401k and down payments..trying to make a decision

[Jalapeñomel]

Is this always a terrible idea or can it be a good way to do a first time down payment? We are trying to buy a home, and we are exploring all our options for down payment.  We do qualify for down payment assistance through the state program for first time homeowners.  We can do a down payment, but we are thinking of upping our down payment to lower our mortgage, and this is something we *may* consider (although we do realize that this may not actually payment, just lower what we owe the bank). 

[Deleted]

I think you are asking whether borrowing from your 401k is a good idea in order to increase the down payment amount on a home.

If that is correct, I strongly urge AGAINST dipping into your 401k for anything other than a very, very dire financial emergency. Even if you were facing bankruptcy, I'd suggest you explore bankruptcy before touching 401k assets, which are often protected in bankruptcy.

Here is one of many articles that highlights some of the reasons to keep your retirement assets focused on retirement. www.investopedia.com/articles/retirement/06/eightreasons401k.asp

The best argument I have is a purely mathematical one, in that your 401k contributions were never taxed. It was a full dollar you earned, never touched by Uncle Sam, that you contributed, which is then growing and earning dividends on your behalf. After fees and penalties (which are not minor), you can "loan yourself" that dollar, which then is no longer earning on your behalf but put to some other use. At some point,you pay back that loan with post-tax (regular) income, which has been taxed at whatever rate, meaning you may need to earn MORE THAN a dollar to pay it back, to allow Uncle Sam his cut.

Will be curious to see other replies, but if you can afford a down payment without touching your 401k, that's a far better answer IMO.

FWIW, when we bought our house during the housing bubble we were strongly urged by real estate agents, lenders, and even co-workers to borrow from our 401ks on a path to home ownership. I'm so, so, glad we did not.

[goldengirlz]

This is a hard no for the reasons already mentioned.

What it comes down to a nutshell is that the downsides of withdrawing or borrowing from your 401k in terms of lost retirement earnings FAR outweigh any potential upside of a lower mortgage payment.

[imojoebunny]

I view 401K as an expense, granted, one you get back far into the future. You pay it now, so you can have it when you need it. You do not need it for a house, you need it when you retire. If you spend it on a house, it is a house, and not retirement savings, so essentially, IMO, you are living beyond your means. You will end up better off in the long run, if you either buy the house you can currently afford with what you have outside of 401K, or you wait and save for a bigger down payment. Either way, you keep saving in the 401K, unless you have some big life problem, like job loss, serious illness, that necessitates using it to live before retirement. Hard no from me.

[Jalapeñomel]

Mar 19, 2017 9:50:06 GMT -5 @juno said:

No! Don't do it. Very few people are oversaving for retirement, but you can post numbers if you want to confirm. Have you used a retirement calculator to see if you are on track? I assume you're talking about a withdrawal and not a loan, but even a loan is a bad idea. A withdrawal is a bad idea because you can never put that money back or regain that tax advantage. Plus, i've never heard about penalty-free withdrawals from a 401k for downpayments like from iras, so you may lose a ton in penalties. A loan is a bad idea because (a) you are losing out on growth of that money in you retirememt account and time is your best friend there and (b) often if you lose your job the loan becomes due immediately or it's treated as a withdrawal (with associated penalties and inability to put it back).

If you post budget, numbers for the mortgage you are thinking and your retirement info, people here are a great resource for reviewing the overall picture and brainstorming.

No, we are not talking about a withdrawal, we are talking about a loan. We would borrow, and then pay back principal and interests to ourselves instead of the bank.

Mar 19, 2017 10:06:46 GMT -5 goldengirlz said:

This is a hard no for the reasons already mentioned.

What it comes down to a nutshell is that the downsides of withdrawing or borrowing from your 401k in terms of lost retirement earnings FAR outweigh any potential upside of a lower mortgage payment.

I guess this is where I'm confused.  It's my understanding that we wouldn't actually wouldn't be losing any retirement money, unless, for some reason, we did not pay it back (and then the tax implications are also dire). 

[Jalapeñomel]

This is one of the links I was reading: www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp, and we would plan to repay it back within a year, possibly 1.5 years. 

