[Finance Advice] Should I use my 401k for down payment for a first-time homeowner?

If I'm not mistaken the penalties (fees) for taking money out of 401k's are really high. If you can use the money without penalty I say go for it.

 

Contribute the max to your 401k...and leave it there until you retire.

live in a small apartment that is very affordable.

Save money for down payment on a real estate purchase years from now (estimate that you'll need to put 20% down).

 

You may take 50% out up to a maximum of $50,000. See if your plan allows more than 1 loan at a time. This is important if an emergency comes about and you need access to cash fast.

I don't believe you will experience a tax penalty, perhaps a default on your loan will affect this?

You will probably be subject to an initial finance fee and an annual loan maintenance fee.

Remember not to forego contributing to your 401(k) when your loan is in pay status.

 

if you're dead set on getting a home sooner, rather than later, then just stop contributing to your 401k immediately. it makes no sense to save into a retirement plan, only to go through the hassel of pulling it out. put it in a money market account instead. those are much more liquid.

retirement plans are for long-term savings and you have a short-term goal. use the appropriate vehicles.

 

Don't forget the corporate match though. For him not contributing to meet the corporate match for the pay period is the equivalent of forfeiting an extra 3% pay.

Past that I agree with you though. Short term goals mean not putting as much into the 401K.

 

The downside of doing the loan on the 401k is that I believe that you will lose the company match until the loan is repaid. Figure out the real cost of the loan by calculated missing matched money over the life of the loan.

It may be wiser to pay up to the matched amount (3%) and have the other money (12%) set aside automatically each month until you reach the desired/needed amount. Of course you are paying tax on that money you are setting aside but depending on the amounts and the length of the loan, it may be cheaper.

20% down is normally a good goal. I'm not saying you should forego that goal but with house prices this low (may last another year) you "might" be able to find a good deal on a house that would be worth the PMI payment assuming you still have enough down to get a decent loan rate.

 

Do not put the max in the company 401k.

You only put the amount available for the match.

The rest can go in a retirement account outside of the 401k like an IRA.

401ks have limited investing options and you are locked into the management fees for the funds available in the 401k.

An IRA allows you to choose a wide range of investments from no-load and low fee funds, stocks, ETF, and other instruments.

Some 401k plans allow you to borrow against them. there is no penalty for this loan, unless it is not repaid.

Personally, I would not bother getting a 401k for a down payment, if I can't save enough money for the down payment. Houses have lots of underlying costs including depreciation, repairs, closing costs. Look at the record number of foreclosures.

If your life changes within 10 years such as a marriage and children, then you may not be able to sell the house for the cost that was invested(mortgage payments, 401k payments, 6% closing costs, property taxes, repairs, lawn service, HOA fees, insurance).

 

I'm going to defer that question to someone else that can more readily explain that to you from a more informed position.

My main two points were 1) 401k's are mainly meant for retirement savings and investment that can be touched before retirement in case of an emergency (though some people do borrow against them for major purchases) and 2) if the company match you receive is dependent on you contributing a percentage of your check and you decided to reroute part of what you were contributing into your 401k into some sort of account to fund the house deposit, then I would recommend you still contribute the percentage your employer matches as a minimum to your 401k so that you receive those benefits from your employer.

That said, if ArtV is correct and they stop matching once you take out a loan against your 401k and you are determined to do as such, point #2 is obviously void.

 

Well, I'll repeat my advice and leave.

Save the max to your 401k and use it ONLY for retirement savings and nothing else.

Live below your means and save money for a while to put a down payment on real estate later in life.

 

1000 no. On the surface, it makes sense to take a loan on your 401k, since you're really paying the interest to yourself. However, the way my company works, if you get let go, you have to re-pay the entirety of the loan within 30 days or some equally crushing time period.

 

Agreed. Compound interest is your friend.

Don't rush in to a home. Take your time, save up, put 15-20% down and get a 15yr mortgage. Keep your payments below 25% of your take-home pay. Make sure you have an emergency fund of 3-6 months expenses in the bank before you buy as well.
Also, keep in mind that there is a LOT of extra expenses with a home. lawnmower, trash bin, recycle bin, weed eater, blinds, curtains, water hoses, shovels, rakes, etc..you'll be surprised at how much you'll need and how much things will cost.

 

Sounds like dave ramsey

 

Using the 401(k) for the down payment makes some sense. You have to pay the tax when you take out the money, but it's been deferred, so you've earned money on that that you wouldn't get if you invest post-tax money. However, if we're talking about just a couple of years of investment earnings, it may not be enough to justify the sacrifice in the flexibility you must make to use the 401(k) -- the risk of switching jobs, having to repay yourself, abiding by the rules of the fund, and so on. The temptation is to overlook the hidden costs of losing that flexibility.

 

If you are doing it because you want to take advantage of the first-time homebuyer credit, then you may want to see about an FHA will allow you to use it as a downpayment at closing, so you don't even need the upfront cash.

 

I think that there are two possibilities.

• You make a 401k withdrawl and pay the income tax (taxed as earnings and not capital gains).
• You can get a loan from the 401K, if your plan allows it, and pay no income taxes. The plan will set the interest rate on the loan (within a couple of points of the going rate). The interest you pay back to yourself in the 401K is not tax deductible like the other standard mortgage interest is. Your primary mortgage lender will also need to know that the down payment is coming as a 401k loan and may very well look at that as a second mortagage of sorts and still require you to come up with other non-obligated down payment monies. If you leave or are let go from your job, the principal becomes due. This is the biggest risk.

I do not see the advantage of using 401K monies for the down payment. If you know that you are buying in the near future, using a saving accounts might be the smartest and most hassle free move.

I could see someone with a 401k with 10 years of savings, getting married and now wanting to buy a house, who might be tempted, to make a 401K withdrawl.

 

At some point the government isn't going to be able to give people large tax incentives to buy homes and when that happens home prices are going to take a major dip. I'd wait on buying a home for now and invest wisely for now.