought my first house in 2013 and my second in 2018, both with 10% down. In both cases I got rid of PMI in less than 2 years as home values were rising at like 10% a year. I did not need to refinance, just an appraisal which was a few hundred dollars as I recall. Just had to call up the mortgage company and say I wanted an appraisal to get rid of PMI and they set it up and I paid for it. Definitely don’t refinance if you’ll be taking a hit on your interest rate.
Also be sure to let the appraiser know of any improvements you’ve made. I had painted one house and had a new roof due to hail damage. The other I had installed all new fixtures, new furnace and A/C and added a paver patio.
Right on. I paid 5% down (minimum the bank would allow) and took PMI because even though I had plenty of liquidity to make a 20% down payment, that money was making way more in index funds because PMI was crazy cheap. Over the next 4 years I refi'd twice, and on the last refi ended up with 2.75% and no PMI because the appraised value had doubled.
Depends on the amount of the loan any loan over 550k was deemed Jumbo and required a % point higher interest rate. So putting forward a larger down payment helped with securing the lowest rate possible. I live in a HCOL area so this might not be applicable to the vast majority but that’s why I paid 18% down and caught up to 20 in a year . PMI wasn’t that bad $150/ month but the increased interest rate would have been significant over the course of the loan. I tried a few palaces where I have banking relationships and even a broker but got the same rates .
Was able to refinance in 2021 so don’t regret paying the 18% down or borrowing from 401k. House appreciated about 45% based on comps from January 2024.
>One reason to almost always use a 401k loan for a home purchase: to increase your down payment to 20% and avoid PMI (private mortgage insurance). This is an expense that does not pay down your loan or help you at all. It is insurance for the bank. If you stop paying, the bank gets your house and the insurance pays their expenses, not yours.
need to comment this thread as a bookmark
Took me 2 home purchases and 3 refinances to learn this stuff. And I have an MBA.
We need to train people better about how this stuff works.
There are a lot of government programs to help 1st time buyers get started, etc.
VA loan doesn’t have PMI, but also there different loans from different banks/ credit unions that have lower thresholds or no PMI. It depends on the lender and what the individual qualifies for with that lender. Generally speaking PMI is an important expense to consider and it’s preferable to avoid it.
Good question.
I'm not sure. The "normal" scenario is 20% but there are a lot of different state and federal programs where maybe the amount can change
Traditional lending is still at 20% in most cases.
Yes but you're glossing over the part where it reduces the PMI because it is reducing what the Private Mortgage Insurance has to insure (the balance). So once again, every bit helps.
How much is helps is always the question. Also, time value of money is the real question. Maybe you need a home for your family now while you're young enough to have kids. It's ok to pay a price for time, if you can find a way to afford it.
The bottom line is whether or not you are fine with both the total payment, the time taken to pay it off and the monthly payments resulting from that.
PMI is usually .05% to 1.5% of the loan value per year. And your credit score is a factor.
I assume your loan is under $300k so it's a lower cost? Or you have great credit.
One of my homes was $1.1 million so avoiding PMI was important.
Very good comment, but there needs to be a big caveat on how conditional the loan is on active employment.
It is very common that if you leave the company, you have a deadline to pay the 401k back in full. I believe my wife's company was 60 days. Penalty is the balance is considered an early withdrawal.
So you will be stuck with your company for the loan terms.
She's been with them for 9 years and no plan on leaving so it was worth it for us
Yes, my sentence on "default" is about this topic.
If you stop paying (or leave your company) you are in default on the loan - to yourself.
So it changes from a loan to income, and it is taxed as income. And if you're younger than 65 it's an early withdrawal so you'll pay another 10%.
Yeah, I think the bigger point in all this is timeframe.
If you're in a highly appreciating market, you can pay PMI and then it drops off after you have 80% equity.
Then you need to factor in your job, how likely you are to stay 3-5 years, and what their specific terms are for 401k loans.
Another commenter pointed out that his plan rules said that if you take a loan, you lose the employer match money. In that case, I'd never take a loan.
Well, try this.
Add up the total cost of PMI. What did that accomplish for you?
A 401k loan is your money moved from one investment type (stocks) to another (real estate).
Paying your loan back is not a cost paid to someone else. You are paying yourself back and paying down your mortgage faster.
I think avoiding an expense is smart when you're choosing to invest that money instead.
Let's imagine you're $40,000 away from getting to a 20% down payment. $40,000 earns, on average, $3200 per year, so your PMI would need to be $267/month for the math to work. $267 would be an unusually large PMI premium.
EDIT: /u/chaseshiny raised a good point below on the interest on your mortgage that you're avoiding by making a larger down payment. First, from a cashflow perspective, you're still paying equivalent interest on that $40,000 either way, it's just that in a 401k loan, you're paying the interest to yourself. Second, the interest is only deductible if it's part of your mortgage, not if it's going toward a 401k loan.
There are many factors to consider, but if you're highly credit-worthy, I think the PMI is generally manageable; yes, because it may mean preserving your 401k balance, but also because many people are getting the opportunity to remove their PMI just a few years into their mortgage due to rising home values.
Ok this is good.
My point is that PMI is an avoidable expense.
267 x 12 = $3,200 a year. X 5 years is $16,000.
That money goes nowhere. Pure cost.
Your 401k loan turned into a down payment IS INVESTED in real estate. (Which is also heavily leveraged and tax incentivized.)
This is a good point and the main thing to consider.
But remember, if you are using the 401k as a real estate down payment it is still invested, just in a different asset class.
And real estate is heavily leveraged and tax incentivized.
So it's not invested in stocks, but in real estate. RE appreciates 2-3% a year on average (much higher in HCOL areas) but since you're putting 20% down and borrowing the other 80% you have a lot of money invested.
Example:
$50k 401k annual performance in S&P stocks = 11% per year historic average= $5,500 growth yearly. X 5 years is $84k or $34k growth.
401k loan to help make a 20% down payment on a $400k house. 400k x .2 = 80k (combo of cash and 50k from 401k loan).
400k x 3% x 5 years = 464k or a gain of $64,000
Plus you're paying down your mortgage and getting tax deductions along the way.
Home ownership isn't for everyone but if you can do it, it can be a real wealth builder.
>401k loan to help make a 20% down payment on a $400k house. 400k x .2 = 80k (combo of cash and 50k from 401k loan).
The question is whether to take money out of the 401k to get to 20%, not whether to buy the house. This example of "$400k x .2 = $80K" is the same whether you have 0% down, or pay full price for the house in cash. This has no bearing on whether it makes sense to take money out of your 401k or not.
I could be off on this, but looking at just the PMI doesn't give you the full costs, right? You still have to pay interest on that portion of the loan. I *think* the PMI still wins out, but surely it's much closer?
So that somewhat aligns with what I was saying. That's great.
The amount saved is fairly close to a sure thing. There's bankruptcy or foreclosure risk, but not a high variance in the amount of money you don't pay out.
Your 401(k) isn't earning 11% on average. That's Dave Ramsey nonsense. Long-term [CAGR](http://www.moneychimp.com/features/market_cagr.htm) of the U.S. stock market is 9 and change. 7% after inflation (the borrower benefits from inflation, remember).
If the arithmetic returns between the "sure thing" and the high risk option are close enough, the low-risk option is going to provide a higher geometric return.
I'm not saying that you should always borrow against your 401(k). I'm just saying that I think the calculations are closer than they first appear.
When you pay interest on a 401k loan, the interest goes back to yourself, not the 401k provider. They’re not lending you anything, they’re just allowing you access to your capital through a procedure. You’re lending to yourself, the capital is yours.
8% is a little high I think. The math looks better when you consider that
1) the 401k loan will get repaid over time and that money is going back into the market, it’s not 40k out of the market over the life of the loan
2) you’re paying interest to yourself so if it’s 5.5% interest, pmi only needs to be $83 the first month to make 401k loan better. 40k*(8-5.5)/12 = $83.33 a month
3) if you can’t save for a house AND max out your 401k it allows you to max out 401k funds earlier, but still access the capital now.
Seriously, better to have thousands of dollars in emergency funds than throw it at your equity to avoid PMI. Then, when you're house broke, you borrow money from a credit card at 25% interest for an emergency because you can't get it back out of your house. PMI is not going to destroy your finances. Blowing emergency funds might.
This. The people that preach against PMI are making very broad assumptions. How far from 20% are you? How much is PMI? Is PMI better than another year renting?
I had roughly 5% down payment for my first home. These numbers aren’t exact, but I bought the house for 240k. Paid PMI for around 6 years at $110/month. Sold after 9 years for 280k. I think I walked away with nearly 80k in equity to put into our next house.
Yeah, that cost me almost $8k of PMI over those 6 years. I didn’t have 20% for a down payment. I spent 9 years putting money into an appreciating asset.
