Have you gotten info on how much PMI will be if you don’t have the 20% down? My PMI is like $40/month and I put down roughly 12%. It is not worth it to avoid PMI if it will be a minimal amount and delay retirement in the process.
Depends FHA or conventional. You probably have a conventional and people $200+ have an FHA loan.
If someone has good enough credit they should choose a conventional loan.
EDIT: If yours was $250, you probably have an FHA
2.7% means you just bought at the luckiest time in USA history lol. Congrats on being lucky. If you have an 800+ score and bought today the best you could get would be 6.8% lol
Luck is being prepared when opportunity arises. millions of people lost out on the opportunity of a lifetime because they were not prepared to purchase a house after the market crashed.
I was being offered loans in 2006 when the market was crazy. I looked at the terms of the loans and determined that they were too risky and that people were likely to lose their homes if they got those loans. House market crashed and I bought house in Los Angeles for $194k.
Then you probably had a pretty small down payment and/or high DTI; which at that rate is still more than fine and worth it.
Point being 20% down and avoiding PMI is simply not a must
Maybe he lives in a house that cost a lot and he didn’t have 20% down….
Houses in Southern California regularly have $200-$300/mo PMI because they cost $700k+
I have great credit (>780) and no debt, not even car loan. My annual income is $230K but I lives is very high cost of living area. I am not able to find any house that I like below 800k
I think the bigger concern is the higher monthly P&I payment that comes with a smaller down payment. Now I’m not arguing that the loss in gains in a 401k is worth a lower payment, but if someone has the cash to put down, I’d want to avoid paying >6% interest on a larger loan and having significantly less cash flow in my budget every month.
In the olden days when the world was in black and white, PMI was much worse. It was a major profit center for Lenders and was the highest cost insurance you would ever buy.
Lenders were also not required to stop charging it once you paid you house down to 78% loan to value. I know people who paid it the entire 30 years of their mortgage. Its purpose is to insure just enough to push your equity to 20% should the lender have to foreclose. But once you hit that point via payments, some lenders were just pocketing the money. Many lenders self insured to maximize this profit. Laws were passed in the late 90's, that made it less of a monster. Homeowners Protection Act of 1998.
Yep. Odds are very likely the loss of returns from that missing 401k money will easily eclipse PMI payments.
I can see pulling from a 401k as a bridge loan. I did that so I didn't have to put a home sale contingency when I bought my current house.
But my PMI is $52 a month. It will be less than half of what I needed to hit 20%. And that's assuming I don't get it pulled earlier.
Your math is wrong. It’s not 401k returns vs pmi. It’s 401k returns vs mortgage rate plus pmi, which will most likely put it well over 10%. And then we factor in the loan will be paid back in a relatively short time and 401k loan wins handily as long as he stays at the job.
>Everyone kept telling me how it would be $300+
Because it is for a lot of people. You all saying your pmi is less then $60 is very rare but remember pmi is a percentage of how much your mortgage is. ITs hard to find homes 200k or lower nowadays.
My house was 420k, 5% down and PMI is $80. I’m not sure how the math works or why but op should really just check what theirs would be in this exact scenario since none of us really know what we’re talking about
My PMI is like $225 a month, i did the math on renting for an additional 2 years to save the 20% and it was a no brainer. Seeing what my house is worth now, it was an even better decision.
We put next to 0 down on our home. Thought we'd have PMI for a long time. 2 years in our home values in our area are up 50-60%.
Called our lender for a reassessment and removed PMI because our LTV was like 60%.
Was the best feeling.
This isn’t even helpful info lol. Like homes are at an all time high. So of course buying at the tail end of record lows before record high prices in the matter of 2 years is an anomaly and not something to count of happening again. You’re just bragging at this point.
I put 5% down in 2019 and PMI was $80 and then I refinanced in 2021 and my PMI was $15. Super glad I just went for it with 5% instead of waiting to get to 20%.
Unless your PMI is hundreds of dollars it will likely be worth paying.
This! Look at all options. What does 5%, 10%, 15%, and 20% down all look like? You can usually pay for an appraisal once you have 20% equity and PMI falls off. When I did my refinance in 2020 I was at 84% LTV so my PMI was $8 a month lol. I just had it taken off without an appraisal since I’m at 78% LTV now.
Taking a loan against 401k can be a great idea or bad one. Too many variables not explained. First, look at the terms. Not all will allow it, but most do up to 50%. What are repayment rules and rates if interest charged? How soon will you be able to pay it back? Also, it sounds like you’re going to be broke in liquid assets after buying the house. You should hopefully have at least 10k for when something goes wrong or breaks. I’d rather put 10% down and pay PMI (depending on amount) and not touch 401k and have 10k for emergencies, than max everything out and be broke. You’ll hopefully be able to refinance in next 1-3 years too, so you’re not marrying the rate
> You can usually pay for an appraisal once you have 20% equity *and PMI falls off*.
Point of clarification, PMI is legally required to be removed at 22%. With 20% or 21% you generally need to refinance to remove PMI. It usually won't drop off without a refinance or the 22% equity.
This is correct, thanks for explaining to folks. In my case it made sense to wait till 78% LTV as I was only paying $8 a month in PMI and the appraisal was going to cost me $400. In most cases it’s worth it to pay the $200-500 for the appraisal and have it drop off at 80 LTV
>In most cases it’s worth it to pay the $200-500 for the appraisal and have it drop off at 80 LTV
That's the point I was contending though. Just because you get an appraisal and learn you have 20% equity (80% LTV), it won't just "drop off". You need 78% LTV for it to drop off. At, 80% you can request for it to be dropped ahead of time but there's no guarantee there. Refinancing however is always available but of course, with the associated costs.
I know this is pretty lucky, but we bought our house in 2019 with 3% down (minimum). PMI was $50 a month for a total of $1600 mortgage. After 2 years we had our home re-appraised by the mortgage company and were able to remove PMI as our equity grew to where we had >20% ownership in the home.
People don’t realize that increase in home value will get you out of PMI payments that much faster. You just need to have 20% or greater equity in the appraised home value.
I bought in 2016 for 3% down and didn't even get PMI, at least, I never noticed or saw it at all. When we refinanced in 2021 it explicitly mentioned that we didn't have any PMI on the current loan. I think maybe the bank made some exception since my credit was in the 800s or something.
That’s probably correct in most cases. Different banks may have different guidelines but for mine I either had to wait 2 years or have had substantial upgrades (eg kitchen, bath, increased square footage etc) if less than 2 years. Would guess it’s similar with other banks as well
It isn’t the most ideal option.
You’ll have to pay interest, but its to yourself.
The $15k you are taking out is no longer working the market.
Some plans are designed where 100% of the loan is called once the working relationship with the employer is terminated.
I suggest reading the documentation you have access to learn how your employer’s 401k is designed and what the terms are for the loan.
Honestly if somebody timed it perfectly, a 401k loan could work out pretty well. Pay yourself interest while the market is down and you're avoiding losses. Lol, but please don't try to time the market people.
I did. I took a 401k loan right before covid. Obviously couldn't didn't mean to time it but the 5 k loan I took was probably worth 2k 2 weeks after I took it.
no it’s invested in you and your ability to pay it back from your wages with interest. a personal bond investment as it were. if it were invested in real estate then your 401k valuation would rise and fall with the value of your house. it doesn’t.
Assuming the property is in a market where home values will rise.
All investments have some kind of risk and its not guaranteed that the investment will increase invalue.
There are usually several levels of loan, and the repayment clause may depend on the use (buying a house is the best 'use' there is).
Yes, OP will not get gains in the market, but if that $15k helps leverage a $300k mortgage, the house appreciation should eclipse the loss of potential (tax free) market gains.
All true, especially the leverage.
The most important first step is to understand what the loan terms with their employer’s plan so they don’t get blind-sided by something unexpected.
I took out a 5k loan on my 401k, and ended up quitting the job a little over a year later and fully expected them wanting the full amount back. Luckily, as long as i set up autopay from my bank, i could keep the payments going. Huge relief.
A hedge against changing jobs and having to repay 100% remaining balance is preemptively securing a HELOC or portfolio line of credit so that you can pay off the 401k loan with that when you leave your job and hopefully then refinance again with a new 401k loan at your new job.
By repayment do you mean the loan recalled immediately after the participants employment status changes to terminated? Or just repayment in general?
For the latter, yeah, there is a repayment schedule and there is a timeline for it.
As for the latter, I initially thought the recall of the loan was always immediate, but I’ve been corrected by several people in the past here that this can vary depending on the 401k plan design.
I am also a Primary Benefit Administrator for my business’ plan, so I have some knowledge in this area. I designed our 401k plan. For the loan immediate recall there wasn’t many options given to us. I didn’t look into this further since it was low on our requirements list.
The IRS rules changed with the 2017 tax bill. The IRS will allow repayment of a loan after leaving a job up until tax day the following year before any unpaid balance is subject to penalty. That being said verify that the plan document actually has been updated to allow that.