401(k) Loans to Purchase a Primary Residence
Regulations require 401(k) plan loans to be repaid on an amortizing basis over not more than five years, unless the loan is used to purchase a primary residence. Longer payback periods are allowed for these particular loans.

Evaluating the use of 401(k) plan loans for home purchases is complex, and plan loans may not be as attractive as mortgage loans. Plan loans do not offer tax deductions for interest payments, as do most types of mortgages, home-equity loans and home-equity lines of credit. The impact on your retirement progress for a loan paid back over many years can be significant. It is best to consult personal tax and financial advisors before taking such loans.

"The Bottom Line
Don't let the financial media scare you away from a valuable liquidity option embedded in your 401(k) plan. When you loan yourself appropriate amounts of money for the right short-term reasons, these transactions can be the simplest, most convenient and lowest-cost source of cash available. Before taking any loan, you should always have a clear plan in mind for repaying these amounts on schedule or earlier.

[Jalapeñomel]

Also, I was always taught that this was a big no-no, but more and more people have told us in the last year or two that we should explore this option (as I guess you did too, @shoegal ...why do you think people are pushing this option?).

[dragon's breath]

I'll be the person who says "it's not always bad", but it's very circumstantially based to be considered "good" or "not as bad as usual".

After the tanking in 2008, I had an opportunity to buy a great piece of property where I will eventually build a house (where I hope to live before and after I retire). The owner was willing to finance the loan, but I still had to come up with a good-sized down payment.

I think the limit on a non-house purchase/build loan on my retirement account was $15k, to be paid back within 5 years.

Yes, you should just keep plugging on during a down turn (buy low, sell high and all that), but by the time I would have the money saved, the land would no longer be there.

So, I chose to take the loan from my retirement account. I paid it back early (I think I was paying myself back at 3%, which was better than a lot of the stock market at the time).

I have no regrets... My retirement fund has not suffered (I maxed until they changed the max from a percentage to a dollar amount, and then I just increased the dollar amount as I could). By every single calculator I can find, I am over funding my retirement (which led to a recent decision to lower my contributions in order to save more money to build the house on the property).

Right now, the land is worth much more than I paid for it and I've had several offers from people who want it (they don't make more land). My plan is to have this land for another 60 years (my family lives a long time).

I don't know that I'd take a loan out to get a smaller house payment if I could afford to buy the house now. Maybe if you thought house prices and interest rates were going to go way up before you could buy it?

My justification was that I was purchasing something that I was already saving/planning for, that would likely go up in value, and that I planned to still have in retirement, but I could sell if I needed to. There was also a limit for how long it would be available at a reasonable (to me) cost. And then I decided that it was worth more than the interest the money would earn during the years I had it "in my pocket" rather than in my retirement account.

If the markets had been doing well, and my retirement was earning more money, it would have been a much harder decision.

[dragon's breath]

A lot of the "never, ever, ever" advice also comes from things outside the actual loan...

The loss of compounding interest while the money is pulled from the retirement account.

The fact that many people (not all) will not only take out the loan, but then lower their contribution because now they have this loan they have to cover.

If something happens and you cannot return to work, you now have to repay the loan immediately, or take it as a withdrawal, including all the consequences that go with that.

A lot of people see it as an easy access to money, and don't stop with just one loan, really crippling their account and how much it can earn over time.

They turn to the retirement account because they have already use up their other options, and now they have multiple loans and are in a lot of debt.

When I took my loan, the only debt I had was my mortgage on my current house. No car debt, credit card debt, etc. I kept my contributions high. I didn't run back to my retirement account for another loan. One thing different for my case, was that banks weren't loaning money for land. If I had been buying a house, which a bank would loan money for, I probably just would have used the bank and paid it off as fast as I could.

[Deleted]

Mar 19, 2017 12:24:09 GMT -5 Jalapeñomel said:

Also, I was always taught that this was a big no-no, but more and more people have told us in the last year or two that we should explore this option (as I guess you did too, @shoegal ...why do you think people are pushing this option?).

I have a few theories on why people are pushing:

- Lenders and real estate agents are highly incented to do so, and even some of the smartest folks that I know who are in the real estate field recommend at least *considering* it.  Realistically, in the DC area, the path to home ownership can be very, very difficult, so I understand that perspective - particularly with folks in their late 20s / 30s who often just have a 401k to draw on in terms of substantive investments.  (The folks with lower ethical standards - well, we all know they just want to flip houses and make the commissions / write the loans!)