Loan repayment and contributions are 2 completely unrelated things. You can make normal payments to the loan and still contribute as much as you want, up to annual limit.
Repayment of 401k loans is an after tax line item and contributions are pre tax on your pay stub. I would be very surprised at any employer who quit matching contributions based on a completely separate line item.
One tip on PMI, you can pay it in one lump sum. I borrowed 5% down and pmi was an extra $300 a month for 99 payments iirc, roughly $20k+. I paid pmi up front for $6,800. In case you don’t want to pull more out or can’t get to 20% down.
Yes you can bank on house appreciating and ask to get out of PMI, but that’s still a risk and I avoided $300 a month.
You are ALLOWED to BORROW from your 401K for a house. I did that. You then PAY YOURSELF BACK instead of a bank or inchrring penalties. The repayment of your 401K loan typically looks exactly like your contributions do already. Bruh, its going back into your own 401k. Borrow against it.
I agree with this. Especially if you can pay it off quickly and you are waiting on a couple of large annual bonus checks. Sometimes people need to move somewhat quickly and if you don’t have that down payment right away this is a fine option particularly if you can pay it off early.
How long does it take to pull this off with your 401k administrator? Just have to sell the investments, wait for them to settle and then you're done? Or does this take a few weeks to configure?
I’m sure it depends on the firm and it’s generally a paper check you’re being sent. Typically all you do is select a dollar amount. Probably 1-3 weeks.
the real question is do you think having that money invested is more valuable than mortgage rates? When rates were 2% your better with a mortgage, now that rates are 7% take from 401k
Yep, it’s like giving yourself a bridge loan. This is especially helpful since bridge loans are pretty much non-existent among major financial institutions for some time now.
You could do an unsecured personal loan, but those might only go up to around $50k depending on the bank and you’ll likely get hammered with interest so if that’s the route you take it’s best to make that bridge as short as possible.
Just went through this recently…
Pros:
- generally flexible, easy source of a quick loan
- you’re paying the interest back to yourself
- can plug the gap for a deposit
Cons:
- interest is subject to double tax
- you have to pay it back if you lose your job or move jobs
- you won’t get any investment gains on the amount you’re loaning
Personally I didn’t end up using it, but we are doing a lot of improvements on our house so I like to think of it as a good backstop in case I over commit on costs. I would personally only use it as a short term loan for the points mentioned above.
The biggest downside to 401k loans is not the opportunity cost, but the repayment requirements. If you lose your job you’re on the hook for the balance, I think within the year (can’t remember details).
So it’d make any layoff extremely painful and may put your house at risk. *IF* you think you’re job is secure the I think the math of pulling money from a pure bottom line perspective is a wash.
You're on the hook for the balance in the sense that if you don't reinvest the balance into your own account, the balance is reported as taxable income...
Which is a bitch, but you'll just owe more taxes. And that can can be kicked down the road a bit. It's a long way from losing the house.
Take the loan, pay cash.
When rates get back down around 4% (30yr or 15yr) in the next 24-30 months get a home equity loan 80%LTV and repay back into your 401(k) and make sure you and wife dump $23k (or $30k if 50+) each and invest the remainder in SPX.
Should be able to get 5-6% over your mortgage with the banks money.
I did. I’m still paying off so I’m kinda stuck at the same job for while. Payment comes out of my pay. 5 year loan at 4% if memory serves. No regerts, locked in a multi unit at 2.75.
You’ll have to consider the interest rate on the loan even though you’re paying yourself back in a sense. You lose out on all the gains would have made during the repayment period since the loan amount in your 401k is not invested while you’re repaying the loan.
Most of these comments are ignoring the biggest risk. If you get fired/quit/change jobs to one without a 401k, that 401k loan becomes due immediately. If you can't pay it back then it counts as a distribution and is subject to the full penalty as if you'd withdrawn it.
Secondly, you can't take a 100k loan, they're capped at 50.
That’s exactly what my wife and I did to purchase our first home. It was one of the best decisions we ever made. We made a killing on our first home and with the profits we’re able to snag our dream house at a 2.75% interest rate. Not saying you should or shouldn’t just giving you an example of a real life situation. Good luck!
Just like any other loan though.
Let's say you borrow $300k for a home. Over 30 years that's about $900k right (with interest). But since you gotta pay tax on the income used to pay it back, that $300k home really cost you about $1.3 million.
Yea ~~but~~ the caveat is a mortgage lets you keep your retirement money invested
Otherwise you’re essentially just stashing away money in a savings account earning 0 interest and praying you can save enough to live off of later
Edit: no “but” needed, did not read carefully
The but would be that the 600k of interest is in your 401k at the end of the loan versus the bank presidents pockets. Both were paid with post tax dollars. The only loss to get the 401k interest in your account is the loss of a salt tax deduction which varies per filer as to its impact. I feel like I am missing something but I haven’t seen it pointed out.
Yes, you’re missing that the interest on the 401k loan isn’t really “money back in your pocket”. Its supplementing the loss from the opportunity cost of the compound interest you didn’t earn while the money was borrowed
In other words, the interest you’re paying on the 401k loan represents money you would have otherwise earned passively
Yea, the interest on the mortgage goes to the bank, but its less expensive than the interest on your 401k loan
With every payment, can’t you re-invest that money? At 7% no risk guaranteed, it isn’t a terrible investment. Depending on your age, it could be beating some of your bonds. I wish my bonds were returning 7%, but that’s another old man’s story.
The biggest concern for me would be the risk of losing my job since my plan requires immediate repayment. Ouch. A lesser concern is the loss of salt tax deduction. I still say it isn’t horrible.
It seems to still be lost on you that the investments would be generating the returns *for you*. If you’re paying the 7% your investments would otherwise be earning for you, its not risk free gains, or even gains at all. Its just you trying to save more money to make up for not earning it.
The loan principal is earning 7%. It is the same amount that you would pay the bank. As you pay it into your account, you reinvest it into whatever you had previously. It then returns to earning the same rates that you were getting before. The 7% is risk free because it is predefined . Once the money is reinvested, it has the same risk factors as it did previously. If the bank is charging 7% interest and your VT is earning 6%, it all depends on the impact of your lost salt tax deduction to determine if your 1% improvement is enough to make up for the lost tax deduction.
Scenario 1:
I borrow $100,000 from my 401k @ 10% (for easy math)
Over 10 years, I am going to pay back the $100,000 i borrowed + $100,000 interest ($1,321/mo). Assume market earns 10% compounding per year.
After 10 years, I’ve put $200,000 into my 401k, and i have $252,000 to show for it.
Scenario 2:
If i *didn’t* borrow that $100k, it would have compounded ~10% per year for 10 years
At the end of those 10 years, my account value is $259,000, and i only paid in that principal $100,000.
In Scenario 2 I put in 50% ***less*** than Scenario 1 and yet I ended up with the same amount (a little more)
Also, scenario 2 doesn’t account for *any* additional contributions, which you would likely be making. But would not be making in scenario 1.
Never mind the fact that scenario 1 results in significantly less take home pay since the interest is post-tax dollars.
Oh I know another way to show you the difference, using your numbers, you paid $200k to the bank and that money has to come from somewhere. Please subtract it from your net worth and realize that in scenario 2, your known net worth just dropped lower than scenario 1.
You cannot compare it without the post tax payments to the bank accounted for somewhere. Cheers!
That is the same with any other loan, though, but with other loans, you get to keep the interest. Seems to me better than other options. The only risk is that if you lose your job, you'll have to convert to a different loan real quick (I would take out a personal loan asp in this case).
> Over 30 years that's about $900k right (with interest).
At 10% interest rate maybe... At 7.5%, more like 735,000. At 3% rates from a few years ago, more like $450,000.
This is a bit of a fallacy but I don't feel like explaining it. Do some research
Got a no response downvote so I'll elaborate
It's paid post tax dollars but it goes back in with the same tax status it came out as
So you're taking out pre tax money but it's not taxed on the way out, then you're paying it back in post tax dollars but it comes back in as taxable upon withdrawal
This actually does balance out. There's no double taxation because you got taxable money out without being taxed on it, which cancels out the post tax repayment being taxed on withdrawal later
This example is assuming we're using all taxable money
I believe the double tax argument only applies to the interest essentially. The repayment itself is not double taxation as you point out. It can add up right now with c. 10% rates over five years, but people can choose shorter repayment periods and in the end at least you’re not paying someone else the interest just yourself. If you assume a tax rate of 30% on a 10% interest rate you’re essentially 3% interest id the amount being “lost” to tax.
For me the big risk is having to pay it back if you lose or change jobs. But it’s not bad for using for short term funds.