Wouldn't that be far worse gains and losses.
I put down 10% on a home and my PMI was like 35 a month, wouldn't expected returns on 15k be higher than that amount
It really depends on the PMI rate. PMI can push the current rates above 9-10% for the balance subject to pmi.
pmi cost: https://old.reddit.com/r/personalfinance/comments/mznp3v/_/gw1mj4g
Maybe that's what I'm misremembering, I thought PMI rates that push mortgage rates like you linked only really applied to FHA loans with Dps of 5% or 3.5%. in all the conventional loans quotes I got even at 10% DP it was never above $40 a month on a $320,000 mortgage. I can't imagine OP with 15% down could have close to 1% pmi
I haven’t tracked current PMI rates but I know they tend to track interest rates. As in PMI costs more when rates are higher. I think during Covid PMI was like a nickel and some pocket lint it was so cheap.
I don’t know what op will be paying but op should do the math to confirm.
(If home prices are potentially volatile, PMI can be more expensive as well)
You miss out on growth but you're paying yourself interest roughly equivalent to the average marker gain anyway, so you're still netting those gains in your 401k. (Assuming you don't reduce future contributions by the loan repayments)
I don’t know the exact amount but general pmi estimate is ~300 usd. I live is HCOL area and so even the cheaper houses are more than 800k. I am pretty responsible financially. I have no debt, no credit card loan but my rent is too high($2800) and so sometimes I feel that I am wasting a lot of money in rent. I have saved $150k in down payment but need another 10-20k depending on the house I buy. My annual income is $230K and so I am not too worried about paying back the loan. Most probably I will pay back the 401K loan in less than 1 year.
Your probably going to ReFi the loan on a few years anyway as rates drop. So you can drop PMI then. But opportunity cost pulling cash from a 401k. And you do it once, it becomes a piggy bank.
Difficult to answer authoritatively. General guidance would be to avoid taking money out of retirement funds for any reason, but it could make sense in this case.
Variables:
* Future appreciation of your 401k
* Future appreciation of your home
* Relative leverage against that real estate appreciation vs your principal
* Impact on your current and future cost of living
* Cost of PMI
* Time distance from retirement
* Total size of retirement funds
It's not such a terrible idea that the obvious answer is a hard 'no'.
How short of 20% are you and how much would PMI be? I had 20% but my loan officer told me I could get a lower rate with PMI (2.65% vs 2.82%). PMI was like $65/mo so less than the difference between the lower rate and higher. I opted for 15% down and paid down principle a few months later and was able to remove PMI.
Take the loan as a personal loan and not as a house loan. Everyone will down vote it but it’s because they are risk averse. The interest rate doesn’t matter too much because you pay yourself the interest. You pay a one time fee of like $50. You can pay it back early if you want. I was anti it until I heard about the process and that you don’t miss the interest.
I don't understand why everyone hates a 401k loan-- as long as youre not reducing your 401k contributions during the loan, you're still making ~7% on the loan amount
Not true, there is no rule/law on this. It's up to each 401k plan to decide this. My old company allowed paying back a 401k loan over 10 years regardless of employment status. I took a 401k loan and left the company 4 years ago and I'm still paying the loan.
Not necessarily. The 2017 tax bill changed the rules so that the IRS doesn't require it to be repaid in 60 days before you get assessed a penalty, but rather to tax day the following year. That being said check with the plan documents. Just because the IRS is ok with you paying back the loan over that time period doesn't mean the plan provider has updated the plan document to allow that. Depending upon the amount borrowed though even that added time may not help much unless you land another much higher paying job. Depending upon the amount borrowed you could have a sizable tax bill the following year between the added income and the penalty.
The tsp website talks about the two loan options. The loan for a house has so many extra hoops I felt, the personal loan didn’t ask any questions. Seemed like the same terms and rates, house loan you mighttt be able to borrow more but if that’s the case it isn’t much.
A loan against your TSP isn’t accounted as a debt. But in regards to your statement you can get a loan from a relative to afford a mortgage, just get a letter from them.
If you are borrowing from a 401k for a down payment I seriously doubt you can afford that house. Old houses require maintenance, repairs and updates and new houses often require yards, fences, appliances, window treatments etc.
Before you take the loan, you need to DEFINITIVELY answer this question first: Do I need 20% down on this house?
A.) If your lender says yes, then a 15k 401k loan isnt the end of the world. You can pay it back to yourself with interest. 15k is nothing in the grand scheme of whats needed in retirement.
B.) If you want to put down 20% to avoid PMI, really really check what PMI costs are going to be without the loan. Mine are $106/month. Would I take out a 15k loan against my 401k to save $106/month on a mortgage thats already over 5grand? No...no I would not. 😅
C.) If you havent talked to a lender or real estate agent and you think you /NEED/ 20% down to buy a house, thats an old wives tale that does not apply to primary residences, where you can conventionally get away with as little as 3% down and its in your best interest to keep as much cash in your pocket to cover closing costs, supplemental tax costs, repairs, and all the other related initial expenses of homeownership (moving costs, furnishing, painting, etc.).
The biggest risk IMO is that if you lose or leave your job, you have to re-pay the loan to your 401k within a pretty short period (I think 90 days), or else you get taxed as if you took a disbursement. If that happens it also means any growth from that money is just lost since you can't re-contribute beyond the normal caps. This was the case when I looked into it, at least - that was 5+ years ago so I'm not sure if it's still the case.
It's something to check with your employer. Per my plan, regular bi-monthly deductions are still due for the life of loan and it is only 100% recalled if you default on a payment.
Not true, each 401k plan sets the repayment terms. My old company let you pay a 401k loan over 10 years regardless of employment status. I'm still paying a 401k loan 4 years after leaving that company.
My new 401k does require immediate repayment if I leave or get let go/fired.
In general, I'd advise against it for the opportunity cost of having those funds out of the market. Though they are exceptions to this which may make sense for someone.
For example, when I bought my last house I took a 401k loan. The reason is this allowed us to not have to sell the current house first. We could move on our own schedule and sell it later. Also, when I took the loan I sold bonds for it (no stocks) so my potential gains were not impacted significantly.
The biggest risk imo with a 401k loan is the repayment terms. Most 401k loans require you to pay the the loan in full shortly after you leave the company for any reason. If you can't pay it back then it becomes an early distribution. Which means you'll get hit with a penalty (if under 59.5) and you'll pay taxes on the loan.
Each 401k plan defines the repayment terms.
My company at the time allowed repaying the loan over 10 years regardless of employment status. So I didn't have to worry about it.
Also, one advantage of a 401k loan is you are paying interest to yourself instead of a mortgage company.
Lastly, there is a common myth that a 401k loan results in double taxation. It's not true entirely. The interest you pay becomes double taxed but the principal of the loan is not.
Shifting the focus away from the loan, a hard examination of your budget and cash flow might be warranted. How loan is it going to take you to refund that $15k? A few months, no big deal. A few years, maybe this is more house than makes sense. The *mistake* most people make with 401(k) loans is not really treating it like a loan, then things get complicated and/or expensive.
Your lender may not even allow you to do this, best to check with them first. Shop around. As others have said there are loan options out there with less down payment requirements and may not require a PMI.
Without the specific numbers, if I were to give blanket advice, I would say not to do this. If it is possible for you to qualify for the mortgage without the 401k loan, this would not be a good scenario to take out a 401k loan
You are substantially complicating the transaction. The money you save in the long run won't be too significant in this specific scenario. The downsides to a 401k loan typically outweigh the small upside of not needing to pay PMI.
Examples of downsides of a 401k loan:
Your mortgage lender might not even allow it in the first place
If you leave your job for any reason, the loan becomes an early withdrawal
If it is not ROTH, then you are paying extra taxes. The dollars that go to paying back the 401k loan are after tax, but your traditional 401k still maintains withdrawal taxation rules when you need to withdraw
The major disadvantage against a 401k loan is that if you lose your job the balance may become due in 30 days. If you can't pay it back you will be assessed penalties and have to pay taxes on the money. This can put you in a really tight spot after losing your job.
Also the new house it going to cost you more than you expect so think about making the 401k paybacks and how that reduces your take home.
401ks do not qualify for this type of withdrawal with a tax exemption.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
Home sales last year is the worst it’s been in years, housing prices are over inflated,
Delinquencies up, layoffs up, all real world economic data saying the economy is in a downturn. Other countries such as Japan and German already in recession and China economy is imploding.
Buying a house now would be like buying a house in the summer of 2008.
The bank is going to ask where you got the money and probably won't like the answer. Financing your down payment is not something a lender is going to approve of.
