Among first-time home buyers, "saving for a downpayment" is often cited as the number one obstacle to homeownership.
Sure, some households manage to put money aside each month into savings, but with each passing year, and asÂ home values climb, the required downpayment size grows.
Oh, and don't forget about closing costs.
Unless you're using seller concessions, closing costs can add another several thousand to your bottom-line and make it that much harder to have the money needed to buy a home.
This is one reason why buyers sometimes borrow from aÂ 401(k) retirement plan.
When you borrow from a 401(k), you can get the money you want for a home in as little as a week and with nothing more than a phone call.
Plus, as you "pay yourself back", you earn interest on your loan which can make the 401(k) withdrawal seem like a good deal.Â But, is it, really?
Here's what to know when you want to borrow from your 401(k) retirement plan in order buy a home.Click to see today's rates (Oct 28th, 2016)
A 401(k) plan is a special retirement program for U.S. employees. The program is sponsored by an employer, andÂ allows employees to make pre-tax contributions to an investment plan.
This means that investments in a 401(k) "come off the top" of your income, before the government levies taxes.
Taxes, in other words, are only paid on what youÂ don't invest in a 401(k).
The program is named after the 1978 addition of section 401(k) to the U.S. federal tax code which allowed such pre-tax investments.Â Taxes on paid on 401(k) retirement plans at the time of withdrawal.
There are more than 50 million U.S. workers who are active participants in a 401(k) program.
When you invest in a retirement program, such as 401(k), there's no rule to preventÂ you from withdrawing your money before you actually retire.
You may have a life emergency, for example, which demands the use of your retirement monies; or, you may need the money to make court-ordered payments.
These types of withdrawalsÂ are known as hardship withdrawals, and they come with a 10% tax penalty.
There's also a provision which allows withdrawals to help with the purchase of a home. Rather than taking a hardship withdrawal, you can actually borrow funds from yourÂ 401(k) account with a promise to pay it back.
Arranging for a 401(k) loan can be quick.Â With just a phone callÂ and some written notes to your plan's administrator, money to purchase a home be wired to you in as little as a week.
However, just because youÂ canÂ borrow from your 401(k) to purchase a home, that doesn't mean that you should.Click to see today's rates (Oct 28th, 2016)
There are some "gotchas" when you borrow from a 401(k) to purchase a home which could raiseÂ your total loan costs to a figure much higher thanÂ what you borrow.
As one example, during the period your 401(k) loan is outstanding, you're typically prevented from making full contributions to your existing retirement plan.
This means that you could forgoÂ up to 5 years of retirement fund contributions, which could make a significant impact on you later in life.
And, to compound matters, if your employer is one that matches 401(k) contributions, you miss out on thoseÂ contributions to your retirement plan as well.
However, the biggest risk to borrowing against your 401(k) is the one of unforeseen circumstances.
Should you borrow against your 401(k) and then leave the company for any reason -- including being let go -- you will have just 60 days to repay the entire remaining balance of your 401(k) loan.
If you're unable to make that repayment, the remaining balance is considered a taxable withdrawal and is, therefore, subject to a 10% tax.
When you borrow from a 401(k) to purchase a home, then, one of the only ways to "beat the market" is to keep your job through the period of the loan, and hope that the stock market losesÂ massive value throughout the 5-year term of your loan.
Borrowing from a 401(k) loan is a legitimate long-term risk.Click to see today's rates (Oct 28th, 2016)
When you borrow from a 401(k) to buy a home, the decision is based on the premise that a large downpayment is neededÂ to purchase a home.
That premise is false. You don't need to put 20% down to purchase a home.
In today's mortgage market environment, there is a bevy of low- and no-downpayment mortgage options available which make it simpler to purchase a home than during any period this decade.
There are no fewerÂ than 7 low-downpayment programs available to today's home buyers. Nearly all are backed by the U.S. government, too, which means that they're not going away soon.
The newest of these low- and no-downpayment programs is theÂ HomeReadyâ„˘ mortgage, which is the most flexible, allowing income from all members who live in a household; and, providing below-market mortgage rates to qualified borrowers.
With so many options to purchase a home with less than 20% down, then, there is often little need to borrow from a 401(k). When you borrow from a 401(k), you put yourself at risk.
Mortgage rates are low, which makes for low mortgage payments. And, in many cities, now it's less expensive to purchase than to rent.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Oct 28th, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Katrina B. Lab Technician
I look forward to reading The Mortgage Reports. Its information and updates helped me to buy my first home. Thank you!
Sandi C. Customer Service Representative
The Mortgage Reports has been extremely helpful in educating me about mortgages, and what is available. Thank you for all that you do!
Thaddeus C. Systems Analyst
I am an aspiring homeowner and The Mortgage Reports helps me daily. Thank you for your excellent information.
2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)