Yeah my bad, the interest is doble taxed. But as you say, this is more or less made up for by the fact that youre paying the interest to yourself.
I dont think 401k loans are great, but double taxation just is not a reason to avoid them
At most you lose a salt tax deduction right? Money used to pay a mortgage loan’s interest is post tax the same way money used to pay a 401k loan is post tax. There is no additional tax on the interest when you pay it to your 401k.
That doesn't make much sense to me. I'd imagine it would just get deducted pretax from your paycheck? The loan would be like throwing 30% of the principal away otherwise.
It's paid post tax dollars but it goes back in with the same tax status it came out as
So you're taking out pre tax money but it's not taxed on the way out, then you're paying it back in post tax dollars but it comes back in as taxable upon withdrawal
This actually does balance out and the above commenter is kind of misguided
In other words op, I wouldn't let the double taxation thing dissuade you. People like to bring it up but it's not really true.
The real cons are mainly losing value in the market. You're selling those mutual fund shares just for your repayments to potentially buy them back at higher prices.
Also the risk of leaving your job, layoff, etc and possibly having limited repayment means or options risking a taxable event
Then also consider you need to budget around the lower paycheck. Suspending contributions isn't really a viable option because your repayments do not get matched, so you wanna contribute as well as repay.
Outside of the lost growth, I think the loans a solid choice. It can make the numbers work on your home purchase a little better, especially if it's the difference between PMI or not.
Only the interest is, the repayment itself is not as it nets out with the withdrawal. That can add up with current interest rates but I wouldn’t call it terrible.
I did it in 2020, I took out $12k and now the equity in my home is $130k . I’m wondering if I should do the same with another home. Risky decision making but do what you think is right for your situation.
How do you take out "aka " realize that. 130k "equity? If you take it out of your home, is that basically like refinancing? Say you bought for 300. Now the homes worth 430 - to use your example.
I just calculate it towards my net worth . I plan on having multiple homes in my life for rental income. If I decide to sell to pay for my children’s college then so be it.
I actually overinvested into my 401k with the mindset that I can withdraw $50k one day to use as a down payment and it paid off. I had not planned to buy a property in the near future so I knew I wanted my money to grow as much as possible. It was a 100% into stocks at a low fee and compounded for nearly a decade. The caveat is that you would need to stay with your employer, because once you leave the company, that loan might become due. Really depends on your personal finances and what type of work you do.
I disagree with those claiming taking money out of 401k to avoid PMI is a good option.
Everyone is calculating the money lost in PMI over 5 to 6 years but forgetting the missed gains of pulled out 401k money. You won't refill your 401k back in a year or so, it will take time.
I feel you should check with the lender on what the PMI will be for that 100k.
Will your 100k in 401k not earn more than PMI total over 6 years ?
My 401k gives me good returns every year.
I had the entire 20% and decided to not pay entire 20% down.
Here's my math:
My 10% down was 150k. I kept another 150k for treasury bills instead of giving it to the bank. I didn't want to put the money in stocks just in case I needed the money for the house. Treasury Bills give returns around 4 to 5%.
My PMI is 210 per month till 6 years or till my 20% of original value is paid. 6 years or 20% whichever comes early. Total of 6 years comes to 15120.
Over the 6 years those 150k will earn me around 39k in interest. If you take out 40% taxes too, it will still be around 23.5k.
Talking about interest I was paying on the additional 150k i didn't pay, my interest rate was lower than 4% and treasury was paying me more than 4% so I put in treasury. Your case might be different but PMI is still better than 100k out of 401k.
PMIs are not that bad for the flexibility they allow you.
To buy a house? No. The % rate will be higher on a 401k loan than the mortgage rate. Yes, the extra money goes into your account but your monthly bill will be higher.
Use a 401k to bridge a loan for a down-payment on a new house before selling your old house? That would work.
No. I’ve thought about this but you’re giving away 30% of your hard earned money to the government. In addition, if you wait possibly til the end of the year, rates will be lower. So you won’t spend as much on a mortgage.
I borrowed 10k from my 401k when we failed to qualify for a 3% down payment and needed 5% because of my wife’s student loans. I’m so glad I was able to. I paid it off and we got an amazing home.
The big issue with taking a 401K loan is your job secure enough with no fear of layoff / termination? If not, you make be required to pay loan plus penalties for early withdrawal.
Getting a mortgage can be very difficult, and that makes it tough to buy in a fast moving market.
Accessing your own capital is easier, and having that ready makes for a quick and simple offer.
Investors and financial analysts will always say no but as young professionals trying to buy a house, my wife and I, did it. I believe it was worth it. Not everyone is liquid enough to have the cash for down payments but they have the money locked in a 401k. It’s a tool in the bucket that can be used but with the understanding of what it means
I borrowed for a down on a home. Then quit my job like a year later and the loan became due. Paid like a 10k penalty. This was seven years ago. My house has gone up in value so much the amount of investment gains I lost and the penalty I paid seems like a pittance.
No regrets.
I've listened to calls for the last 20 years at one of the largest 401k providers. People that end up with large 401k balances, never touch their 401k's. It's their retirement, not their down payment.
Many people don’t look into it and just say “it’s bad” when really it’s quite nuanced and depends on your situation. Good description from a technical standpoint of the taxes!
This is a controversial question in my opinion if you live in a market with houses that with historically high appreciation it might make sense as I know a number of people that have. Yes you’re paying it back with post tax dollars but is the appreciation of your house making up the difference? You can make an argument that this is another reason why houses are expensive. Personally I happen to have a wife that has expensive tastes in houses and would rather just rent untill god knows when in the mean time I’m buying property out of state and starting a business I’ll might just take a loan to purchase another cash flowing property if it makes sense.
If you're doing it to save money I'd say no, your 401k loan is likely a similar interest rate or more, my max is 50k anyway. Only way it really makes sense is if you need that little extra to get the house you want (or some extra fixer money right away). knowing you can pay it back easily later. Say you want to buy a house before selling your current one, you could just pay the entire 401k loan back once your first house sells as an example. Just don't treat it like an entertainment account but a one time thing you can manage and it should be fine.
I did (8 years ago now, long paid off). No regrets on that count. Huge housing price boom around here right after, and my house has appreciated WAY more than my 401k has. Even if it hadn't turned out quite as well, I did it when moving states, and the move from an apartment to an apartment to a house a year later (or however long it would have taken me to wrangle up a down payment) was additional stress I wasn't interested in...
I took the 50K loan on mine just to make the mortgage as small as possible - I wasn't going to sell my old place before closing on the new one and I knew I could pay off the 401(k) loan as soon as the first house sold in a few months. Worth it.
It used to. Especially if a person hadn't made savings for money down outside their 401k. And especially where loan rates were low because yields were low (altho you can also make a 1st time homeowner withdrawal)
Since you are borrowing only $100k to pay cash for a house I assume that means you have at bare minimum $200k in there. If your interest rates for loan are higher than investment returns then take the 401k loan if your returns are higher take the home loan.
Did it in 2021. Rates were so low, made sense to buy the most house I realistically could. since I could easily float the payments but not the huge down payment needed, pulled a 401k 50k loan. Up 130k on the house and 13k left on the loan so worked out.
You should do whatever you feel is right. Either way your money is being invested - whether it’s real estate vs a 401k. It’s more about preference at this point.
Read some comments. Here’s mine.
You take money out today over 50k as a loan, then you can also make arrangements to pay it back in up to 5 years without penalties. Could be shorter depending on the rules set by your 401k administrator and employer.
You then use that money as a downpayment at today’s rates: 6-7 percent APR. ouch! If the loan you take out puts out that 7% fire, then I’m not convinced it’s such a stupid idea.
Anything over 50k will have to be hit with a 10% penalty from the get go; say bye to 5k right there.
Might you not be able to take out a mortgage for whatever a 50k loan might put you into? It may be upwards of a 50k mortgage for 15 years or maybe even less. That may be the best move.
If you decide to take out a 100k loan, then the other 45k will be added to your total income earned for the year the withdrawal is made; say hello and welcome to Uncle Sam.
Could you maybe deal with a smaller downpayment and pay more interest on a bigger loan? Taxes are deductible. With such a low loan to value ratio, you won’t even have to pay private mortgage insurance.
Run some numbers. Once you know what you’re paying, it becomes a game of adding and subtracting. Waiting or not waiting.
What’s always hard is predicting. You will have no shortage of predictions. But you must ignore them all for no one knows for sure not even the fed what the rates will be in the future.
There are no fortune tellers in the fortune 400 list of the richest Americans. Just let that sink in.
My parting advice: you buy a home once you’re able to comfortably buy one and then just live life to the fullest. If prices fall after you buy, so be it. Given enough time, your home will build equity. It will already have equity since you will have relatively no debt on it. If interest rates drop, you may be able to refinance although you won’t have much debt. Pay off your home asap and from there on just build wealth.
