Borrowing from Your 401k to Buy a House

With mortgage interest rates at their lowest in 50 years, I am surprised by the number of people who still borrow from their 401k plan to buy a house. One reason might have to do with a lack of information about the advantages and disadvantages. I think a bigger reason is the fact that most people fail to consider the true cost of the loan which is based on the difference in the rate of return on their retirement savings versus the cost of other mortgage loan options.

Although you can borrow from your 401k plan to buy a house, it is usually not your best option. Your 401k plan should be dedicated primarily for your retirement. If you ever plan to borrow from your 401k plan to buy a house, you should understand the advantages and disadvantages.

Advantages of Borrowing from Your 401k Plan

First, the money you borrow is your money. You don’t have to apply for a loan. There is no credit check, no debt to income ratios, no closing costs and no penalty for early withdrawal.

Second, no collateral is required and therefore, you will not risk losing your home if you don’t repay the loan.

Disadvantages of Borrowing from Your 401k Plan

First, when you take money out of your 401k plan, you’ll lose out on the benefits of compounding and tax deferral. You will likely reduce the amount of money that you’ll ultimately have saved and available for your retirement.

Second, the amount that you borrow must be paid back out of your paycheck and you could end up having to pay taxes and a penalty if you don’t repay the loan. This can occur if you get laid off.

Before you borrow from your 401k plan to buy a house, you should understand the advantages and disadvantages and compare the cost with other mortgage loan options.