Taking out a 401k loan for larger down payment

[Anonymous]

To minimize our monthly payments on a 30 year mortgage we are considering taking out a 50k loan from my 401k. From my understanding if we make additional payments on the mortgage AFTER closing, it won’t actually reduce the minimum payment (this is how it worked with my student loans) but instead reduce the amount of time you have left.

So even if we throw 100k into it after we close we will simply have 27 years left vs 30 but still have high minimum payments every month. I want our monthly payments to be as low as possible so I’d rather take 50k from my 401k and aggressively pay it back (all interest goes to myself). I’m 34 and have a 450k 401k balance.

[Anonymous]

OP here, meant to ask does this sound like a good idea or am I misguided?

[Anonymous]

You can recast the loan without changing the interest rate to lower your monthly payment.

[Anonymous]

I was able to do a no fee recast. I think that is what you want. But you could also do that and a 401K loan to have an even lower payment.

[Anonymous]

If you can "aggressively pay yourself back" for the 401k loan, just do that in advance a save a bigger downpayment in the first place. Nobody wants to have to wait any more.

[Anonymous]

Anonymous wrote:If you can "aggressively pay yourself back" for the 401k loan, just do that in advance a save a bigger downpayment in the first place. Nobody wants to have to wait any more.

OP here, yes I was expecting people to say this but I don’t think it’s unreasonable to not want to wait for a house because it impacts your lifestyle significantly and playing the waiting game has only hurt people in the past 10 years.

I wasn’t aware of the recasting option. If you can do it with little to no fees I think this would be a good choice. I thought my only option would be a complete refinance which is heavy on fees

[Anonymous]

Anonymous wrote:

Anonymous wrote:If you can "aggressively pay yourself back" for the 401k loan, just do that in advance a save a bigger downpayment in the first place. Nobody wants to have to wait any more.

OP here, yes I was expecting people to say this but I don’t think it’s unreasonable to not want to wait for a house because it impacts your lifestyle significantly and playing the waiting game has only hurt people in the past 10 years.

I wasn’t aware of the recasting option. If you can do it with little to no fees I think this would be a good choice. I thought my only option would be a complete refinance which is heavy on fees

I am one of the PPs who did a recast. I purposely got a mortage that had a no-fee recast option (at the time this was with Wells Fargo but that was a while ago). I agree I would buy something now if you can and not wait to save up.

[Anonymous]

Anonymous wrote:

Anonymous wrote:If you can "aggressively pay yourself back" for the 401k loan, just do that in advance a save a bigger downpayment in the first place. Nobody wants to have to wait any more.

OP here, yes I was expecting people to say this but I don’t think it’s unreasonable to not want to wait for a house because it impacts your lifestyle significantly and playing the waiting game has only hurt people in the past 10 years.

I wasn’t aware of the recasting option. If you can do it with little to no fees I think this would be a good choice. I thought my only option would be a complete refinance which is heavy on fees

Yes, heaven forbid your lack of money “impact your lifestyle” temporarily.

[Anonymous]

Do NOT take money out of your retirement because you overspent on a house. If you can refinance to a 15 year depending on your interest rate. Pay in extra and every few years do a recast. We did two recast. It saved us a lot of money. We paid $250 each time.

[Anonymous]

Anonymous wrote:

Anonymous wrote:If you can "aggressively pay yourself back" for the 401k loan, just do that in advance a save a bigger downpayment in the first place. Nobody wants to have to wait any more.

OP here, yes I was expecting people to say this but I don’t think it’s unreasonable to not want to wait for a house because it impacts your lifestyle significantly and playing the waiting game has only hurt people in the past 10 years.

I wasn’t aware of the recasting option. If you can do it with little to no fees I think this would be a good choice. I thought my only option would be a complete refinance which is heavy on fees

My friend did this at about the same age/net worth as you, against my objections, and it turned out fine. They paid back the 401k and got the house. Maybe they lost a little in market gains in the 401k, but to them, it was worth it. If you intend to recast, make sure your mortgage has a no-fee option to do it.

[Anonymous]

Anonymous wrote:Do NOT take money out of your retirement because you overspent on a house. If you can refinance to a 15 year depending on your interest rate. Pay in extra and every few years do a recast. We did two recast. It saved us a lot of money. We paid $250 each time.

Yeah, recasting is what you're looking for, OP. And, like this PP, it cost me $250 - I don't think free recasts are the norm (though I don't doubt they're out there).

One caveat: my lender required me to pay 10% of the balance in order to do a recast. In other words, if your mortgage balance is $500K, you need to come up with $50K plus the $250 fee. Perhaps not all lenders have that 10% requirement.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If you can "aggressively pay yourself back" for the 401k loan, just do that in advance a save a bigger downpayment in the first place. Nobody wants to have to wait any more.

OP here, yes I was expecting people to say this but I don’t think it’s unreasonable to not want to wait for a house because it impacts your lifestyle significantly and playing the waiting game has only hurt people in the past 10 years.

I wasn’t aware of the recasting option. If you can do it with little to no fees I think this would be a good choice. I thought my only option would be a complete refinance which is heavy on fees

My friend did this at about the same age/net worth as you, against my objections, and it turned out fine. They paid back the 401k and got the house. Maybe they lost a little in market gains in the 401k, but to them, it was worth it. If you intend to recast, make sure your mortgage has a no-fee option to do it.

Sorry, I misread your original post. I thought you meant to take out a 401k loan for the downpayment. Taking a 401k loan out to recast the mortgage makes less sense. How much interest do you pay back the 401k? I assume it's with after-tax dollars? Are you guys house-poor? I think it's a bad idea.

[Anonymous]

With rates so high throwing money at down payment affect monthly payment very little so keep that in mind.

[Anonymous]

Anonymous wrote:To minimize our monthly payments on a 30 year mortgage we are considering taking out a 50k loan from my 401k. From my understanding if we make additional payments on the mortgage AFTER closing, it won’t actually reduce the minimum payment (this is how it worked with my student loans) but instead reduce the amount of time you have left.

So even if we throw 100k into it after we close we will simply have 27 years left vs 30 but still have high minimum payments every month. I want our monthly payments to be as low as possible so I’d rather take 50k from my 401k and aggressively pay it back (all interest goes to myself). I’m 34 and have a 450k 401k balance.

Not a bad idea. However, consider that interest rates are more likely to go down than up from here and you'll likely refinance a few times as the rates go down anyways..

[Anonymous]

How does it reduce your monthly payments? Don’t you still pay back the mortgage plus the 401k loan? How is the total less than the amount you would have owed on the mortgage without the higher down payment?