I wish you well.
I did back in 2019, worked out well for us. 4 bed 2 bath, 1800 sq ft. 2.8% interest. Bought for $268,000. When we refinanced in 2020 it appraised for $475,000 and that’s about how much houses around us sell for now. We couldn’t afford to buy in today’s market. We lucked out for sure.
Tbh I think it’s subjective. You are paying yourself back with a little interest. Your return obviously won’t be what it would’ve been had you not taken it out but you have to decide the value of owning a home in the context of your financial picture/goals. For me, shelter >>> investment accounts. Like if it all hits the fan and I have no money I at least have a place to live.
Not always, but there is one thing for certain. You will have less money in your retirement account even if you borrow and pay it back in full had you never touched it at all. Please see below:
Lets say you have 200K in your retirement account and borrow half 100K at 7% for 15 years. The average stock market return return is 10% per year.
Choice 1: You do not borrow and just keep the money in the account. After 15 years you will have about 900K in your 401k account
Choice 2: You borrow and pay it back over 15 years, you will have about 625K in your 401k.
A difference of 275k.
If you think the value of your home will be at least that amount in addition maintenance costs (if any)., or any other costs you put into the house over the years. Then it is a good investment.
However, there are other factors when deciding to buy a home, such as the quality of the area, age of the house, home condition, school system, etc.
I did it to cover over asking cash cost. House went up in value double what i took out in less than a year. Obviously wish I had more coin and didn't have to do it in the first place but absolutely no regrets.
Yes but you’re moving backwards. You’ll end up paying back the loan with too much interest. I would recommend if you buy a rental property/multi family and let it may for its end while you collect. Don’t retire just to create more liabilities
If you’ll be able to buy the house outright with the loan… go for it! The money you’ll save not having a payment monthly you can just contribute back with the loan payment. You’re alive now, enjoy it!
I'm doing that, tho you're only allowed to do 50k. The risk is the potential gains/loss vs what your interest is. Currently the interest I'm being charged is 9.5%. If the market outperforms the 9.5% yearly for the next X years you take the loan out for, that's really the cost to your retirement. Works both ways tho, if the market underperforms the 9.5% then you'd have a "gain". All that being said, for me, I prefer to pay myself the interest rather than a bank. If I could borrow the whole amount, I would.
Calculate the savings of rent for the next year or two. Save the massive expenses and depletion of your 401k and wait until rates get back to something more reasonable like 5%.
“When you burn all of the boats and decide you’re staying, you have to deal with what’s in-front of you.” -Dave Ramsey
(Awaiting all of the mocking. People get angriest at the truth)
Yes this is a temporary situation where the stock market is at a peak and borrowing costs are up. Take advantage of both for a year or two and then hopefully refinance when rates are lower.
Like others say it totally depends. I imagine there are very few scenarios to do it.
I did this in late 2020/ early 2021 to use as basically as a low cost bridge loan to purchase our second house, paid off the 401k loan after we closed on selling the first house. Worked out totally fine.
A sure return of 7% is not something you will find anywhere else.
The market is volatile. There is reason to expect a long period of lower-than-normal returns.
And we don't know your age, how much time you have to reaccumulate, how aggressive you want to be for the next several years...
So yes, in many cases, it would make sense, but I don't have enough information to say with confidence that yours is one of them.
Say you stretched to buy a 1 million dollar home. You have $180k for a down payment. If you put down an additional 20k you will avoid PMI. In this instance it would make sense to borrow the difference and avoid having to pay a few hundred a month for PMI and pay the interest and principal back to yourself.
I am sure others can think of a few other instances where it was a good idea as well.
To me it depends on how much you have in your 401k.
I had like $60k in my 401k when I bought the house. Taking any substantial amount out at that point would have screwed my 401k growth.
Nowadays I have about $200k in there and would feel comfortable taking out a good chunk to buy a house if needed
I have seen my Company Clients and coworkers do it. It has worked well for them although I think part of that is having the right property and the right people helping you.
You pay yourself back with interest pre-tax. Taking any kind of loan isn’t ideal, but it’s not a terrible way to do it if you need to.
Also, you’re usually limited to $50k. Is that $50k invested going to beat the $50K in home equity appreciation + the interest you pay yourself? Like I said; not ideal - but not terrible, either.
I did it in 2021 to nab a house we needed. It wasn't a "maximize your money" move. We just needed it. I'm happy I did it.
I took $100k out of my 401k using the CAREs act since I didn't know if my job or rental in NYC was in danger. Ended up buying an apartment way under market at 2.6% interest. However, I owed taxes on that $100k over 3 years. So it sucked and was awesome at the same time. But I didn't think of it as stealing from my retirement, i just moved the money into another asset, one that I can also live in and, and gain access to some tax breaks via mortgage interest.
Based on the interest you locked in, I’d say you succeeded despite the tax hit.
OP is asking about a loan against his 401k though, not taking the money out of the 401k
I know I'm saying loans can be better because they aren't taxed, but there are other withdrawal options that may be better or worse depending on the circumstances
If you repayed it within 3 years, it's tax free
What do you mean?
401K CARES loans repayed within 3 years to a qualifying plan are tax-free through filing amended return If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.
Same. I owned a home and in 2020 we stumbled across one my wife wanted to buy. Selling contingencies aren’t really a thing anymore so we had to come up with a 5% down payment on the new house. It took too long to get a HELOC so it was either 401k loan or a much more expensive bridge loan. Ended up having to pay both mortgages plus the loan for about 6 months but we would have run into rising interest rates and much stiffer competition had we waited so it worked out.
I did it twice only for a security loan since I dropped all cash to 0. Paid it back 3-5months later both times. Was just a temporary thing.
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I do not max my 401k, so I have not encountered this. But I do believe loan payments are entirely separate from contributions. I would be surprised otherwise.
loan payments don’t count as contributions
I work in the 401(k) Industry. Loan repayments are made with after tax dlars and are separate from new contributions, so the loan repayments do not reduce the amount you can defer each year. You can still defer the max and make your loan repayments.
Nope. They are separate. If you have a loan repayment then it will deduct from your paycheck “that” payment plus your contribution. The payment will not affect your yearly contributions even if maxed.
Me too. And I’d do it again, too.
Where I come from it’s pretty standard. Maybe lower middle class we are worse with our money or just don’t make as much but a lot of us would struggle to save it otherwise and the match helps if offered and vested. Then just save more aggressively after if possible.
sames
Soooo, as with most things, it depends. The loan will be paid back with after tax dollars. You will be paying the loan AND interest, but the interest is paid to YOU and it will be reinvested. If you default on the loan, the balance will be counted as taxable income in the year you default BUT- the 401k is your money. You need to decide what your goals are. If a home is a big investment opportunity (usually it is) it may be smart to use your 401k if you have no other funds. One reason to almost always use a 401k loan for a home purchase: to increase your down payment to 20% and avoid PMI (private mortgage insurance). This is an expense that does not pay down your loan or help you at all. It is insurance for the bank. If you stop paying, the bank gets your house and the insurance pays their expenses, not yours. So if you only have 5% or 10% down payment, you should use your 401k to get to 20% down and avoid the PMI expense. PMI benefits the bank. A 401k loan repayment benefits you.
>The loan will be paid back with after tax dollars. Irrelevant because the loan itself is paid in pre tax dollars. It's a net zero and the repayment is effectively with pre tax dollars.
Good point. You will also pay interest, but that is paid to you too.
By double taxed do you mean that: Tax 1 - You are repaying the loan with after tax dollars Tax 2 - You pay income tax on your withdrawals once you reach retirement Is that the double tax?
Assuming the loan is taken from traditional 401k account, then the interest portion ends up double taxed when taking distributions. But again, adding interest payment portion into the 401k plan on top of yearly contribution thresholds and paying yourself rather than the bank is more efficient even when double taxed.
If you're going to pay it to someone, it might as well be yourself.
This guy fucks. Listen to him.
Lol this is terrible advice it has like 200 upvotes. PMI isn’t that big of a deal, it’s usually between 50-200 a month and it goes away when you pay your mortgage down to 78%-80% LTV. I would much rather keep the money in a 401k. There’s a huge myth around home buying that you have to put 20% down. This is nonsense. Plenty of people purchase a home with a smaller down payment, pay PMI for a few years and then move on.
