Should You Borrow From Your 401k to Purchase a Home?
Because the down payment for a home purchase has significantly increased over the last couple of years. This is causing homebuyers to look at creative ways to obtain enough money for a down payment on a mortgage loan.
Should a home buyer consider taking money out of their 401(k) for a down payment?
Numbers from the St. Louis Federal Reserve show the median home price in America is $454,000. This can put buyers in a pickle when it comes to putting together a significant down payment to secure a decent mortgage with an affordable monthly payment.
Some experts say borrowing from a 401(k) can be helpful if it is used in an educated and reserved manner. For a home buyer just getting started in real estate that does not have the help of the profit from a previous home sale, leveraging funds from a 401(k) can make sense to help you get into a home.
There are different ways to use money from a 401(k) for home purchases most of these fall into two categories including a 401(k) loan or a 401(k) withdrawal. A 401(k) loan is the most advised by financial experts because it gives the most flexibility. This is because the loan will have a significantly lower cost than the withdrawal. The loan will not lower a borrower's credit score because it will not be reported to the credit bureau. This will be helpful when you go to apply for a mortgage loan.
For those considering searching for a 401(k) loan, it is a good idea to work with human resources at your company and your 401K plan sponsor to receive the correct paperwork and get the process going.
Good information to note about taking out a 401(k) loan
There can be several benefits and a few drawbacks to using funds from your 401(k) retirement account. It is good to be knowledgeable and aware of them before taking out a loan from your 401(k).
The first thing you want to know about this loan is that it is not taxable and all interest is paid back to your account. This is a big benefit and if you use this money for a home purchase you are able to pay it back over the course of 10 years instead of five years when using the money for a non-home purchase.
Another benefit is that the loan funds are able to be accessed quickly and there's no need for a credit check. A drawback and something to seriously consider is the amount of interest paid on this type of loan. The interest is taxed two times even though the loan itself is not taxed. The interest is taxed when you pay it through your salary or paycheck and it is taxed again when you withdraw the interest money at the time of retirement.
A major consideration is that this loan is highly tied to your job security. If you leave the current job you are at, a majority of these loans will require that you repay the loan in full before you move on. Any remaining balance can be treated as a taxable distribution.
For more information on real estate in Granbury Texas and help to find homes within your budget please contact us anytime.