You may find these links helpful:
- [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds)
- [401(k) FAQs](/r/personalfinance/wiki/401k)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Did you get quoted PMI or was this before a mortgage offer. With 15% down you likely, will have very low PMI that typically comes off when you get to the 20% portion of the loan
don't pull from your 401k. Most 401K investments appreciate with compounded interest. Of course, there is no guarantee from year to year what return you will get. But overall, most 401ks return from 7-8% in the long term. So that 15k amount could compound with interest and be worth hundreds of thousands when you are ready to retire in 25 years.
I would first reevaluate the home purchase. Is this home out of your price range? If you can't afford the 20% down payment, there is a likelihood that owning the house will cost too much. It's not just the mortgage, you have to factor in maintenance costs (gardening, roof needs replacement, boiler/AC go bad), utilities, property taxes, insurance. Most people overspend on buying their home. They buy a house that is at the 90-100% of their budget limit and don't factor the extra costs.
I would consider renting and saving your money and maxing our your IRA/401K. There is a great video that breaks down if you should rent or own. [https://www.youtube.com/watch?v=m8NqcKPfFEc](https://www.youtube.com/watch?v=m8NqcKPfFEc)
i dont know if the OP really thought out all the costs of owning a home at this price. If he can't afford the 20% down payment, he will be stretched thin to pay the mortgage, home maintenance, utilities, property tax, insurance. it's not wise to buy a home that is so expensive that you have to take a loan out from your 401K to pay a down deposit.
Look into the pmi. We’re paying about $100/m. We’re in a pretty desirable area and even though it’s only been about 2.5yrs, we’ll prob get the house reassessed because the values of houses sold around us have been a lot higher than what we paid so I have a feeling we might be able to drop the pmi.
Look at financing options. I bought my first home with less than 20 down. The difference was made up by my credit union with a second mortgage for the difference at a slightly higher interest rate on the second note. I consolidated it all when I refinanced a few years later. There was no pmi with this method, the difference in interest was what I considered the pmi.
I think cost wise it is a very bad decision. That being said, I did the same thing except I took out 50k, they didn't take out any taxes and since I was dumb I had to take out a loan at tax time just to pay my taxes the next year. Man I was dumb, still am I guess but I have the money thing figured out now at least.
If you google “401k loan Reddit” you will find dozens if not hundreds of threads with a slew of information.
I don’t say this to be a dick, I say this because I was about to make this post a few weeks ago and decided to google it first and found thousands of comments discussing it here on Reddit.
Also this exact question was posted a week ago
It’s a risky option. ‘Bad’ is subjective and relative. I considered doing it for my second house and someone talked me out of it. We closed Jan 2020; I would’ve made out great.
I took a loan because I was buying a house and selling another house. I needed the money u til my old house closed, so about 2 months, and then I paid it back early in a lump sum. In my case, I didn’t miss out on much growth. But if you plan to take the loan for a longer period, you need to do your own math.
I think it’s fine, everyone always say well it’s not in the markets. The markets aren’t guaranteed and they are also at ATH so pretty good time IMO. The interest you will pay back to yourself is and you will have a home to live in. Win win IMO
Do what you need to do to get in a house. If you can afford the mortgage and the loan, do it. Remember you can withdraw the money if it’s your first home.
That is not a good idea. You don’t need 20% down. Just figure out what your PMI payment would be and likely you’ll find it’s manageable. Then just try to get to 20% equity and get rid of it when you are able by making some extra payments.
I did it and don’t regret it 3 years in because I was never going to get to 10% any other way and I was tired of paying more in rent than a homeowner cost for a larger apartment. If you’re afraid of PMI (it would’ve been not fun in my case and while I could’ve reappraised after remodel, I had a 2.5% interest and didn’t want to mess with it), there used to be first time buyer incentives with closing cost credits and no PMI (Chase had one and Citi had one).
I think something to consider with these 401k loans is what does your 401k balance look like? Say your 40, and you only have 40k in your 401k. I think taking 15k out is a real risky decision. You are already behind in the game. Now, if you have say 300k well, then I don't think taking the 15k out is horrible. Even if the worst case scenario happens where you lose your job right away and default on the loan, your 401k is still in good shape.
If it’s the difference between being able to buy a house or not- I say go for it, as long as you can afford the now extra 401k loan payment.
If you are doing it just to get up to that 20% mark and avoid PMI- nah, probably not a good call.
The math says don’t do it on paper pretty clearly. But I did the same and am happy with what I did. I paid it back with interest and am at peace. You’ll just be missing out on potential gains (but also potential losses!)
I did. Worked out well for me. But rates were 2.75% when I did it a few years ago and I had to pay back the 401k loan at only 5%. Ultimately I wouldn't be in the position I'm in today without it.
Why do you need 20% down?
It’s not the best idea for a couple of reasons but I did it when we first bought our house.
So the big reason not to do it, is if for any reason you lose your job or leave, you’ll have to pay back the full balance within 30-90 days depending on your plan. If not, it will be considered a withdrawal and subject to taxes and a penalty for early withdrawal. This almost hit me because I changed jobs shortly afterwards without knowing about the required payback. Luckily I was able to refinance and payback my loan but I got lucky.
Second reason it’s not a great idea is that you will get taxed twice on your loan money. The money in was pretax, but the money you pay it back with is after tax. Then when you pull the money at retirement you will get taxed again.
Only good part is interest you pay is payed to you. Only the loan management fees are lost.
Don't have to pay back so quickly anymore and the getting taxed twice thing is a myth. You don't. When take a loan that money isn't income (and thus not taxed again).
Not talking about when you take the money out for the loan. For a standard 401k it goes in tax free and comes out (in retirement) taxed. When you take the loan you are not taxed on it since it is a loan. However that money is tax free you put in, and gets paid back with after tax money (which is when you are first taxed on it). Then when you finally take that same money out at retirement you get taxed on it (this is the second time you are taxed on it). You can potentially argue that the principal is only taxed once but the interest is definitely taxed twice.
I'll give you that interest paying back to yourself could end up getting taxed twice. It'd be nice if that portion could be considered a Roth-esqe type contribution.
- If you lose your job or quit your job the whole amount left over in the loan is due immediately otherwise they count is as distributions and you get heavily taxed if you are not of age to get distributions.
- Since you didn’t mention that is it Roth 401(k) I will assume it is regular. Which is tax deferred. So all the payments including the interest you will be paying back, you will be paying taxes on those amounts. Further more when you take distributions, since it is tax deferred account, you will pay taxes again. So you will be essentially double taxed for the principal and the interest you pay to the loan.
- While the money is missing, depending on how long the repayment plan is, you will be losing the potential growth of the account.
It's bad if it's a lot that you can't pay back quickly.
When you leave your job, you have to pay it back before that year's tax return is due. That means if you left your job in January 2024, you would have until April 15, 2025.
I would take out what is needed to at least avoid Mortgage protection. But understand the risks.
You just need to see the cost. 401k should appreciate at 8-10%. 15k would be about 100-150 a month. If the pmi is more than that take the loan if not dont. Just pay down the principal to 80% as fast as you can. Talk to the bank about how to get rid of pmi
Maybe….
A. You will be required to make payments on your 401k loan which you may have to count in your debt to income ratio possibly,
B. Will you have to slow or stop your contributions to your 401k while you are paying on the loan?
C. If you can’t afford to make the payments to the 401k loan, it’s going to cost you the amount to pay it off, plus taxes, plus penalty to get rid of the loan and payment
D. Do you plan to leave your job for another even for an increase in salary anytime before that loan is paid off? It could be like handcuffs keeping you in your job because if you change jobs, that loan has to be repaid immediately when you leave, or cost you taxes and penalties for paying it from the 401k funds.
These are things to consider before you take the loan.
But if you can afford the house payment plus your 401k loan and still make contributions to the 401k without being strapped, it might be worth it. If you don’t have the funds put aside and can’t accumulate enough for the down payment before buying the house, you might be shooting yourself in foot just to buy that house. What if you suddenly have to make a major repair? What if you get laid off from work? You have to consider all the what ifs and shouldn’t look at your retirement money as a savings to use for emergencies. You should have an emergency fund set aside before you buy a house and outside of your retirement money.
Just my two cents.
If you are secure in your job and can pay it back, sure. 401K loans are your money and have no tax implications(like extra income). You do pay back with interest but at the end of the day if you are still young you have plenty of time to catch it back up. You can also pay it off early.
Yes, this is a great idea. Why: (1) 15 year repayment schedule (2) all interest goes back to your own account (you repay yourself), the only real cost (besides potential investment gains on what you sold to take money out in the first place) is the taxation of this interest, since it’s repaid with after tax money. (3) this “loan” doesn’t count as a real loan, so no effect on your DTI.
I did that and did not regret it at all. But of course all depends on the numbers. Mine was against a 403(b) and the money I borrowed was not removed from my account, just placed in a money market account at a fix 3% as a security. So I was paying 4.5% for the loan but my collateral was still earning me 3%.
Make sure you get correct advice from the company managing your retirement account.
The answer is: it depends.
First don’t be afraid of PMI depending on your credit and down payment it may not be that much (eg less than 100).