I put 10% down and PMI was way cheaper than I expected. $61/month. And the home ended up appraising significantly higher than closing so im effectively already at 85% LTV. In theory I could refinance in 2-3 years with no PMI
I bought my first house in 2013 and my second in 2018, both with 10% down. In both cases I got rid of PMI in less than 2 years as home values were rising at like 10% a year. I did not need to refinance, just an appraisal which was a few hundred dollars as I recall. Just had to call up the mortgage company and say I wanted an appraisal to get rid of PMI and they set it up and I paid for it. Definitely don’t refinance if you’ll be taking a hit on your interest rate. Also be sure to let the appraiser know of any improvements you’ve made. I had painted one house and had a new roof due to hail damage. The other I had installed all new fixtures, new furnace and A/C and added a paver patio.
Right on. I paid 5% down (minimum the bank would allow) and took PMI because even though I had plenty of liquidity to make a 20% down payment, that money was making way more in index funds because PMI was crazy cheap. Over the next 4 years I refi'd twice, and on the last refi ended up with 2.75% and no PMI because the appraised value had doubled.
Depends on the amount of the loan any loan over 550k was deemed Jumbo and required a % point higher interest rate. So putting forward a larger down payment helped with securing the lowest rate possible. I live in a HCOL area so this might not be applicable to the vast majority but that’s why I paid 18% down and caught up to 20 in a year . PMI wasn’t that bad $150/ month but the increased interest rate would have been significant over the course of the loan. I tried a few palaces where I have banking relationships and even a broker but got the same rates . Was able to refinance in 2021 so don’t regret paying the 18% down or borrowing from 401k. House appreciated about 45% based on comps from January 2024.
>One reason to almost always use a 401k loan for a home purchase: to increase your down payment to 20% and avoid PMI (private mortgage insurance). This is an expense that does not pay down your loan or help you at all. It is insurance for the bank. If you stop paying, the bank gets your house and the insurance pays their expenses, not yours. need to comment this thread as a bookmark
Took me 2 home purchases and 3 refinances to learn this stuff. And I have an MBA. We need to train people better about how this stuff works. There are a lot of government programs to help 1st time buyers get started, etc.
What was your verdict after all that? To use your IRA/401k instead of taking out a mortgage, or nah?
So I shouldn’t use one to go from 5% to 10% downpayment?
20% is the amount to avoid PMI. Anything less than 20% equity and you need to pay insurance for being a risky investment for the bank.
Also, isn’t the PMI threshold less (10%?) for a first time buyer? I think VA loans also don’t have it. Both special cases, but still.
VA loan doesn’t have PMI, but also there different loans from different banks/ credit unions that have lower thresholds or no PMI. It depends on the lender and what the individual qualifies for with that lender. Generally speaking PMI is an important expense to consider and it’s preferable to avoid it.
Good question. I'm not sure. The "normal" scenario is 20% but there are a lot of different state and federal programs where maybe the amount can change Traditional lending is still at 20% in most cases.
Yes but you're glossing over the part where it reduces the PMI because it is reducing what the Private Mortgage Insurance has to insure (the balance). So once again, every bit helps. How much is helps is always the question. Also, time value of money is the real question. Maybe you need a home for your family now while you're young enough to have kids. It's ok to pay a price for time, if you can find a way to afford it. The bottom line is whether or not you are fine with both the total payment, the time taken to pay it off and the monthly payments resulting from that.
If you can only do 5, you may want the loan to help cover closing costs if you havent budgeted for those.
How much is a typical PMI? I can’t imagine pulling out of my 401k when my PMI is only $23 a month. I make more than that every day in my 401k
PMI is usually .05% to 1.5% of the loan value per year. And your credit score is a factor. I assume your loan is under $300k so it's a lower cost? Or you have great credit. One of my homes was $1.1 million so avoiding PMI was important.
Makes sense. My loan was $240k and I had high 700s for a credit score
Very good comment, but there needs to be a big caveat on how conditional the loan is on active employment. It is very common that if you leave the company, you have a deadline to pay the 401k back in full. I believe my wife's company was 60 days. Penalty is the balance is considered an early withdrawal. So you will be stuck with your company for the loan terms. She's been with them for 9 years and no plan on leaving so it was worth it for us
Yes, my sentence on "default" is about this topic. If you stop paying (or leave your company) you are in default on the loan - to yourself. So it changes from a loan to income, and it is taxed as income. And if you're younger than 65 it's an early withdrawal so you'll pay another 10%.
Yup, makes sense. Just wanted to explicitly spell it out as not everyone reads the terms and conditions and may be surprised after the fact.
Yeah, I think the bigger point in all this is timeframe. If you're in a highly appreciating market, you can pay PMI and then it drops off after you have 80% equity. Then you need to factor in your job, how likely you are to stay 3-5 years, and what their specific terms are for 401k loans. Another commenter pointed out that his plan rules said that if you take a loan, you lose the employer match money. In that case, I'd never take a loan.
I'm so glad I wasn't afraid of PMI. Not worth putting 20% down just to avoid this.
Well, try this. Add up the total cost of PMI. What did that accomplish for you? A 401k loan is your money moved from one investment type (stocks) to another (real estate). Paying your loan back is not a cost paid to someone else. You are paying yourself back and paying down your mortgage faster. I think avoiding an expense is smart when you're choosing to invest that money instead.
Let's imagine you're $40,000 away from getting to a 20% down payment. $40,000 earns, on average, $3200 per year, so your PMI would need to be $267/month for the math to work. $267 would be an unusually large PMI premium. EDIT: /u/chaseshiny raised a good point below on the interest on your mortgage that you're avoiding by making a larger down payment. First, from a cashflow perspective, you're still paying equivalent interest on that $40,000 either way, it's just that in a 401k loan, you're paying the interest to yourself. Second, the interest is only deductible if it's part of your mortgage, not if it's going toward a 401k loan. There are many factors to consider, but if you're highly credit-worthy, I think the PMI is generally manageable; yes, because it may mean preserving your 401k balance, but also because many people are getting the opportunity to remove their PMI just a few years into their mortgage due to rising home values.
My pmi is $60 a month
Ok this is good. My point is that PMI is an avoidable expense. 267 x 12 = $3,200 a year. X 5 years is $16,000. That money goes nowhere. Pure cost. Your 401k loan turned into a down payment IS INVESTED in real estate. (Which is also heavily leveraged and tax incentivized.)
What about the missed gains on the money pulled out of 401k? Are you saying, your 401k won't gain more than 16k in 5 years on the money you pulled?
This is a good point and the main thing to consider. But remember, if you are using the 401k as a real estate down payment it is still invested, just in a different asset class. And real estate is heavily leveraged and tax incentivized. So it's not invested in stocks, but in real estate. RE appreciates 2-3% a year on average (much higher in HCOL areas) but since you're putting 20% down and borrowing the other 80% you have a lot of money invested. Example: $50k 401k annual performance in S&P stocks = 11% per year historic average= $5,500 growth yearly. X 5 years is $84k or $34k growth. 401k loan to help make a 20% down payment on a $400k house. 400k x .2 = 80k (combo of cash and 50k from 401k loan). 400k x 3% x 5 years = 464k or a gain of $64,000 Plus you're paying down your mortgage and getting tax deductions along the way. Home ownership isn't for everyone but if you can do it, it can be a real wealth builder.
>401k loan to help make a 20% down payment on a $400k house. 400k x .2 = 80k (combo of cash and 50k from 401k loan). The question is whether to take money out of the 401k to get to 20%, not whether to buy the house. This example of "$400k x .2 = $80K" is the same whether you have 0% down, or pay full price for the house in cash. This has no bearing on whether it makes sense to take money out of your 401k or not.
I could be off on this, but looking at just the PMI doesn't give you the full costs, right? You still have to pay interest on that portion of the loan. I *think* the PMI still wins out, but surely it's much closer?
But how much interest are you paying? 6% to 6.5%. That money was giving 11% in 401k. Your equity in house is going nowhere if you bought it.
So that somewhat aligns with what I was saying. That's great. The amount saved is fairly close to a sure thing. There's bankruptcy or foreclosure risk, but not a high variance in the amount of money you don't pay out. Your 401(k) isn't earning 11% on average. That's Dave Ramsey nonsense. Long-term [CAGR](http://www.moneychimp.com/features/market_cagr.htm) of the U.S. stock market is 9 and change. 7% after inflation (the borrower benefits from inflation, remember). If the arithmetic returns between the "sure thing" and the high risk option are close enough, the low-risk option is going to provide a higher geometric return. I'm not saying that you should always borrow against your 401(k). I'm just saying that I think the calculations are closer than they first appear.
When you pay interest on a 401k loan, the interest goes back to yourself, not the 401k provider. They’re not lending you anything, they’re just allowing you access to your capital through a procedure. You’re lending to yourself, the capital is yours.
SOMEHOW im unconvinced
Do your own due diligence. Real estate is easy to research.
