Having trouble deciding to use 401K for down payment......................

[Daguy]

I have a 401K that's about 10,000 and very volatile. I wonder and I am asking if you guys and gals think its a good Idea to use a loan from this for my down payment. I plan on using the tax credit 7500 to pay the loan.

I am looking to buy in the 150,000-200,000K range. FHA 3.5% down.

Is this a good move? Will the appreciation of the house over the next 10 years be able to match the appreciation fo a 401K about 11%.

Has any one done this yet and how did it work out?

Any feedback would be greatly appreciated!

Thanks.

[cobaltnv]

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@Daguy wrote:

I have a 401K that's about 10,000 and very volatile. I wonder and I am asking if you guys and gals think its a good Idea to use a loan from this for my down payment. I plan on using the tax credit 7500 to pay the loan.

I am looking to buy in the 150,000-200,000K range. FHA 3.5% down.

Is this a good move? Will the appreciation of the house over the next 10 years be able to match the appreciation fo a 401K about 11%.

Has any one done this yet and how did it work out?

Any feedback would be greatly appreciated!

Thanks.

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I would recommend against using retirement savings for a downpayment if at all possible. This is particularly true in markets that are down significantly. Taking out $$ now will in all likelihood result in your missing out on the recovery (which will eventually happen). Market recoveries account for a significant portion of the overall increase in $$ value of investments. Of course if you got lucky and paid back the loan before the correction then you would make out well.

I would also caution against comparing house appreciation with 401k gains. That is the kind of thinking that landed us into the current financial mess. House appreciation is only important if you are selling and moving somewhere with much lower appreciation during the same time period. IMO

Good luck and best wishes!

Cheers 

[Lel]

There's no way to predict how much your 401(k) or your house will appreciate over the next 10 years.  You shouldn't rely on your 401(k)'s past performance as predictor of future results.

The question of whether to take a loan from your 401(k) has been the subject of debate on these boards in the past, with some very strong opinions expressed on both side of the issue.

My opinion is that if possible, you should try to avoid dipping into your retirement savings.  Like was already mentioned, you could miss out on a significant recovery in the stock market.  I do not believe the appreciation in the housing market is going to be as robust, but this is going to be somewhat dependent on where you live.

Some people are keen on 401(k) loans because "you pay interest to yourself, not to a bank".  That much is true.  However, just keep in mind that the money that you pay back into your 401(k) is after-tax income - that is, it has already been taxed.  When you start taking distributions from your 401(k) at retirement, you get taxed on this income again.  The money you pay back is double-taxed.  So, it's not as great a deal as it seems on the surface.

Having said that, I will certainly agree that there cases in which a 401(k) loan makes sense to the individual borrower.  You'll have to decide what you consider to be the better choice in your case.

[demi]

I took a loan out when I bought my house, not for the down (I closed out an old deferred comp account for that) but to pay off back taxes.  In my case, I think it worked well, it was before the market went down, and now the money I am repaying is buying in low.  I am paying 8%.  Not sure if it is a good deal for everyone, but if its what it takes to get into the house, you just need to weigh the cost/benifits.  I am in an area where housing prices have dropped significantly, and I ended up with a beautiful brand new home that I hope to stay in, its absolutely perfect for me (as long as I can climb the stairs !).

[DallasLoanGuy]

if you are paying yourself back with the tax credit, what does appreciation have to do with it?
i think it is a good plan. maybe not for everyone, but a good way to get into a home.

[DallasLoanGuy]

cobalt makes a good point about taking money out at the lows and putting it back at the highs. so there is the risk