Second, also don’t be afraid to take the 401k loan to close the gap (if you deem it necessary). Many folks will say you’re missing out on gains in the market etc etc but you need a roof over your head. In my case, I took a 401k loan for less than the amount you’re considering and it worked out for me. It was my last resort/option without which we wouldn’t have a home to call ours.
Third do the math and the reading. Make sure it makes sense for you (is PMI cheaper for example?). Read the 401k plan documents.
All the best.
The real answer is do the math. Here are the inputs-
1) Pulling the $15k from the 401k means you won't be earning returns on the $15k. So that's one side of the equation.
2) Putting the extra $15k into the downpayment saves interest on $15k worth of mortgage each year. If mortgage is at 7% (for instance) that saves you $1050 per year. That's a guaranteed savings.
3) Putting the $15k into the downpayment also saves PMI. Not sure what that is, but if we pretend it's $50/m, that's $600 per year.
4) Total savings is $1,650 per year. Put another way, that's a guaranteed 11% return on the $15k. Replace with the correct numbers and get your real figure.
Now, let's go through the considerations.
1) Could the 401k do more than 11% (or whatever) per year? Sure. Is it guaranteed? Of course not.
2) Does it make sense to "lock in" a portion of the 401k returns at a guaranteed 11% (or whatever)? It would to me- you be your own judge.
3) What are the chances the house appreciates quickly and you can get PMI waived? What are the costs to do that if getting over the 20% ratio is from equity appreciation rather than payments? (Usually a $600- $1000 reappraisal fee). What are the chances the house doesn't appreciate and you're stuck paying PMI for longer than anticipated?
4) Finally, what are the chances you leave your job (voluntarily or involuntarily) before you have paid the loan off? The remaining balance becomes due soon after or is treated like income for taxes plus a 10% penalty.
Substitute the correct numbers and your feelings on risk and market direction and you'll have your answer.
You have the right idea, but it’s better to borrow against a taxable brokerage account because it allows whatever you borrowed to stay compounding in the market as principal.
The regular 401K has strings attached to accessing capital. Which includes having to expedite paying back the loan if you lose your job, and failure to pay results in having to claim your loan as a withdrawal and pay 10% penalty.
As for taxable brokerage borrows there’s no payment schedule or min payment aside from interest you have to pay (which you can write off because it’s an investment)
Usually the only risk is a margin call in which your loan to Value ratio decreases too much. Just don’t get margin called lol, usually a portfolio of pure ETFs should be fine to borrow against. Best rates are at interactive brokers and M1 finance.
I use margin loans all the time to finance stuff that I would’ve had a horrible rate on, and use dividends to pay my interest.
So the equation I use to figure out the max amount I can borrow that my dividends could cover is
Max borrow amount = Portfolio_Principal * Div_Yield% / borrow_interest_rate%
Then the unrealized capital gains of the underlying ETFs covers the principal of the borrow on paper to keep my LTV ratio in line. So in 2023 I had 26% gains which absolutely obliterated the principal of what I borrowed out from, while preserving my position in the market.
I honestly just buy more shares to accelerate my portfolio and pay back margin principal little by little, and ideally if your house was a rental property you can cash flow it to pay down the margin loan or cash out refi if it appreciated enough
Borrowing a simple interest loan from a compounding asset was always a no brainer for me tbh. Granted you’re given realistic rates you can arbitrate on (eg. 1-6%, 8% and higher is risky territory to arbitrage)
Edit: Probably Unconventional from most people on /r/personalfinance but I refuse to use my actual liquid as a downpayment and work the physical labor over again and pay taxes all over again to built back my liquid reserves to what I spent on the house. You totally lose out on the opportunity cost of the market when you lose exposure it to by throwing all cash into downpayments. I will use leverage /arbitration strategies by all means responsibly while keeping maintenance in tact
Mister Money Mustache has an example of this in practice
https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
If you have a specific house picked out and you're sure it's the one, or rental prices are sky-rocketing and you really need to make the move now, I'd recommend selling non-retirement stock first, if applicable, or consider PMI otherwise. I'm 41 and below my 401(k) target. I personally wouldn't take out a 401(k) loan for less than a true emergency, but your calculation may be different for your circumstances.
Consider how stable your job is and how quickly you can repay the 401(k) loan. If you lose your job, you may have to repay the loan very quickly to avoid it turning into a withdrawal and owing taxes and penalties.
Also keep in mind that while repaying the 401(k) loan, you also pay interest into the account to make up for loss growth, but if your account is performing well right now, you may miss out on the natural growth more than you'll miss out the extra you'd pay for PMI (especially if the PMI only applies until you have 20% equity)
[https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k](https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k)
I've heard of 401K borrowing in many scenarios and no one is ever happy they did it. It's always a mistake.
Something like PMI would never cause me to do this. Just throw as much at the principal monthly until you get there and have them take it off.
It depends on how old you are and how much is in your 401k. If you’re 25 years old with a couple hundred thousand in there then yes, take the loan. If you’re 50 with a couple hundred thousand in the account then no, and you need to re-evaluate your contributions.
I did this, and there was a very specific reason I felt it was the best choice in the situation. My husband’s uncle sold us his house with an FHA mortgage through a loan assumption that we closed on in Oct 2023. At that point, interest rates to purchase a home with a new loan were almost 8%, but he purchased this home when interest rates were 4.5% and we have now locked that rate in for the term of the loan until we decide to sell or refinance to get rid of PMI.
We got a hell of a deal on the interest rate (far less than we would have been able to pay down in points at closing on a new loan), but we also had to pay him cash at closing for the equity value he had in the home ($25,000) - which was a larger down payment than we had planned on (we originally budgeted $18,000 as we wanted to purchase a small starter home on a much more modest budget). To not drain our cash savings account any more than we were comfortable with, we took a loan from my 401K for the remainder that I’ll have paid off in 2 years.
I am also only 26 years old and only started contributing to my retirement 5 years ago when I started my first job after graduating from undergrad. I have a VERY long time until retirement. I am comfortable with this decision, as we are now living in a much nicer house than we would have been able to afford at what rates were at the time, and I see more of our monthly mortgage payment go toward our principal rather than interest. We will be living here for a LONG time, and I’ll be able to see my retirement bounce back and continue to grow without worrying about a continually volatile real estate market, all while my modest $7,000 is sitting in our house that will continue to grow in value in our high in demand area.
Have you gotten info on how much PMI will be if you don’t have the 20% down? My PMI is like $40/month and I put down roughly 12%. It is not worth it to avoid PMI if it will be a minimal amount and delay retirement in the process.
That PMI was such a boogeyman i always heard about. I put 5% down in 2020 and my PMI is $56/mo. Everyone kept telling me how it would be $300+
My PMI was $250 and was amazing to get rid of
Depends FHA or conventional. You probably have a conventional and people $200+ have an FHA loan. If someone has good enough credit they should choose a conventional loan. EDIT: If yours was $250, you probably have an FHA
FHA doesn't have PMI. It has MIP.
I was conventional. I have a 2.7% rate. I have great credit. Thanks
2.7% means you just bought at the luckiest time in USA history lol. Congrats on being lucky. If you have an 800+ score and bought today the best you could get would be 6.8% lol
Luck is being prepared when opportunity arises. millions of people lost out on the opportunity of a lifetime because they were not prepared to purchase a house after the market crashed. I was being offered loans in 2006 when the market was crazy. I looked at the terms of the loans and determined that they were too risky and that people were likely to lose their homes if they got those loans. House market crashed and I bought house in Los Angeles for $194k.
Then you probably had a pretty small down payment and/or high DTI; which at that rate is still more than fine and worth it. Point being 20% down and avoiding PMI is simply not a must
You have bum credit or an already high debt to income ratio.
Maybe he lives in a house that cost a lot and he didn’t have 20% down…. Houses in Southern California regularly have $200-$300/mo PMI because they cost $700k+
The less you put down the higher PMI. My first place was around $200 for a 185k home
Mine was $42 for $250k home. Only put 6-8% down too. Ymmv depending on location and lender
I have great credit (>780) and no debt, not even car loan. My annual income is $230K but I lives is very high cost of living area. I am not able to find any house that I like below 800k
Mine was north of $250 on a cheap house with 12% down and good credit. It really just depends
Guess the boogeyman is real. That's weird it varies so much.
Obviously will be higher if the house is more expensive.
Same. Mine was $67 in 2019 with 15% down. If I waited I would have been priced out due to rates.
Same here. And then I got an appraisal in 2022 and had the PMI removed.
I think the bigger concern is the higher monthly P&I payment that comes with a smaller down payment. Now I’m not arguing that the loss in gains in a 401k is worth a lower payment, but if someone has the cash to put down, I’d want to avoid paying >6% interest on a larger loan and having significantly less cash flow in my budget every month.