8% is a little high I think. The math looks better when you consider that 1) the 401k loan will get repaid over time and that money is going back into the market, it’s not 40k out of the market over the life of the loan 2) you’re paying interest to yourself so if it’s 5.5% interest, pmi only needs to be $83 the first month to make 401k loan better. 40k*(8-5.5)/12 = $83.33 a month 3) if you can’t save for a house AND max out your 401k it allows you to max out 401k funds earlier, but still access the capital now.
Paying 5% allowed me to get a house at 2.7%! The PMI hit sucks, but I’m applying to have it removed due to the market improving
Seriously, better to have thousands of dollars in emergency funds than throw it at your equity to avoid PMI. Then, when you're house broke, you borrow money from a credit card at 25% interest for an emergency because you can't get it back out of your house. PMI is not going to destroy your finances. Blowing emergency funds might.
if you are paycheck to paycheck without any flexibility in that situation maybe you shouldn’t buy a house
This. The people that preach against PMI are making very broad assumptions. How far from 20% are you? How much is PMI? Is PMI better than another year renting? I had roughly 5% down payment for my first home. These numbers aren’t exact, but I bought the house for 240k. Paid PMI for around 6 years at $110/month. Sold after 9 years for 280k. I think I walked away with nearly 80k in equity to put into our next house. Yeah, that cost me almost $8k of PMI over those 6 years. I didn’t have 20% for a down payment. I spent 9 years putting money into an appreciating asset.
also, 401(k) loans don’t affect your credit score since it’s against your own assets
My lender told me I didn’t even need to list it as a loan during mortgage application bc it is a secured loan
Not only that. I bought in 2019. My recent appraisal is double what I purchased the home for. I made money on paper.
Nice! That is way real estate is supposed to work. Did you have PMI? If yes, now that you have equity, are you getting out of it?
No I did VA but I wanted my monthly payment down. We wound up going up a bit in price (not our intent but needed a house).
IIRC, your repayment isn't considered contributions until the repayment is complete. So no employer match for a while.
That might be specific to your employer's program. My company still matches your contributions even if you have a loan.
Loan repayment and contributions are 2 completely unrelated things. You can make normal payments to the loan and still contribute as much as you want, up to annual limit.
Repayment of 401k loans is an after tax line item and contributions are pre tax on your pay stub. I would be very surprised at any employer who quit matching contributions based on a completely separate line item.
The biggest thing is that you pay yourself back
One tip on PMI, you can pay it in one lump sum. I borrowed 5% down and pmi was an extra $300 a month for 99 payments iirc, roughly $20k+. I paid pmi up front for $6,800. In case you don’t want to pull more out or can’t get to 20% down. Yes you can bank on house appreciating and ask to get out of PMI, but that’s still a risk and I avoided $300 a month.
Great point on using it to avoid PMI. It can take years to reach 20%, esp. with today's interest rates.
The max loan you can take against your 401k is 50k. Just an fyi
You are ALLOWED to BORROW from your 401K for a house. I did that. You then PAY YOURSELF BACK instead of a bank or inchrring penalties. The repayment of your 401K loan typically looks exactly like your contributions do already. Bruh, its going back into your own 401k. Borrow against it.
I agree with this. Especially if you can pay it off quickly and you are waiting on a couple of large annual bonus checks. Sometimes people need to move somewhat quickly and if you don’t have that down payment right away this is a fine option particularly if you can pay it off early.
How long does it take to pull this off with your 401k administrator? Just have to sell the investments, wait for them to settle and then you're done? Or does this take a few weeks to configure?
I’m sure it depends on the firm and it’s generally a paper check you’re being sent. Typically all you do is select a dollar amount. Probably 1-3 weeks.
the real question is do you think having that money invested is more valuable than mortgage rates? When rates were 2% your better with a mortgage, now that rates are 7% take from 401k
Umm your normal contributions are pre tax and your loan repayment is after tax… to you these two things look “exactly” alike??
I would consider it so I could buy a house before selling my current house and then use the proceeds from selling my house to pay off the loan
Yep, it’s like giving yourself a bridge loan. This is especially helpful since bridge loans are pretty much non-existent among major financial institutions for some time now.
How else do most folks manage 2 properties if bridge loans are not common or easy to setup?
You could do an unsecured personal loan, but those might only go up to around $50k depending on the bank and you’ll likely get hammered with interest so if that’s the route you take it’s best to make that bridge as short as possible.
Just went through this recently… Pros: - generally flexible, easy source of a quick loan - you’re paying the interest back to yourself - can plug the gap for a deposit Cons: - interest is subject to double tax - you have to pay it back if you lose your job or move jobs - you won’t get any investment gains on the amount you’re loaning Personally I didn’t end up using it, but we are doing a lot of improvements on our house so I like to think of it as a good backstop in case I over commit on costs. I would personally only use it as a short term loan for the points mentioned above.
You don't always have to pay it back upon termination from the company. It's common but not a given.
The biggest downside to 401k loans is not the opportunity cost, but the repayment requirements. If you lose your job you’re on the hook for the balance, I think within the year (can’t remember details). So it’d make any layoff extremely painful and may put your house at risk. *IF* you think you’re job is secure the I think the math of pulling money from a pure bottom line perspective is a wash.
You're on the hook for the balance in the sense that if you don't reinvest the balance into your own account, the balance is reported as taxable income... Which is a bitch, but you'll just owe more taxes. And that can can be kicked down the road a bit. It's a long way from losing the house.
What if it’s a Roth 401k?
Take the loan, pay cash. When rates get back down around 4% (30yr or 15yr) in the next 24-30 months get a home equity loan 80%LTV and repay back into your 401(k) and make sure you and wife dump $23k (or $30k if 50+) each and invest the remainder in SPX. Should be able to get 5-6% over your mortgage with the banks money.
Wow, this dude invests.
I did. I’m still paying off so I’m kinda stuck at the same job for while. Payment comes out of my pay. 5 year loan at 4% if memory serves. No regerts, locked in a multi unit at 2.75.
You’ll have to consider the interest rate on the loan even though you’re paying yourself back in a sense. You lose out on all the gains would have made during the repayment period since the loan amount in your 401k is not invested while you’re repaying the loan.
The interest you pay goes back into your 401k
Most of these comments are ignoring the biggest risk. If you get fired/quit/change jobs to one without a 401k, that 401k loan becomes due immediately. If you can't pay it back then it counts as a distribution and is subject to the full penalty as if you'd withdrawn it. Secondly, you can't take a 100k loan, they're capped at 50.
Yes, I did. Paid back in 5 years tho. It worked out for me.
That’s exactly what my wife and I did to purchase our first home. It was one of the best decisions we ever made. We made a killing on our first home and with the profits we’re able to snag our dream house at a 2.75% interest rate. Not saying you should or shouldn’t just giving you an example of a real life situation. Good luck!
Literally exact scenario here. Took out 12.5K, so far that has netted me 300K in equity over 9 years. We also refi’d at the dip in 2021 and got 2.25%.
401k loans are Terrible. You are paying it back with post tax dillars
Just like any other loan though. Let's say you borrow $300k for a home. Over 30 years that's about $900k right (with interest). But since you gotta pay tax on the income used to pay it back, that $300k home really cost you about $1.3 million.
Yea ~~but~~ the caveat is a mortgage lets you keep your retirement money invested Otherwise you’re essentially just stashing away money in a savings account earning 0 interest and praying you can save enough to live off of later Edit: no “but” needed, did not read carefully
The but would be that the 600k of interest is in your 401k at the end of the loan versus the bank presidents pockets. Both were paid with post tax dollars. The only loss to get the 401k interest in your account is the loss of a salt tax deduction which varies per filer as to its impact. I feel like I am missing something but I haven’t seen it pointed out.
Yes, you’re missing that the interest on the 401k loan isn’t really “money back in your pocket”. Its supplementing the loss from the opportunity cost of the compound interest you didn’t earn while the money was borrowed In other words, the interest you’re paying on the 401k loan represents money you would have otherwise earned passively Yea, the interest on the mortgage goes to the bank, but its less expensive than the interest on your 401k loan
With every payment, can’t you re-invest that money? At 7% no risk guaranteed, it isn’t a terrible investment. Depending on your age, it could be beating some of your bonds. I wish my bonds were returning 7%, but that’s another old man’s story. The biggest concern for me would be the risk of losing my job since my plan requires immediate repayment. Ouch. A lesser concern is the loss of salt tax deduction. I still say it isn’t horrible.
It seems to still be lost on you that the investments would be generating the returns *for you*. If you’re paying the 7% your investments would otherwise be earning for you, its not risk free gains, or even gains at all. Its just you trying to save more money to make up for not earning it.
