topic Re: Borrow from pension/401k for down payment? in Mortgage Loans

Borrow from pension/401k for down payment?

Anonymous — Sat, 21 Feb 2015 22:45:03 GMT

My accountant says it is a bad idea because the money would build more if staying put. LO at bank says that it is misinformation and the accountant is wrong. I do trust my accountant and his advice, but now I do not know what to think. I can borrow more than enough for my down payment and pay back to myself (over 30 years) at a decent rate. I can only borrow up to 50% or $50,000 of pension. That being said, I will still have plenty invested. My wife and I are in our early thirties so ample time to build on. And getting a bigger tax break I could pay back to the pension loan much faster so the money would be there to build on. Im only talking 3.5% of $250,000 which is $8,750. Would it be smart with the housing market, and what I have stated above to use it, or leave it? I have no problem saving, but could take some time. And we want to stop pi**ing away money on rent.

Re: Borrow from pension/401k for down payment?

Glenn_S — Sun, 22 Feb 2015 00:49:17 GMT

Your accountant is right, in that when you take a loan from invested funds, you take those funds out of the coumpounding of interest during the time the funds are tied up in the loan. In essence, the funds are the collateral the same as your house is collatral for your mortgage. HOWEVER, the interest you are paying on the 401k loan is being paid back into your account. So its not like you aren't getting gains on the money, it just may not be as much as if you didn't tie it up with the loan. We are paying ourselves 4.25% which is less than the 7-10% gains we typically make on the money, but its better than zero.

Whether it is a good thing to use 401k funds for a DP is up to you. We are doing the same thing because we were aware of the relatively minor loss in gains, but wanted to move on a house now with rates so low.

BTW, don't let Loan Officers give financial advice, they know their business, but a CPA will tend to steer you better. Just like most LO's know very little about credit and what affects it.

Re: Borrow from pension/401k for down payment?

jfg1022 — Sun, 22 Feb 2015 02:14:01 GMT

We withdrew $50K from my 401K for our closing costs and reserves. I am in my mid 30s and have a substantial amount in my 401K so I'm not worried plus I am paying the interest back to myself. I know a lot of people poo poo taking out loans from your 401K but it's what's good for us.

Re: Borrow from pension/401k for down payment?

oscar_actuary — Sun, 22 Feb 2015 02:22:56 GMT

just don't lose or quite your job, unelss you can pay back the loan immediately, or pay the 10% penalty for early withdraw

Re: Borrow from pension/401k for down payment?

skigirl916 — Sun, 22 Feb 2015 02:37:31 GMT

I took out money from my IRA - not a loan, an early payout. It's worth it to me. That 10K is worth more in my house than in my IRA given how home prices are rising.

Trick is, roll the 401K distribution into an IRA so that you can spend 10K of it on your home purchase, then you don't have to take the 10% penalty, just the normal taxes.

Re: Borrow from pension/401k for down payment?

Anonymous — Sun, 22 Feb 2015 05:12:49 GMT

Thanks for all the input. I think I will feel better now if I need to pull money from the pension. I appreciate all the tips.

Re: Borrow from pension/401k for down payment?

Glenn_S — Sun, 22 Feb 2015 06:39:24 GMT

@oscar_actuary wrote:
just don't lose or quite your job, unelss you can pay back the loan immediately, or pay the 10% penalty for early withdraw

Not all plans are structured that way. My previous job allowed you to keep paying the loan as long as you kept the 401k in their plan.