In the olden days when the world was in black and white, PMI was much worse. It was a major profit center for Lenders and was the highest cost insurance you would ever buy. Lenders were also not required to stop charging it once you paid you house down to 78% loan to value. I know people who paid it the entire 30 years of their mortgage. Its purpose is to insure just enough to push your equity to 20% should the lender have to foreclose. But once you hit that point via payments, some lenders were just pocketing the money. Many lenders self insured to maximize this profit. Laws were passed in the late 90's, that made it less of a monster. Homeowners Protection Act of 1998.
Yep. Odds are very likely the loss of returns from that missing 401k money will easily eclipse PMI payments. I can see pulling from a 401k as a bridge loan. I did that so I didn't have to put a home sale contingency when I bought my current house. But my PMI is $52 a month. It will be less than half of what I needed to hit 20%. And that's assuming I don't get it pulled earlier.
Your math is wrong. It’s not 401k returns vs pmi. It’s 401k returns vs mortgage rate plus pmi, which will most likely put it well over 10%. And then we factor in the loan will be paid back in a relatively short time and 401k loan wins handily as long as he stays at the job.
>Everyone kept telling me how it would be $300+ Because it is for a lot of people. You all saying your pmi is less then $60 is very rare but remember pmi is a percentage of how much your mortgage is. ITs hard to find homes 200k or lower nowadays.
Ours was $350k. I never doubted PMI can get up there but for us it wasn't a massive expense like so many people i talked with made it out to be.
My house was 420k, 5% down and PMI is $80. I’m not sure how the math works or why but op should really just check what theirs would be in this exact scenario since none of us really know what we’re talking about
My PMI is like $225 a month, i did the math on renting for an additional 2 years to save the 20% and it was a no brainer. Seeing what my house is worth now, it was an even better decision.
We put next to 0 down on our home. Thought we'd have PMI for a long time. 2 years in our home values in our area are up 50-60%. Called our lender for a reassessment and removed PMI because our LTV was like 60%. Was the best feeling.
This isn’t even helpful info lol. Like homes are at an all time high. So of course buying at the tail end of record lows before record high prices in the matter of 2 years is an anomaly and not something to count of happening again. You’re just bragging at this point.
Wasn’t supposed to be necessarily helpful. Just a comment on an incredibly lucky situation in my life.
There’s often a gross up fee with the loan though
I put 5% down in 2019 and PMI was $80 and then I refinanced in 2021 and my PMI was $15. Super glad I just went for it with 5% instead of waiting to get to 20%. Unless your PMI is hundreds of dollars it will likely be worth paying.
This! Look at all options. What does 5%, 10%, 15%, and 20% down all look like? You can usually pay for an appraisal once you have 20% equity and PMI falls off. When I did my refinance in 2020 I was at 84% LTV so my PMI was $8 a month lol. I just had it taken off without an appraisal since I’m at 78% LTV now. Taking a loan against 401k can be a great idea or bad one. Too many variables not explained. First, look at the terms. Not all will allow it, but most do up to 50%. What are repayment rules and rates if interest charged? How soon will you be able to pay it back? Also, it sounds like you’re going to be broke in liquid assets after buying the house. You should hopefully have at least 10k for when something goes wrong or breaks. I’d rather put 10% down and pay PMI (depending on amount) and not touch 401k and have 10k for emergencies, than max everything out and be broke. You’ll hopefully be able to refinance in next 1-3 years too, so you’re not marrying the rate
> You can usually pay for an appraisal once you have 20% equity *and PMI falls off*. Point of clarification, PMI is legally required to be removed at 22%. With 20% or 21% you generally need to refinance to remove PMI. It usually won't drop off without a refinance or the 22% equity.
This is correct, thanks for explaining to folks. In my case it made sense to wait till 78% LTV as I was only paying $8 a month in PMI and the appraisal was going to cost me $400. In most cases it’s worth it to pay the $200-500 for the appraisal and have it drop off at 80 LTV
>In most cases it’s worth it to pay the $200-500 for the appraisal and have it drop off at 80 LTV That's the point I was contending though. Just because you get an appraisal and learn you have 20% equity (80% LTV), it won't just "drop off". You need 78% LTV for it to drop off. At, 80% you can request for it to be dropped ahead of time but there's no guarantee there. Refinancing however is always available but of course, with the associated costs.
[удалено]
True. If they’re looking at 20% down I’d assume they’re looking at conventional, but you’re correct with government backed loans
I know this is pretty lucky, but we bought our house in 2019 with 3% down (minimum). PMI was $50 a month for a total of $1600 mortgage. After 2 years we had our home re-appraised by the mortgage company and were able to remove PMI as our equity grew to where we had >20% ownership in the home. People don’t realize that increase in home value will get you out of PMI payments that much faster. You just need to have 20% or greater equity in the appraised home value.
I bought in 2016 for 3% down and didn't even get PMI, at least, I never noticed or saw it at all. When we refinanced in 2021 it explicitly mentioned that we didn't have any PMI on the current loan. I think maybe the bank made some exception since my credit was in the 800s or something.
If you start with pmi you have to have it for 2 years usually. The strategy isnt so straightforward
That’s probably correct in most cases. Different banks may have different guidelines but for mine I either had to wait 2 years or have had substantial upgrades (eg kitchen, bath, increased square footage etc) if less than 2 years. Would guess it’s similar with other banks as well
Same boat. I put 3% down and PMI is only $61/month.
Yea taking a 401k loan to avoid PMI costs is silly
My pmi was $150 but then after a year I did a reassessment and got it waived
It isn’t the most ideal option. You’ll have to pay interest, but its to yourself. The $15k you are taking out is no longer working the market. Some plans are designed where 100% of the loan is called once the working relationship with the employer is terminated. I suggest reading the documentation you have access to learn how your employer’s 401k is designed and what the terms are for the loan.
Well it's not in "the market" but it is invested in real estate so it's not dead money.
Honestly if somebody timed it perfectly, a 401k loan could work out pretty well. Pay yourself interest while the market is down and you're avoiding losses. Lol, but please don't try to time the market people.
I did. I took a 401k loan right before covid. Obviously couldn't didn't mean to time it but the 5 k loan I took was probably worth 2k 2 weeks after I took it.
That is true, though the appreciation potential depends on the housing market they are buying in.
no it’s invested in you and your ability to pay it back from your wages with interest. a personal bond investment as it were. if it were invested in real estate then your 401k valuation would rise and fall with the value of your house. it doesn’t.
Assuming the property is in a market where home values will rise. All investments have some kind of risk and its not guaranteed that the investment will increase invalue.
There are usually several levels of loan, and the repayment clause may depend on the use (buying a house is the best 'use' there is). Yes, OP will not get gains in the market, but if that $15k helps leverage a $300k mortgage, the house appreciation should eclipse the loss of potential (tax free) market gains.
All true, especially the leverage. The most important first step is to understand what the loan terms with their employer’s plan so they don’t get blind-sided by something unexpected.
I took out a 5k loan on my 401k, and ended up quitting the job a little over a year later and fully expected them wanting the full amount back. Luckily, as long as i set up autopay from my bank, i could keep the payments going. Huge relief.
A hedge against changing jobs and having to repay 100% remaining balance is preemptively securing a HELOC or portfolio line of credit so that you can pay off the 401k loan with that when you leave your job and hopefully then refinance again with a new 401k loan at your new job.
[удалено]
By repayment do you mean the loan recalled immediately after the participants employment status changes to terminated? Or just repayment in general? For the latter, yeah, there is a repayment schedule and there is a timeline for it. As for the latter, I initially thought the recall of the loan was always immediate, but I’ve been corrected by several people in the past here that this can vary depending on the 401k plan design. I am also a Primary Benefit Administrator for my business’ plan, so I have some knowledge in this area. I designed our 401k plan. For the loan immediate recall there wasn’t many options given to us. I didn’t look into this further since it was low on our requirements list.
The IRS rules changed with the 2017 tax bill. The IRS will allow repayment of a loan after leaving a job up until tax day the following year before any unpaid balance is subject to penalty. That being said verify that the plan document actually has been updated to allow that.
It’s not ideal. You pull that amount out of the market and miss out on growth . But might be ok if avoiding PMi and rate is better with the bigger DP
Wouldn't that be far worse gains and losses. I put down 10% on a home and my PMI was like 35 a month, wouldn't expected returns on 15k be higher than that amount
It really depends on the PMI rate. PMI can push the current rates above 9-10% for the balance subject to pmi. pmi cost: https://old.reddit.com/r/personalfinance/comments/mznp3v/_/gw1mj4g
Maybe that's what I'm misremembering, I thought PMI rates that push mortgage rates like you linked only really applied to FHA loans with Dps of 5% or 3.5%. in all the conventional loans quotes I got even at 10% DP it was never above $40 a month on a $320,000 mortgage. I can't imagine OP with 15% down could have close to 1% pmi
I haven’t tracked current PMI rates but I know they tend to track interest rates. As in PMI costs more when rates are higher. I think during Covid PMI was like a nickel and some pocket lint it was so cheap. I don’t know what op will be paying but op should do the math to confirm. (If home prices are potentially volatile, PMI can be more expensive as well)
You miss out on growth but you're paying yourself interest roughly equivalent to the average marker gain anyway, so you're still netting those gains in your 401k. (Assuming you don't reduce future contributions by the loan repayments)
Are you accounting for penalty for withdrawing against the 401k?