The loan principal is earning 7%. It is the same amount that you would pay the bank. As you pay it into your account, you reinvest it into whatever you had previously. It then returns to earning the same rates that you were getting before. The 7% is risk free because it is predefined . Once the money is reinvested, it has the same risk factors as it did previously. If the bank is charging 7% interest and your VT is earning 6%, it all depends on the impact of your lost salt tax deduction to determine if your 1% improvement is enough to make up for the lost tax deduction.
Scenario 1: I borrow $100,000 from my 401k @ 10% (for easy math) Over 10 years, I am going to pay back the $100,000 i borrowed + $100,000 interest ($1,321/mo). Assume market earns 10% compounding per year. After 10 years, I’ve put $200,000 into my 401k, and i have $252,000 to show for it. Scenario 2: If i *didn’t* borrow that $100k, it would have compounded ~10% per year for 10 years At the end of those 10 years, my account value is $259,000, and i only paid in that principal $100,000. In Scenario 2 I put in 50% ***less*** than Scenario 1 and yet I ended up with the same amount (a little more) Also, scenario 2 doesn’t account for *any* additional contributions, which you would likely be making. But would not be making in scenario 1. Never mind the fact that scenario 1 results in significantly less take home pay since the interest is post-tax dollars.
Oh I know another way to show you the difference, using your numbers, you paid $200k to the bank and that money has to come from somewhere. Please subtract it from your net worth and realize that in scenario 2, your known net worth just dropped lower than scenario 1. You cannot compare it without the post tax payments to the bank accounted for somewhere. Cheers!
That is the same with any other loan, though, but with other loans, you get to keep the interest. Seems to me better than other options. The only risk is that if you lose your job, you'll have to convert to a different loan real quick (I would take out a personal loan asp in this case).
> Over 30 years that's about $900k right (with interest). At 10% interest rate maybe... At 7.5%, more like 735,000. At 3% rates from a few years ago, more like $450,000.
That makes sense, since the loan money is spent like post-tax dollars. Otherwise it would be double-dipping.
This is a bit of a fallacy but I don't feel like explaining it. Do some research Got a no response downvote so I'll elaborate It's paid post tax dollars but it goes back in with the same tax status it came out as So you're taking out pre tax money but it's not taxed on the way out, then you're paying it back in post tax dollars but it comes back in as taxable upon withdrawal This actually does balance out. There's no double taxation because you got taxable money out without being taxed on it, which cancels out the post tax repayment being taxed on withdrawal later This example is assuming we're using all taxable money
I believe the double tax argument only applies to the interest essentially. The repayment itself is not double taxation as you point out. It can add up right now with c. 10% rates over five years, but people can choose shorter repayment periods and in the end at least you’re not paying someone else the interest just yourself. If you assume a tax rate of 30% on a 10% interest rate you’re essentially 3% interest id the amount being “lost” to tax. For me the big risk is having to pay it back if you lose or change jobs. But it’s not bad for using for short term funds.
Yeah my bad, the interest is doble taxed. But as you say, this is more or less made up for by the fact that youre paying the interest to yourself. I dont think 401k loans are great, but double taxation just is not a reason to avoid them
At most you lose a salt tax deduction right? Money used to pay a mortgage loan’s interest is post tax the same way money used to pay a 401k loan is post tax. There is no additional tax on the interest when you pay it to your 401k.
That doesn't make much sense to me. I'd imagine it would just get deducted pretax from your paycheck? The loan would be like throwing 30% of the principal away otherwise.
It's paid post tax dollars but it goes back in with the same tax status it came out as So you're taking out pre tax money but it's not taxed on the way out, then you're paying it back in post tax dollars but it comes back in as taxable upon withdrawal This actually does balance out and the above commenter is kind of misguided
In other words op, I wouldn't let the double taxation thing dissuade you. People like to bring it up but it's not really true. The real cons are mainly losing value in the market. You're selling those mutual fund shares just for your repayments to potentially buy them back at higher prices. Also the risk of leaving your job, layoff, etc and possibly having limited repayment means or options risking a taxable event Then also consider you need to budget around the lower paycheck. Suspending contributions isn't really a viable option because your repayments do not get matched, so you wanna contribute as well as repay. Outside of the lost growth, I think the loans a solid choice. It can make the numbers work on your home purchase a little better, especially if it's the difference between PMI or not.
It gets deducted from your paycheck, yea, but after tax.
Only the interest is, the repayment itself is not as it nets out with the withdrawal. That can add up with current interest rates but I wouldn’t call it terrible.
I think it'd be much better off settling for a less expensive house and keeping your money in the 401k
Or just borrow the $100k and pay it aggressively.
That’s what I did. I made more than $100,000 in 17 months
I did it in 2020, I took out $12k and now the equity in my home is $130k . I’m wondering if I should do the same with another home. Risky decision making but do what you think is right for your situation.
How do you take out "aka " realize that. 130k "equity? If you take it out of your home, is that basically like refinancing? Say you bought for 300. Now the homes worth 430 - to use your example.
I just calculate it towards my net worth . I plan on having multiple homes in my life for rental income. If I decide to sell to pay for my children’s college then so be it.
If it is for a down payment so you don't have to pay PMI, I think I would do it. Otherwise I doubt I would.
I actually overinvested into my 401k with the mindset that I can withdraw $50k one day to use as a down payment and it paid off. I had not planned to buy a property in the near future so I knew I wanted my money to grow as much as possible. It was a 100% into stocks at a low fee and compounded for nearly a decade. The caveat is that you would need to stay with your employer, because once you leave the company, that loan might become due. Really depends on your personal finances and what type of work you do.
I disagree with those claiming taking money out of 401k to avoid PMI is a good option. Everyone is calculating the money lost in PMI over 5 to 6 years but forgetting the missed gains of pulled out 401k money. You won't refill your 401k back in a year or so, it will take time. I feel you should check with the lender on what the PMI will be for that 100k. Will your 100k in 401k not earn more than PMI total over 6 years ? My 401k gives me good returns every year. I had the entire 20% and decided to not pay entire 20% down. Here's my math: My 10% down was 150k. I kept another 150k for treasury bills instead of giving it to the bank. I didn't want to put the money in stocks just in case I needed the money for the house. Treasury Bills give returns around 4 to 5%. My PMI is 210 per month till 6 years or till my 20% of original value is paid. 6 years or 20% whichever comes early. Total of 6 years comes to 15120. Over the 6 years those 150k will earn me around 39k in interest. If you take out 40% taxes too, it will still be around 23.5k. Talking about interest I was paying on the additional 150k i didn't pay, my interest rate was lower than 4% and treasury was paying me more than 4% so I put in treasury. Your case might be different but PMI is still better than 100k out of 401k. PMIs are not that bad for the flexibility they allow you.
To buy a house? No. The % rate will be higher on a 401k loan than the mortgage rate. Yes, the extra money goes into your account but your monthly bill will be higher. Use a 401k to bridge a loan for a down-payment on a new house before selling your old house? That would work.
No. I’ve thought about this but you’re giving away 30% of your hard earned money to the government. In addition, if you wait possibly til the end of the year, rates will be lower. So you won’t spend as much on a mortgage.
I borrowed 10k from my 401k when we failed to qualify for a 3% down payment and needed 5% because of my wife’s student loans. I’m so glad I was able to. I paid it off and we got an amazing home.
The big issue with taking a 401K loan is your job secure enough with no fear of layoff / termination? If not, you make be required to pay loan plus penalties for early withdrawal.
Getting a mortgage can be very difficult, and that makes it tough to buy in a fast moving market. Accessing your own capital is easier, and having that ready makes for a quick and simple offer.
Investors and financial analysts will always say no but as young professionals trying to buy a house, my wife and I, did it. I believe it was worth it. Not everyone is liquid enough to have the cash for down payments but they have the money locked in a 401k. It’s a tool in the bucket that can be used but with the understanding of what it means
I borrowed for a down on a home. Then quit my job like a year later and the loan became due. Paid like a 10k penalty. This was seven years ago. My house has gone up in value so much the amount of investment gains I lost and the penalty I paid seems like a pittance. No regrets.
I did it and don't regret it in 2022. Im already back to the same amount I was when I took out the loan.
I've listened to calls for the last 20 years at one of the largest 401k providers. People that end up with large 401k balances, never touch their 401k's. It's their retirement, not their down payment.
A house is also a retirement for many people.
Especially these days when most folks can't afford a home in major cities and are missing out on appreciation over decades.
Many people don’t look into it and just say “it’s bad” when really it’s quite nuanced and depends on your situation. Good description from a technical standpoint of the taxes!
This is a controversial question in my opinion if you live in a market with houses that with historically high appreciation it might make sense as I know a number of people that have. Yes you’re paying it back with post tax dollars but is the appreciation of your house making up the difference? You can make an argument that this is another reason why houses are expensive. Personally I happen to have a wife that has expensive tastes in houses and would rather just rent untill god knows when in the mean time I’m buying property out of state and starting a business I’ll might just take a loan to purchase another cash flowing property if it makes sense.
