401K loan for down payment?

[Watchmann]

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@Anonymous wrote:

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@webhopper wrote:

I used a 401k loan for my down payment, and then when I got my bonus in march. I paid off the loan and took out another loan, which was used to pay off 2 vehicles. One of the vehicles was financed at 22%, my fiance had some credit issues in the past, so his rate was terrible!  I figured that I wouldn't gain 22% on my money, so it was better to gain 5.5% than to lose 22%

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Sounds like the interest rate will be one of the most important factors for me to consider. Would a personal loan at a lower interest rate make more sense?

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Probably not.  A personal loan interest rate will almost certainly be higher than a 401k interest rate.  The big advantage of a 401k loan is it more or less 'off the books' as it doesn't impact your credit report or score. 

[Anonymous]

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@Watchmann wrote:

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@Anonymous wrote:

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@webhopper wrote:

I used a 401k loan for my down payment, and then when I got my bonus in march. I paid off the loan and took out another loan, which was used to pay off 2 vehicles. One of the vehicles was financed at 22%, my fiance had some credit issues in the past, so his rate was terrible!  I figured that I wouldn't gain 22% on my money, so it was better to gain 5.5% than to lose 22%

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Sounds like the interest rate will be one of the most important factors for me to consider. Would a personal loan at a lower interest rate make more sense?

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Probably not.  A personal loan interest rate will almost certainly be higher than a 401k interest rate.  The big advantage of a 401k loan is it more or less 'off the books' as it doesn't impact your credit report or score. 

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I also believe that personal loans cannot be used for some/all closing costs and/or down payments, depending on the loan. Again, a 401k loan can make sense right now, but less is more.

Your best to worst options for down payment/closing costs:

1) Seller contribution (i.e. seller flat out pays some of the closing costs. Won't cover everything, but can help a lot)

1.5) Down payment assistance programs (check your city/state for basically free cash, but there are income restrictions)

2) Savings/cash out of pocket (incl. gift funds, selling of non-appreciating assets, etc)

3) 401k loan/selling of appreciating assets ("Seasoned" IRA funds, etc)

4) 401k hardship withdrawal

I'm sure I missed something in that list, so hoping others can suggest corrections.

EDIT: Added 1.5

EDIT 2: Added IRA funds to #3 as per Webhopper's advice

[webhopper]

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@Anonymous wrote:

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@webhopper wrote:

I used a 401k loan for my down payment, and then when I got my bonus in march. I paid off the loan and took out another loan, which was used to pay off 2 vehicles. One of the vehicles was financed at 22%, my fiance had some credit issues in the past, so his rate was terrible!  I figured that I wouldn't gain 22% on my money, so it was better to gain 5.5% than to lose 22%

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Sounds like the interest rate will be one of the most important factors for me to consider. Would a personal loan at a lower interest rate make more sense?

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A lot of lenders won't allow you to borrow the funds for closing, unless its secured by your own assets such as your car or your money.

On the after tax repayment of the loan...  Its my understanding that the money that goes into the 401k originally is not taxed...  its a tax deferred contribution that you pay taxes on later in life, as opposed to a roth IRA which is taxed up front instead of on the back end.    If you're already going to be paying a loan with after tax dollars, its not much different to pay the loan back to yourself.

Some 401k plans offer real estate loans with a 15 yr term.  I'm not sure how these work.  Mine offers it, but I've never used it.   I set my repayment up to be done in 3 yrs.

[webhopper]

4) 401k hardship withdrawal

I'm sure I missed something in that list, so hoping others can suggest corrections.

EDIT: Added 1.5

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I would like to add on #4 that if you have funds in a Roth IRA, you can withdraw those funds that have matured (been in there for 5 yrs) without penalty if they are used for qualifying higher education costs for you or your qualifying dependent, or for the purchase of a principle residence WITHOUT paying penalty fees.  You'll still be taxed on the withdrawel, and the withdrawel may move you into a higher tax bracket.   

This would best be discussed with your Plan Administrator or with your tax pro.

[Anonymous]

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@Watchmann wrote:

Usually you are limited to 1/2 of the 401(k) value or $50,000, whichever is less, and the payback is usually no more than 5 years.  So just be aware you'll have a pretty hefty loan repayment on the amount borrowed PLUS the new mortgage loan payment, plus taxes/insurance.  It may work for you, but if you don't have the funds for a down payment without having to borrow them I'm not sure it would be a good idea.  It would be better to save the amount needed for the down payment.

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Thanks! I actually do have savings for a down payment but if it's enough will depend on how much of a down payment, as well as other factors like closing costs, etc. My goal is to be frugal and pinch every penny I can over the next few months.

[Anonymous]

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@Watchmann wrote:

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@Anonymous wrote:

---

@webhopper wrote:

I used a 401k loan for my down payment, and then when I got my bonus in march. I paid off the loan and took out another loan, which was used to pay off 2 vehicles. One of the vehicles was financed at 22%, my fiance had some credit issues in the past, so his rate was terrible!  I figured that I wouldn't gain 22% on my money, so it was better to gain 5.5% than to lose 22%

---

Sounds like the interest rate will be one of the most important factors for me to consider. Would a personal loan at a lower interest rate make more sense?