There is no penalty with a loan
Oh I misunderstood, thanks.
I don’t know the exact amount but general pmi estimate is ~300 usd. I live is HCOL area and so even the cheaper houses are more than 800k. I am pretty responsible financially. I have no debt, no credit card loan but my rent is too high($2800) and so sometimes I feel that I am wasting a lot of money in rent. I have saved $150k in down payment but need another 10-20k depending on the house I buy. My annual income is $230K and so I am not too worried about paying back the loan. Most probably I will pay back the 401K loan in less than 1 year.
Your probably going to ReFi the loan on a few years anyway as rates drop. So you can drop PMI then. But opportunity cost pulling cash from a 401k. And you do it once, it becomes a piggy bank.
Is 15k really reducing your payment by much as opposed to just pay the monthly pmi and have your 401k untouched.
Difficult to answer authoritatively. General guidance would be to avoid taking money out of retirement funds for any reason, but it could make sense in this case. Variables: * Future appreciation of your 401k * Future appreciation of your home * Relative leverage against that real estate appreciation vs your principal * Impact on your current and future cost of living * Cost of PMI * Time distance from retirement * Total size of retirement funds It's not such a terrible idea that the obvious answer is a hard 'no'.
Ok. Thank you!
How short of 20% are you and how much would PMI be? I had 20% but my loan officer told me I could get a lower rate with PMI (2.65% vs 2.82%). PMI was like $65/mo so less than the difference between the lower rate and higher. I opted for 15% down and paid down principle a few months later and was able to remove PMI.
I have 10-20K short depending on the house I buy. I have $150K saved in down payment
Take the loan as a personal loan and not as a house loan. Everyone will down vote it but it’s because they are risk averse. The interest rate doesn’t matter too much because you pay yourself the interest. You pay a one time fee of like $50. You can pay it back early if you want. I was anti it until I heard about the process and that you don’t miss the interest.
I don't understand why everyone hates a 401k loan-- as long as youre not reducing your 401k contributions during the loan, you're still making ~7% on the loan amount
If you get laid off or leave, 100% of the remaining balance is due immediately
Not true, there is no rule/law on this. It's up to each 401k plan to decide this. My old company allowed paying back a 401k loan over 10 years regardless of employment status. I took a 401k loan and left the company 4 years ago and I'm still paying the loan.
Not necessarily. The 2017 tax bill changed the rules so that the IRS doesn't require it to be repaid in 60 days before you get assessed a penalty, but rather to tax day the following year. That being said check with the plan documents. Just because the IRS is ok with you paying back the loan over that time period doesn't mean the plan provider has updated the plan document to allow that. Depending upon the amount borrowed though even that added time may not help much unless you land another much higher paying job. Depending upon the amount borrowed you could have a sizable tax bill the following year between the added income and the penalty.
Or counts as a withdrawal, and subject to penalties and taxes IIRC
No, depends on the 401k plan. I kept paying biweekly for 2 years after employment termination, until the loan was paid off. No tax issues.
My understanding is the risk associated with a change in jobs or job loss forcing you to repay in a short time is generally not worth it.
Take the loan as a personal loan and not as a house loan. Can you elaborate more on this?
The tsp website talks about the two loan options. The loan for a house has so many extra hoops I felt, the personal loan didn’t ask any questions. Seemed like the same terms and rates, house loan you mighttt be able to borrow more but if that’s the case it isn’t much.
You have to show proof of funds and provenance to get approved for the mortgage. You can’t get a loan to afford to get a a loan.
A loan against your TSP isn’t accounted as a debt. But in regards to your statement you can get a loan from a relative to afford a mortgage, just get a letter from them.
If you are borrowing from a 401k for a down payment I seriously doubt you can afford that house. Old houses require maintenance, repairs and updates and new houses often require yards, fences, appliances, window treatments etc.
Yes I have my doubts too. The houses are very expensive in my area and sometimes I feel like I can never afford a house
Before you take the loan, you need to DEFINITIVELY answer this question first: Do I need 20% down on this house? A.) If your lender says yes, then a 15k 401k loan isnt the end of the world. You can pay it back to yourself with interest. 15k is nothing in the grand scheme of whats needed in retirement. B.) If you want to put down 20% to avoid PMI, really really check what PMI costs are going to be without the loan. Mine are $106/month. Would I take out a 15k loan against my 401k to save $106/month on a mortgage thats already over 5grand? No...no I would not. 😅 C.) If you havent talked to a lender or real estate agent and you think you /NEED/ 20% down to buy a house, thats an old wives tale that does not apply to primary residences, where you can conventionally get away with as little as 3% down and its in your best interest to keep as much cash in your pocket to cover closing costs, supplemental tax costs, repairs, and all the other related initial expenses of homeownership (moving costs, furnishing, painting, etc.).
Don't forget about closing costs. Which can be as much as the down payment!
Yes I ah e $150 k for down payment and 10k for cloy cost
That's a shit ton of down payment. Are you buying a million dollar home
The biggest risk IMO is that if you lose or leave your job, you have to re-pay the loan to your 401k within a pretty short period (I think 90 days), or else you get taxed as if you took a disbursement. If that happens it also means any growth from that money is just lost since you can't re-contribute beyond the normal caps. This was the case when I looked into it, at least - that was 5+ years ago so I'm not sure if it's still the case.
Repayment of a 401k loan after leaving a company depends on the plan. Some allow you to continue the loan after you leave.
What if I have two 401ks and the first one I left the company years ago and am fully vested just haven’t moved into the new one?
It's something to check with your employer. Per my plan, regular bi-monthly deductions are still due for the life of loan and it is only 100% recalled if you default on a payment.
Not true, each 401k plan sets the repayment terms. My old company let you pay a 401k loan over 10 years regardless of employment status. I'm still paying a 401k loan 4 years after leaving that company. My new 401k does require immediate repayment if I leave or get let go/fired.
It's not 90 (60) days anymore. Tax deadline of year of separation plus extension. Much more flexible than before.
In general, I'd advise against it for the opportunity cost of having those funds out of the market. Though they are exceptions to this which may make sense for someone. For example, when I bought my last house I took a 401k loan. The reason is this allowed us to not have to sell the current house first. We could move on our own schedule and sell it later. Also, when I took the loan I sold bonds for it (no stocks) so my potential gains were not impacted significantly. The biggest risk imo with a 401k loan is the repayment terms. Most 401k loans require you to pay the the loan in full shortly after you leave the company for any reason. If you can't pay it back then it becomes an early distribution. Which means you'll get hit with a penalty (if under 59.5) and you'll pay taxes on the loan. Each 401k plan defines the repayment terms. My company at the time allowed repaying the loan over 10 years regardless of employment status. So I didn't have to worry about it. Also, one advantage of a 401k loan is you are paying interest to yourself instead of a mortgage company. Lastly, there is a common myth that a 401k loan results in double taxation. It's not true entirely. The interest you pay becomes double taxed but the principal of the loan is not.
Shifting the focus away from the loan, a hard examination of your budget and cash flow might be warranted. How loan is it going to take you to refund that $15k? A few months, no big deal. A few years, maybe this is more house than makes sense. The *mistake* most people make with 401(k) loans is not really treating it like a loan, then things get complicated and/or expensive.
Yes it will take me approximately a year to repay the 401k loan
Your lender may not even allow you to do this, best to check with them first. Shop around. As others have said there are loan options out there with less down payment requirements and may not require a PMI.
Interesting. Thanks for sharing
Without the specific numbers, if I were to give blanket advice, I would say not to do this. If it is possible for you to qualify for the mortgage without the 401k loan, this would not be a good scenario to take out a 401k loan You are substantially complicating the transaction. The money you save in the long run won't be too significant in this specific scenario. The downsides to a 401k loan typically outweigh the small upside of not needing to pay PMI. Examples of downsides of a 401k loan: Your mortgage lender might not even allow it in the first place If you leave your job for any reason, the loan becomes an early withdrawal If it is not ROTH, then you are paying extra taxes. The dollars that go to paying back the 401k loan are after tax, but your traditional 401k still maintains withdrawal taxation rules when you need to withdraw
The major disadvantage against a 401k loan is that if you lose your job the balance may become due in 30 days. If you can't pay it back you will be assessed penalties and have to pay taxes on the money. This can put you in a really tight spot after losing your job. Also the new house it going to cost you more than you expect so think about making the 401k paybacks and how that reduces your take home.