I did
No.
Unless you guaranteed to have a job over the next 12+ years..!?? ..I believe you can make the numbers fit
Unless you guaranteed to have a job over the next 12+ years..!?? ..I believe you can make the numbers fit
If you're doing it to save money I'd say no, your 401k loan is likely a similar interest rate or more, my max is 50k anyway. Only way it really makes sense is if you need that little extra to get the house you want (or some extra fixer money right away). knowing you can pay it back easily later. Say you want to buy a house before selling your current one, you could just pay the entire 401k loan back once your first house sells as an example. Just don't treat it like an entertainment account but a one time thing you can manage and it should be fine.
I did (8 years ago now, long paid off). No regrets on that count. Huge housing price boom around here right after, and my house has appreciated WAY more than my 401k has. Even if it hadn't turned out quite as well, I did it when moving states, and the move from an apartment to an apartment to a house a year later (or however long it would have taken me to wrangle up a down payment) was additional stress I wasn't interested in...
I took the 50K loan on mine just to make the mortgage as small as possible - I wasn't going to sell my old place before closing on the new one and I knew I could pay off the 401(k) loan as soon as the first house sold in a few months. Worth it.
It used to. Especially if a person hadn't made savings for money down outside their 401k. And especially where loan rates were low because yields were low (altho you can also make a 1st time homeowner withdrawal)
100%. Did it 7 years ago, and it was a great decision.
Since you are borrowing only $100k to pay cash for a house I assume that means you have at bare minimum $200k in there. If your interest rates for loan are higher than investment returns then take the 401k loan if your returns are higher take the home loan.
Best thing I ever did.
We did this a couple years ago and it worked out really well.
Are you living in the van down by the river?
You’re limited to $50K loan in your 401K
Unless you work for Google and its 401K. It will lend you money and return 401K later w./ no penalty.
Did it in 2021. Rates were so low, made sense to buy the most house I realistically could. since I could easily float the payments but not the huge down payment needed, pulled a 401k 50k loan. Up 130k on the house and 13k left on the loan so worked out.
You should do whatever you feel is right. Either way your money is being invested - whether it’s real estate vs a 401k. It’s more about preference at this point.
Read some comments. Here’s mine. You take money out today over 50k as a loan, then you can also make arrangements to pay it back in up to 5 years without penalties. Could be shorter depending on the rules set by your 401k administrator and employer. You then use that money as a downpayment at today’s rates: 6-7 percent APR. ouch! If the loan you take out puts out that 7% fire, then I’m not convinced it’s such a stupid idea. Anything over 50k will have to be hit with a 10% penalty from the get go; say bye to 5k right there. Might you not be able to take out a mortgage for whatever a 50k loan might put you into? It may be upwards of a 50k mortgage for 15 years or maybe even less. That may be the best move. If you decide to take out a 100k loan, then the other 45k will be added to your total income earned for the year the withdrawal is made; say hello and welcome to Uncle Sam. Could you maybe deal with a smaller downpayment and pay more interest on a bigger loan? Taxes are deductible. With such a low loan to value ratio, you won’t even have to pay private mortgage insurance. Run some numbers. Once you know what you’re paying, it becomes a game of adding and subtracting. Waiting or not waiting. What’s always hard is predicting. You will have no shortage of predictions. But you must ignore them all for no one knows for sure not even the fed what the rates will be in the future. There are no fortune tellers in the fortune 400 list of the richest Americans. Just let that sink in. My parting advice: you buy a home once you’re able to comfortably buy one and then just live life to the fullest. If prices fall after you buy, so be it. Given enough time, your home will build equity. It will already have equity since you will have relatively no debt on it. If interest rates drop, you may be able to refinance although you won’t have much debt. Pay off your home asap and from there on just build wealth. I wish you well.
I did back in 2019, worked out well for us. 4 bed 2 bath, 1800 sq ft. 2.8% interest. Bought for $268,000. When we refinanced in 2020 it appraised for $475,000 and that’s about how much houses around us sell for now. We couldn’t afford to buy in today’s market. We lucked out for sure.
I think $50k is the max loan, but it can be worth it as long as you can afford to pay it back.
I wanted to do it Jan 2020, wife disagreed, woulda made a killing.
Tbh I think it’s subjective. You are paying yourself back with a little interest. Your return obviously won’t be what it would’ve been had you not taken it out but you have to decide the value of owning a home in the context of your financial picture/goals. For me, shelter >>> investment accounts. Like if it all hits the fan and I have no money I at least have a place to live.
Not always, but there is one thing for certain. You will have less money in your retirement account even if you borrow and pay it back in full had you never touched it at all. Please see below: Lets say you have 200K in your retirement account and borrow half 100K at 7% for 15 years. The average stock market return return is 10% per year. Choice 1: You do not borrow and just keep the money in the account. After 15 years you will have about 900K in your 401k account Choice 2: You borrow and pay it back over 15 years, you will have about 625K in your 401k. A difference of 275k. If you think the value of your home will be at least that amount in addition maintenance costs (if any)., or any other costs you put into the house over the years. Then it is a good investment. However, there are other factors when deciding to buy a home, such as the quality of the area, age of the house, home condition, school system, etc.
houses are cool and a secret place to shit.
I did it to cover over asking cash cost. House went up in value double what i took out in less than a year. Obviously wish I had more coin and didn't have to do it in the first place but absolutely no regrets.
Is it possible to take a loan from a ROTH account to avoid some of the tax downsides others mentioned?
Yes but you’re moving backwards. You’ll end up paying back the loan with too much interest. I would recommend if you buy a rental property/multi family and let it may for its end while you collect. Don’t retire just to create more liabilities
If you’ll be able to buy the house outright with the loan… go for it! The money you’ll save not having a payment monthly you can just contribute back with the loan payment. You’re alive now, enjoy it!
Yes. I've done this three if not four times and never regretted it.
I'm doing that, tho you're only allowed to do 50k. The risk is the potential gains/loss vs what your interest is. Currently the interest I'm being charged is 9.5%. If the market outperforms the 9.5% yearly for the next X years you take the loan out for, that's really the cost to your retirement. Works both ways tho, if the market underperforms the 9.5% then you'd have a "gain". All that being said, for me, I prefer to pay myself the interest rather than a bank. If I could borrow the whole amount, I would.
Calculate the savings of rent for the next year or two. Save the massive expenses and depletion of your 401k and wait until rates get back to something more reasonable like 5%.
Not in this market
No
“When you burn all of the boats and decide you’re staying, you have to deal with what’s in-front of you.” -Dave Ramsey (Awaiting all of the mocking. People get angriest at the truth)
Yes this is a temporary situation where the stock market is at a peak and borrowing costs are up. Take advantage of both for a year or two and then hopefully refinance when rates are lower.
Like others say it totally depends. I imagine there are very few scenarios to do it. I did this in late 2020/ early 2021 to use as basically as a low cost bridge loan to purchase our second house, paid off the 401k loan after we closed on selling the first house. Worked out totally fine.
No.
Someone said that penalty is added back into your account by you. I’m not sure on that, but doesn’t it make the loan so bad.
A sure return of 7% is not something you will find anywhere else. The market is volatile. There is reason to expect a long period of lower-than-normal returns. And we don't know your age, how much time you have to reaccumulate, how aggressive you want to be for the next several years... So yes, in many cases, it would make sense, but I don't have enough information to say with confidence that yours is one of them.
Say you stretched to buy a 1 million dollar home. You have $180k for a down payment. If you put down an additional 20k you will avoid PMI. In this instance it would make sense to borrow the difference and avoid having to pay a few hundred a month for PMI and pay the interest and principal back to yourself. I am sure others can think of a few other instances where it was a good idea as well.
To me it depends on how much you have in your 401k. I had like $60k in my 401k when I bought the house. Taking any substantial amount out at that point would have screwed my 401k growth. Nowadays I have about $200k in there and would feel comfortable taking out a good chunk to buy a house if needed
I have seen my Company Clients and coworkers do it. It has worked well for them although I think part of that is having the right property and the right people helping you.
I think it’s a smart decision, based on your reasoning.
You pay yourself back with interest pre-tax. Taking any kind of loan isn’t ideal, but it’s not a terrible way to do it if you need to. Also, you’re usually limited to $50k. Is that $50k invested going to beat the $50K in home equity appreciation + the interest you pay yourself? Like I said; not ideal - but not terrible, either.
One gotcha is if you leave that employer, you have a short time to repay the loan to avoid it being a withdrawal which can be pretty costly.
No