- Many people have DONE this.  You will find the actual percentage cited varies, depending on the source, but I recently saw an article citing about 1 in 5 that have taken a 401k loan - once someone has done this, it is easier to give advice to others as an option, because if YOU'VE done it, it can't be terrible!

It is also a legitimate source of liquidity, so it's not like it's a *crazy stupid option* like using cash advances on a bunch of credit cards or something!- it's just an option that comes with REAL costs and fees, which are often "glossed over" as opposed to really examined.  Many look at our 401k balances and see larger balances there than anywhere else, so its tempting to put that money towards something that has always (in America) been touted as "a good investment" - i.e., homeownership.

[lys]

I would take second part time jobs for a period of time and/or cut your current spending to boost your down payment fund. Do NOT touch your 401K funds.

[Jalapeñomel]

This is all very helpful, thanks!

[steamboat185]

We did it when buying our second house, but we knew we could and would repay the loan as soon as the first one sold. We paid a roughly $200 fee and paid the money back with interest in about 4 months. For us the only concern was if DH unexpectedly got let go because the money was due back within 30 days. For a first time buyer I'd be a bit concerned since you will have a new home and an additional "loan", but as a bridge loan I'd do it again.

[stretchad]

We considered it briefly. Our current place has a ton of equity we wanted to access for a down payment on a new place. But this market is so hot it's nearly impossible to sell current while simply buying a new one and not having an in between temporary living situation. So we considered accessing funds from 401k to buy something before we sold our current place and paying it back immediately once we sold our place and got the proceeds from the sale. Ended up not taking this route at all.

[Jalapeñomel]

Mar 19, 2017 14:36:28 GMT -5 mofongo said:

I feel pretty privileged that I didn't have to worry about a down payment. I used to think this was a horrible idea, but the truth is for a lot of people buying a home isn't possible without something like this. I'm a social worker, so a low paying field. I have several single social work friends who have done this in order to buy a house. I know this board is primarily focused on savings, retirement, etc, but that's just not everyone's reality.

I do think this is part of the reason we've encountered so many people who do this here.

Homes here that don't need a ton of renovations and are within a reasonable commute to the city start at about $400k plus +$13k annual property taxes). I would imagine that most middle class folks don't have $80k in savings in this VHCOL area.

At this point in time, we have to be out of our apartment by August 1st. If we rent, we have to have first and last months rent, security deposit, and a broker's fee, so if we look to rent a house/condo/apartment where we aren't on top of each other, we're looking $12,000 to move before the actual moving part.

[Jalapeñomel]

Mar 19, 2017 19:15:55 GMT -5 @juno said:

It sounds like you have enough for a DP without the loan though? Are you trying to avoid PMI or is this only to lower your payment? What sorts of rates are you seeing? They are still at historic lows i think. And deductible. A loan right now isn't costing you much. Without more info i don't see a reason to mess w/ retirement if you can get a loan from a bank at a good rate and payments you can afford. Then instead of madly paying down a 401k loan for the next 1.5 years on top of your mortgage payment, pay extra on your mortgage. Or put that into savings. Some debt can be a hedge against inflation, and having liquidity and not putting all your eggs in your housing basket can be smart.

We are looking to avoid PMI if possible, but it seems that may be the better of the two options if it comes to that.

I'm really just trying to research the hell out of every possible scenario; it is my nature to obsess.

[sadlebred]

This has only been glanced over--How stable is the job? If you are let go or leave for any reason, the loan repayment will most likely be due immediately/in a short amount of time. Could you come up with that kind of cash/other monies/credit to repay it?

[hbomdiggity]

My MM confession - we did it.

Is it the best option? No. But MM isn't the reality esp when it comes to HCOL.

When we bought our first home in HCOL, we needed 115k downpayment to get under the jumbo number. Except we only had 100k saved. We took the loan to make up the difference.

Juno is right -you still have to be able to afford the payment. For us it was an issue of not having cash to close vs monthly payment.