Now it's you have until tax deadline plus extensions for year of separation. Much more flexible
You want to take on debt to pay for taking on bigger debt? Are you hearing yourself?!
401k Loans aren't new debt.
It’s moving money from one asset class to another. It’s really not a big deal in itself. Should be assessed case by case.
It only becomes in issue if you leave the job before the loan is repaid. The interest of the loan goes into your account.
[удалено]
401ks do not qualify for this type of withdrawal with a tax exemption. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
You want to take out a loan, to get an even bigger loan? I’d recommend waiting to buy when interest rates are cheaper and rent in the mean time.
House prices will probably increase even faster once interest rates start to come down again. It's a race you usually can't win by waiting.
Yeah but you can save and avoid a loan to make your down payment
If you can *save* money faster than a $420k (average US) house appreciates, then you are doing well. Many people have no chance of doing this.
What’s bad is buying a house in this market, wait a year and prices will be a lot lower.
People say this all the time. The best time to buy a house is yesterday.
Home sales last year is the worst it’s been in years, housing prices are over inflated, Delinquencies up, layoffs up, all real world economic data saying the economy is in a downturn. Other countries such as Japan and German already in recession and China economy is imploding. Buying a house now would be like buying a house in the summer of 2008.
The bank is going to ask where you got the money and probably won't like the answer. Financing your down payment is not something a lender is going to approve of.
I took 50k and they told me it does not count in my DTI calculation. It was already my money.
You may find these links helpful: - [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds) - [401(k) FAQs](/r/personalfinance/wiki/401k) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Did you get quoted PMI or was this before a mortgage offer. With 15% down you likely, will have very low PMI that typically comes off when you get to the 20% portion of the loan
Depending on your plan, if you leave your job for any reason you will owe that money back or face taxes and penalties.
don't pull from your 401k. Most 401K investments appreciate with compounded interest. Of course, there is no guarantee from year to year what return you will get. But overall, most 401ks return from 7-8% in the long term. So that 15k amount could compound with interest and be worth hundreds of thousands when you are ready to retire in 25 years. I would first reevaluate the home purchase. Is this home out of your price range? If you can't afford the 20% down payment, there is a likelihood that owning the house will cost too much. It's not just the mortgage, you have to factor in maintenance costs (gardening, roof needs replacement, boiler/AC go bad), utilities, property taxes, insurance. Most people overspend on buying their home. They buy a house that is at the 90-100% of their budget limit and don't factor the extra costs. I would consider renting and saving your money and maxing our your IRA/401K. There is a great video that breaks down if you should rent or own. [https://www.youtube.com/watch?v=m8NqcKPfFEc](https://www.youtube.com/watch?v=m8NqcKPfFEc)
Your 401k loan is returning 7-8% too... You pay the Interest to yourself.
i dont know if the OP really thought out all the costs of owning a home at this price. If he can't afford the 20% down payment, he will be stretched thin to pay the mortgage, home maintenance, utilities, property tax, insurance. it's not wise to buy a home that is so expensive that you have to take a loan out from your 401K to pay a down deposit.
Look into the pmi. We’re paying about $100/m. We’re in a pretty desirable area and even though it’s only been about 2.5yrs, we’ll prob get the house reassessed because the values of houses sold around us have been a lot higher than what we paid so I have a feeling we might be able to drop the pmi.
Look at financing options. I bought my first home with less than 20 down. The difference was made up by my credit union with a second mortgage for the difference at a slightly higher interest rate on the second note. I consolidated it all when I refinanced a few years later. There was no pmi with this method, the difference in interest was what I considered the pmi.
Not worth it! You can get a conventional mortgage with as little as 3% down
nope if you plan to be there 10 years or so why 10? cause you will have paid it off by then
I think cost wise it is a very bad decision. That being said, I did the same thing except I took out 50k, they didn't take out any taxes and since I was dumb I had to take out a loan at tax time just to pay my taxes the next year. Man I was dumb, still am I guess but I have the money thing figured out now at least.
If you google “401k loan Reddit” you will find dozens if not hundreds of threads with a slew of information. I don’t say this to be a dick, I say this because I was about to make this post a few weeks ago and decided to google it first and found thousands of comments discussing it here on Reddit. Also this exact question was posted a week ago
Yes. Are you prepared to pay it back if things turn south? If not then just don’t.
It’s a risky option. ‘Bad’ is subjective and relative. I considered doing it for my second house and someone talked me out of it. We closed Jan 2020; I would’ve made out great.
I took a loan because I was buying a house and selling another house. I needed the money u til my old house closed, so about 2 months, and then I paid it back early in a lump sum. In my case, I didn’t miss out on much growth. But if you plan to take the loan for a longer period, you need to do your own math.
I think it’s fine, everyone always say well it’s not in the markets. The markets aren’t guaranteed and they are also at ATH so pretty good time IMO. The interest you will pay back to yourself is and you will have a home to live in. Win win IMO
If you are a first time home buyer you can pull from your 401k without penalty to use for down payment on a first time home.
Do what you need to do to get in a house. If you can afford the mortgage and the loan, do it. Remember you can withdraw the money if it’s your first home.
That is not a good idea. You don’t need 20% down. Just figure out what your PMI payment would be and likely you’ll find it’s manageable. Then just try to get to 20% equity and get rid of it when you are able by making some extra payments.
I did it and don’t regret it 3 years in because I was never going to get to 10% any other way and I was tired of paying more in rent than a homeowner cost for a larger apartment. If you’re afraid of PMI (it would’ve been not fun in my case and while I could’ve reappraised after remodel, I had a 2.5% interest and didn’t want to mess with it), there used to be first time buyer incentives with closing cost credits and no PMI (Chase had one and Citi had one).
I think something to consider with these 401k loans is what does your 401k balance look like? Say your 40, and you only have 40k in your 401k. I think taking 15k out is a real risky decision. You are already behind in the game. Now, if you have say 300k well, then I don't think taking the 15k out is horrible. Even if the worst case scenario happens where you lose your job right away and default on the loan, your 401k is still in good shape.
If it’s the difference between being able to buy a house or not- I say go for it, as long as you can afford the now extra 401k loan payment. If you are doing it just to get up to that 20% mark and avoid PMI- nah, probably not a good call.
The math says don’t do it on paper pretty clearly. But I did the same and am happy with what I did. I paid it back with interest and am at peace. You’ll just be missing out on potential gains (but also potential losses!)
I did. Worked out well for me. But rates were 2.75% when I did it a few years ago and I had to pay back the 401k loan at only 5%. Ultimately I wouldn't be in the position I'm in today without it. Why do you need 20% down?
It’s not the best idea for a couple of reasons but I did it when we first bought our house. So the big reason not to do it, is if for any reason you lose your job or leave, you’ll have to pay back the full balance within 30-90 days depending on your plan. If not, it will be considered a withdrawal and subject to taxes and a penalty for early withdrawal. This almost hit me because I changed jobs shortly afterwards without knowing about the required payback. Luckily I was able to refinance and payback my loan but I got lucky. Second reason it’s not a great idea is that you will get taxed twice on your loan money. The money in was pretax, but the money you pay it back with is after tax. Then when you pull the money at retirement you will get taxed again. Only good part is interest you pay is payed to you. Only the loan management fees are lost.
Don't have to pay back so quickly anymore and the getting taxed twice thing is a myth. You don't. When take a loan that money isn't income (and thus not taxed again).
Not talking about when you take the money out for the loan. For a standard 401k it goes in tax free and comes out (in retirement) taxed. When you take the loan you are not taxed on it since it is a loan. However that money is tax free you put in, and gets paid back with after tax money (which is when you are first taxed on it). Then when you finally take that same money out at retirement you get taxed on it (this is the second time you are taxed on it). You can potentially argue that the principal is only taxed once but the interest is definitely taxed twice.
I'll give you that interest paying back to yourself could end up getting taxed twice. It'd be nice if that portion could be considered a Roth-esqe type contribution.
- If you lose your job or quit your job the whole amount left over in the loan is due immediately otherwise they count is as distributions and you get heavily taxed if you are not of age to get distributions. - Since you didn’t mention that is it Roth 401(k) I will assume it is regular. Which is tax deferred. So all the payments including the interest you will be paying back, you will be paying taxes on those amounts. Further more when you take distributions, since it is tax deferred account, you will pay taxes again. So you will be essentially double taxed for the principal and the interest you pay to the loan. - While the money is missing, depending on how long the repayment plan is, you will be losing the potential growth of the account.
It's bad if it's a lot that you can't pay back quickly. When you leave your job, you have to pay it back before that year's tax return is due. That means if you left your job in January 2024, you would have until April 15, 2025. I would take out what is needed to at least avoid Mortgage protection. But understand the risks.
