Hello,
I’ve been a long time lurker and would appreciate your opinions on an option I have been playing around with regarding my first home purchase. Sorry for the long post.
I had always heard that taking a loan from your 401k for a home purchase was a horrible idea, so I didn’t give it much weight until I got my first estimate for PMI charges. Now that I am looking into it, I can’t seem to find the “catch”.
Here is a bit of background on my situation. My wife and I are looking at homes in the 350k range in a high cost of living area. We make about 150k per year combined and have saved about 50k for a downpayment.
Our first estimate from a mortgage broker was for an FHA loan, which has a 1.5% up front charge if PMI is required. That works out to roughly 5k up front plus 3k per year in PMI charges. Assuming that we pay PMI for five years, that would be about 20k total in PMI payments.
On the other hand, if I were to withdraw ~20k from my 401k in order to get to a 20% downpayment, I would avoid these charges and essentially earn a guaranteed 100% return on the funds over 5 years.
The biggest complaints that I have seen regarding 401k loans is that people tend to defer new contributions while they repay the loan, which ultimately results in a lower account balance. My wife and I already max out our contributions, so this actually seems like a benefit to me. I can put in more contributions (the interest on the loan) then would otherwise be allowed.
The other concern is that if I were terminated, the funds would need to be repayed within a few months or it would be considered a withdrawal. This doesn’t seem like a huge deal to me as our income would decline so much in the event of my layoff, that the tax penalty consequences would seemingly be minimal. Also, the alternative burdens of getting a larger mortgage and paying PMI wouldn’t go away if I were layed off.
Before I make a potentially huge mistake, am I missing something?
Thanks!
I’ve been a long time lurker and would appreciate your opinions on an option I have been playing around with regarding my first home purchase. Sorry for the long post.
I had always heard that taking a loan from your 401k for a home purchase was a horrible idea, so I didn’t give it much weight until I got my first estimate for PMI charges. Now that I am looking into it, I can’t seem to find the “catch”.
Here is a bit of background on my situation. My wife and I are looking at homes in the 350k range in a high cost of living area. We make about 150k per year combined and have saved about 50k for a downpayment.
Our first estimate from a mortgage broker was for an FHA loan, which has a 1.5% up front charge if PMI is required. That works out to roughly 5k up front plus 3k per year in PMI charges. Assuming that we pay PMI for five years, that would be about 20k total in PMI payments.
On the other hand, if I were to withdraw ~20k from my 401k in order to get to a 20% downpayment, I would avoid these charges and essentially earn a guaranteed 100% return on the funds over 5 years.
The biggest complaints that I have seen regarding 401k loans is that people tend to defer new contributions while they repay the loan, which ultimately results in a lower account balance. My wife and I already max out our contributions, so this actually seems like a benefit to me. I can put in more contributions (the interest on the loan) then would otherwise be allowed.
The other concern is that if I were terminated, the funds would need to be repayed within a few months or it would be considered a withdrawal. This doesn’t seem like a huge deal to me as our income would decline so much in the event of my layoff, that the tax penalty consequences would seemingly be minimal. Also, the alternative burdens of getting a larger mortgage and paying PMI wouldn’t go away if I were layed off.
Before I make a potentially huge mistake, am I missing something?
Thanks!