---

Probably not.  A personal loan interest rate will almost certainly be higher than a 401k interest rate.  The big advantage of a 401k loan is it more or less 'off the books' as it doesn't impact your credit report or score. 

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That makes sense. I actually thought of that after processing all of this info today.

[Anonymous]

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@Anonymous wrote:

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@Watchmann wrote:

---

@Anonymous wrote:

---

@webhopper wrote:

I used a 401k loan for my down payment, and then when I got my bonus in march. I paid off the loan and took out another loan, which was used to pay off 2 vehicles. One of the vehicles was financed at 22%, my fiance had some credit issues in the past, so his rate was terrible!  I figured that I wouldn't gain 22% on my money, so it was better to gain 5.5% than to lose 22%

---

Sounds like the interest rate will be one of the most important factors for me to consider. Would a personal loan at a lower interest rate make more sense?

---

Probably not.  A personal loan interest rate will almost certainly be higher than a 401k interest rate.  The big advantage of a 401k loan is it more or less 'off the books' as it doesn't impact your credit report or score. 

---

I also believe that personal loans cannot be used for some/all closing costs and/or down payments, depending on the loan. Again, a 401k loan can make sense right now, but less is more.

Your best to worst options for down payment/closing costs:

1) Seller contribution (i.e. seller flat out pays some of the closing costs. Won't cover everything, but can help a lot)

1.5) Down payment assistance programs (check your city/state for basically free cash, but there are income restrictions)

2) Savings/cash out of pocket (incl. gift funds, selling of non-appreciating assets, etc)

3) 401k loan/selling of appreciating assets ("Seasoned" IRA funds, etc)

4) 401k hardship withdrawal

I'm sure I missed something in that list, so hoping others can suggest corrections.

EDIT: Added 1.5

EDIT 2: Added IRA funds to #3 as per Webhopper's advice

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Thank you! I'm going to try to negotiate the seller paying at least part of the closing costs, which should help. I'm also hoping that I'll enough in savings. If not, I'll consider the 401K. I also have a IRA. So, that may be an option.

[webhopper]

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@Anonymous wrote:

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@Anonymous wrote:

---

@Watchmann wrote:

---

@Anonymous wrote:

---

@webhopper wrote:

I used a 401k loan for my down payment, and then when I got my bonus in march. I paid off the loan and took out another loan, which was used to pay off 2 vehicles. One of the vehicles was financed at 22%, my fiance had some credit issues in the past, so his rate was terrible!  I figured that I wouldn't gain 22% on my money, so it was better to gain 5.5% than to lose 22%

---

Sounds like the interest rate will be one of the most important factors for me to consider. Would a personal loan at a lower interest rate make more sense?

---

Probably not.  A personal loan interest rate will almost certainly be higher than a 401k interest rate.  The big advantage of a 401k loan is it more or less 'off the books' as it doesn't impact your credit report or score. 

---

I also believe that personal loans cannot be used for some/all closing costs and/or down payments, depending on the loan. Again, a 401k loan can make sense right now, but less is more.

Your best to worst options for down payment/closing costs:

1) Seller contribution (i.e. seller flat out pays some of the closing costs. Won't cover everything, but can help a lot)

1.5) Down payment assistance programs (check your city/state for basically free cash, but there are income restrictions)

2) Savings/cash out of pocket (incl. gift funds, selling of non-appreciating assets, etc)

3) 401k loan/selling of appreciating assets ("Seasoned" IRA funds, etc)

4) 401k hardship withdrawal

I'm sure I missed something in that list, so hoping others can suggest corrections.

EDIT: Added 1.5

EDIT 2: Added IRA funds to #3 as per Webhopper's advice

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Thank you! I'm going to try to negotiate the seller paying at least part of the closing costs, which should help. I'm also hoping that I'll enough in savings. If not, I'll consider the 401K. I also have a IRA. So, that may be an option.

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Is your IRA a Roth or a Traditional?

[Anonymous]

Thanks so much for the wealth of info! I keep joking to my friends and family that I'm going to be a financial/credit guru after all of this is done. Maybe I won't be an expert but I'll definitely know FAR more than I did before I began this journey!

[webhopper]

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@Anonymous wrote:

Thanks so much for the wealth of info! I keep joking to my friends and family that I'm going to be a financial/credit guru after all of this is done. Maybe I won't be an expert but I'll definitely know FAR more than I did before I began this journey!

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I'm glad I'm able to help   My sister asked me for advice the other day, she's 24, has been working for 2 yrs now, has 5k saved in a regular savings account, but doesn't know what to do with it.  I advised her to open a roth for the reason being is that if she wants to buy a house in 5 yrs when she's more settled, she'll be able to pull her funds and hopefully they will have grown