The worst happened in that H was laid off before it was repaid. We had 60 days* to pay back, but ended up longer because there was a way to roll it in to an ira or something. But we paid it back when our house sold, which sold for 200k more than we paid for it - less than 4 years later. So yeah, no regrets.

Sure, our plan had been to stay in our rental for another 6-8mos to get more saved, but the LL listed it for sale so we had to make a decision.

H continued to max his contribution while in repayment. It was also not a significant portion of his account, which continued to make nice gains (esp compared to mine since I get zero employer contribution).

ETA
*It was 60 days from his separation date, which was a few months after the day he was notified. At that point we knew we were relocating and selling the house.

[hbomdiggity]

Mar 19, 2017 21:05:55 GMT -5 sadlebred said:

This has only been glanced over--How stable is the job? If you are let go or leave for any reason, the loan repayment is due immediately. Could you come up with that kind of cash within a week or two?

This is not correct.

Obviously, review the repayment terms, but you have more than 1 week.

[mich1]

Mar 19, 2017 12:21:36 GMT -5 Jalapeñomel said:

This is one of the links I was reading: www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp, and we would plan to repay it back within a year, possibly 1.5 years. 

401(k) Loans to Purchase a Primary Residence
Regulations require 401(k) plan loans to be repaid on an amortizing basis over not more than five years, unless the loan is used to purchase a primary residence. Longer payback periods are allowed for these particular loans.

Evaluating the use of 401(k) plan loans for home purchases is complex, and plan loans may not be as attractive as mortgage loans. Plan loans do not offer tax deductions for interest payments, as do most types of mortgages, home-equity loans and home-equity lines of credit. The impact on your retirement progress for a loan paid back over many years can be significant. It is best to consult personal tax and financial advisors before taking such loans.

"The Bottom Line
Don't let the financial media scare you away from a valuable liquidity option embedded in your 401(k) plan. When you loan yourself appropriate amounts of money for the right short-term reasons, these transactions can be the simplest, most convenient and lowest-cost source of cash available. Before taking any loan, you should always have a clear plan in mind for repaying these amounts on schedule or earlier.

It would probably make more sense to throw that money at your mortgage and allow the money you have in your retirement account to continue to earn you money.

[audry80]

We did it!! We live in a HCOL area and needed a large down payment to get our offer accepted. Our monthly cash flow is high but we lacked the down payment funds and didn't want to wait another couple of years to save. We did it and have no regrets.

Such a MM failure

[niq]

If you can pay it back within a year/year and a half, I'm on team "it's not the worst idea in the world". Though ... if that's the case, why not overpay on the mortgage and get PMI removed quickly instead? Is there a minimum length of time before they will do that?

What percentage of your retirement accounts are we talking about here?

[dragon's breath]

Have you looked into an "80/10/10" loan? When I bought my current house, I had an "80/20" loan and paid off the 20% loan in a year or two (long before a balloon payment kicked in). Apparently you can't get those anymore (or they are hard to get), but I'm seeing that the 80/10/10 is kind of its replacement, just requiring that you have a 10% down payment, but you still avoid PMI. I would go that route before raiding the 401k in this case.

[mrsdoe]

I think this is robbing Peter to pay Paul. I'd be curious to see actual numbers. What are the actual #s here? We were pressured to do so by our agent when we bought and we refused and I'm glad we did. We put 5% down and saw the property as a short term (under 7 years) home so it was cheaper to pay a slightly higher rate than pmi. We ended up refinancing to a 15 year ahead of time anyways. Many of my friends have done 2 loans to either avoid pmi or get them over the jumbo limit (I'm hcol as well so I know it is difficult).

[Jalapeñomel]

Mar 19, 2017 23:25:17 GMT -5 dragon's breath said:

Have you looked into an "80/10/10" loan? When I bought my current house, I had an "80/20" loan and paid off the 20% loan in a year or two (long before a balloon payment kicked in). Apparently you can't get those anymore (or they are hard to get), but I'm seeing that the 80/10/10 is kind of its replacement, just requiring that you have a 10% down payment, but you still avoid PMI. I would go that route before raiding the 401k in this case.

i have not. I will look into this.

My job is pretty secure; I teach hard sciences in a high needs school in NYC.