Borrowing from retirement accounts for down payment

[Anonymous]

How much of a bad idea is this? I realize it's not ideal. More money would always be ideal, but what would you do in the following scenario?

Option 1: Using just savings for downpayment; will have to upgrade later because house we can afford now won't work as kids grow.

Option 2: Borrowing from retirement account for larger downpayment in order to buy "forever home." Wouldn't need to sell/buy down the road; stability for kids.

[Anonymous]

Option 1.

[Anonymous]

Just to clarify - this can be a loan, right? That you will pay back? Not a withdrawal with penalty?

[Anonymous]

Need more info... How old are you? What is 401k balance? How much are you taking out?

[Anonymous]

Option 1.

[Anonymous]

Bad idea. Use savings.

Make sure if you don’t take my advice that this doesn’t count as debt for mortgage underwriting purposes

[Anonymous]

We did option 2 - not ideal, but given the cost of real estate in this area, and the extra cost + burden of moving twice seemed like a better trade off. 3 years in, time will tell!

[Anonymous]

We did this last year. It doesn’t count as debt in the DRI calculation. Also, it’s not a terrible idea, lots of people do it. You should just try to pay it down as fast as possible.

[Anonymous]

Anonymous wrote:We did this last year. It doesn’t count as debt in the DRI calculation. Also, it’s not a terrible idea, lots of people do it. You should just try to pay it down as fast as possible.

DTI not DRI

[Anonymous]

We did option 2–as a 5 year loan. The money we borrowed does not earn interest, but does ultimately end up back in the account— an we did not lose employer match. . We paid off about 45 months, and are getting ready to make a lump sum repayment for the rest.

The upside is that moving again costs a lot of money—agent fees, origination fee, inspection fees, survey fee, moving company. It’s a lot cheaper (and less stressful) to move once. Downside is you lose the interest on the withdrawal until you put it back. And, if you switch jobs before you pay it back, you have to treat the amount of the loan outstanding as a withdrawal,and pay interest and penalties.

I say do it if;

You are younger (not nearing retirement)

You are doing a loan, not a withdrawal

Your budget can easily handle the monthly repayment amount on the loan

You expect to be at your job until the end of the repayment period.

I’m in TSP, which has a very low interest rate on home loans. Also, the value of my house grew faster than my TSP. Lifecycle fund. So, I came out slightly ahead by borrowing and buying. The money I pit in my house grew fast. But no one can really predict a housing crash or a stock market crash.

Usually, I would say no go. But I think buying a house is one of the few things you bend rules to do.

[Anonymous]

If you'd be slowly repaying it, no way would I borrow from retirement. What if you lose your job? The full repayment is due quickly (like 90 days?), or you owe the taxes on it come tax time. Neither of which are palatable options during a job loss.

Also, don't forget the max you can borrow is 50K or half the balance of your account, whichever is LOWER.

However, we did take about 95K from 2 401Ks recently to bridge buying a house before selling our current one. We knew our house would sell extremely fast, and it really was just to keep our cash cushion high through the move. We're disciplined and weren't worried about spending it, and in a competitive market, a contingency to sell your current home is a no go.

It worked out great. They were paid back in less than 2 months and it cost us about $40 in a processing fees. So I'm not anti borrowing ever, but only in very short term situations. I'd say with a like of sight to repayment in 6 months or less. Financial advisor we work with agreed.

[Anonymous]

If you have room in your budget for repayment, you would have room in your budget to save. Clearly you don’t, because you don’t have the savings.

[Anonymous]

Anonymous wrote:If you have room in your budget for repayment, you would have room in your budget to save. Clearly you don’t, because you don’t have the savings.

This makes no sense.

[Anonymous]

generally a bad idea but severity depends on other facts as pp stated - age, loan structure, interest rates...etc. i personally would NEVER do it but...

[Anonymous]

I say neither - but a smaller house that you can afford now and make it work. No one NEEDS a huge house as their kids get older, and then you won’t have to downsize again when you reach retirement and the giant home doesn’t make sense anymore.