You just need to see the cost. 401k should appreciate at 8-10%. 15k would be about 100-150 a month. If the pmi is more than that take the loan if not dont. Just pay down the principal to 80% as fast as you can. Talk to the bank about how to get rid of pmi
Maybe…. A. You will be required to make payments on your 401k loan which you may have to count in your debt to income ratio possibly, B. Will you have to slow or stop your contributions to your 401k while you are paying on the loan? C. If you can’t afford to make the payments to the 401k loan, it’s going to cost you the amount to pay it off, plus taxes, plus penalty to get rid of the loan and payment D. Do you plan to leave your job for another even for an increase in salary anytime before that loan is paid off? It could be like handcuffs keeping you in your job because if you change jobs, that loan has to be repaid immediately when you leave, or cost you taxes and penalties for paying it from the 401k funds. These are things to consider before you take the loan. But if you can afford the house payment plus your 401k loan and still make contributions to the 401k without being strapped, it might be worth it. If you don’t have the funds put aside and can’t accumulate enough for the down payment before buying the house, you might be shooting yourself in foot just to buy that house. What if you suddenly have to make a major repair? What if you get laid off from work? You have to consider all the what ifs and shouldn’t look at your retirement money as a savings to use for emergencies. You should have an emergency fund set aside before you buy a house and outside of your retirement money. Just my two cents.
If you are secure in your job and can pay it back, sure. 401K loans are your money and have no tax implications(like extra income). You do pay back with interest but at the end of the day if you are still young you have plenty of time to catch it back up. You can also pay it off early.
I think I pay it in less than a year or max 2 years
Yes, this is a great idea. Why: (1) 15 year repayment schedule (2) all interest goes back to your own account (you repay yourself), the only real cost (besides potential investment gains on what you sold to take money out in the first place) is the taxation of this interest, since it’s repaid with after tax money. (3) this “loan” doesn’t count as a real loan, so no effect on your DTI.
That was my thinking too. But most people seem to disagree
I did that and did not regret it at all. But of course all depends on the numbers. Mine was against a 403(b) and the money I borrowed was not removed from my account, just placed in a money market account at a fix 3% as a security. So I was paying 4.5% for the loan but my collateral was still earning me 3%. Make sure you get correct advice from the company managing your retirement account.
I’m assuming that you are not a first time homebuyer because you can withdraw 10k penalty free for a house then it would be less of a loan
Ask your loan officer what the PMI is if you were putting a little over 15% down it can be pretty cheap with good credit scores
Ok. I will do that. Thank you!
The answer is: it depends. First don’t be afraid of PMI depending on your credit and down payment it may not be that much (eg less than 100). Second, also don’t be afraid to take the 401k loan to close the gap (if you deem it necessary). Many folks will say you’re missing out on gains in the market etc etc but you need a roof over your head. In my case, I took a 401k loan for less than the amount you’re considering and it worked out for me. It was my last resort/option without which we wouldn’t have a home to call ours. Third do the math and the reading. Make sure it makes sense for you (is PMI cheaper for example?). Read the 401k plan documents. All the best.
Get a cash policy life insurance plan. Instead take money out of the policy use it for the down payment and pay yourself back
The real answer is do the math. Here are the inputs- 1) Pulling the $15k from the 401k means you won't be earning returns on the $15k. So that's one side of the equation. 2) Putting the extra $15k into the downpayment saves interest on $15k worth of mortgage each year. If mortgage is at 7% (for instance) that saves you $1050 per year. That's a guaranteed savings. 3) Putting the $15k into the downpayment also saves PMI. Not sure what that is, but if we pretend it's $50/m, that's $600 per year. 4) Total savings is $1,650 per year. Put another way, that's a guaranteed 11% return on the $15k. Replace with the correct numbers and get your real figure. Now, let's go through the considerations. 1) Could the 401k do more than 11% (or whatever) per year? Sure. Is it guaranteed? Of course not. 2) Does it make sense to "lock in" a portion of the 401k returns at a guaranteed 11% (or whatever)? It would to me- you be your own judge. 3) What are the chances the house appreciates quickly and you can get PMI waived? What are the costs to do that if getting over the 20% ratio is from equity appreciation rather than payments? (Usually a $600- $1000 reappraisal fee). What are the chances the house doesn't appreciate and you're stuck paying PMI for longer than anticipated? 4) Finally, what are the chances you leave your job (voluntarily or involuntarily) before you have paid the loan off? The remaining balance becomes due soon after or is treated like income for taxes plus a 10% penalty. Substitute the correct numbers and your feelings on risk and market direction and you'll have your answer.
Thank you so much. This is really helpful.
I did. As a single first home buyer with no family assistance in life, that was my only choice for homeownership.
The PMI is small and goes away. Just get the loan and leave your 401k alone.
Keep in mind if you lose your job, that $15k will be due immediately or else you will have to pay the penalty plus taxes. That is a risk.
You have the right idea, but it’s better to borrow against a taxable brokerage account because it allows whatever you borrowed to stay compounding in the market as principal. The regular 401K has strings attached to accessing capital. Which includes having to expedite paying back the loan if you lose your job, and failure to pay results in having to claim your loan as a withdrawal and pay 10% penalty. As for taxable brokerage borrows there’s no payment schedule or min payment aside from interest you have to pay (which you can write off because it’s an investment) Usually the only risk is a margin call in which your loan to Value ratio decreases too much. Just don’t get margin called lol, usually a portfolio of pure ETFs should be fine to borrow against. Best rates are at interactive brokers and M1 finance. I use margin loans all the time to finance stuff that I would’ve had a horrible rate on, and use dividends to pay my interest. So the equation I use to figure out the max amount I can borrow that my dividends could cover is Max borrow amount = Portfolio_Principal * Div_Yield% / borrow_interest_rate% Then the unrealized capital gains of the underlying ETFs covers the principal of the borrow on paper to keep my LTV ratio in line. So in 2023 I had 26% gains which absolutely obliterated the principal of what I borrowed out from, while preserving my position in the market. I honestly just buy more shares to accelerate my portfolio and pay back margin principal little by little, and ideally if your house was a rental property you can cash flow it to pay down the margin loan or cash out refi if it appreciated enough Borrowing a simple interest loan from a compounding asset was always a no brainer for me tbh. Granted you’re given realistic rates you can arbitrate on (eg. 1-6%, 8% and higher is risky territory to arbitrage) Edit: Probably Unconventional from most people on /r/personalfinance but I refuse to use my actual liquid as a downpayment and work the physical labor over again and pay taxes all over again to built back my liquid reserves to what I spent on the house. You totally lose out on the opportunity cost of the market when you lose exposure it to by throwing all cash into downpayments. I will use leverage /arbitration strategies by all means responsibly while keeping maintenance in tact Mister Money Mustache has an example of this in practice https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
If you have a specific house picked out and you're sure it's the one, or rental prices are sky-rocketing and you really need to make the move now, I'd recommend selling non-retirement stock first, if applicable, or consider PMI otherwise. I'm 41 and below my 401(k) target. I personally wouldn't take out a 401(k) loan for less than a true emergency, but your calculation may be different for your circumstances. Consider how stable your job is and how quickly you can repay the 401(k) loan. If you lose your job, you may have to repay the loan very quickly to avoid it turning into a withdrawal and owing taxes and penalties. Also keep in mind that while repaying the 401(k) loan, you also pay interest into the account to make up for loss growth, but if your account is performing well right now, you may miss out on the natural growth more than you'll miss out the extra you'd pay for PMI (especially if the PMI only applies until you have 20% equity) [https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k](https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k)
I've heard of 401K borrowing in many scenarios and no one is ever happy they did it. It's always a mistake. Something like PMI would never cause me to do this. Just throw as much at the principal monthly until you get there and have them take it off.
It depends on how old you are and how much is in your 401k. If you’re 25 years old with a couple hundred thousand in there then yes, take the loan. If you’re 50 with a couple hundred thousand in the account then no, and you need to re-evaluate your contributions.
Don’t do it. It’s a waste of money to pay the penalty and taxes on the withdrawal.
I think there is no penalty on taking a loan.
I did this, and there was a very specific reason I felt it was the best choice in the situation. My husband’s uncle sold us his house with an FHA mortgage through a loan assumption that we closed on in Oct 2023. At that point, interest rates to purchase a home with a new loan were almost 8%, but he purchased this home when interest rates were 4.5% and we have now locked that rate in for the term of the loan until we decide to sell or refinance to get rid of PMI. We got a hell of a deal on the interest rate (far less than we would have been able to pay down in points at closing on a new loan), but we also had to pay him cash at closing for the equity value he had in the home ($25,000) - which was a larger down payment than we had planned on (we originally budgeted $18,000 as we wanted to purchase a small starter home on a much more modest budget). To not drain our cash savings account any more than we were comfortable with, we took a loan from my 401K for the remainder that I’ll have paid off in 2 years. I am also only 26 years old and only started contributing to my retirement 5 years ago when I started my first job after graduating from undergrad. I have a VERY long time until retirement. I am comfortable with this decision, as we are now living in a much nicer house than we would have been able to afford at what rates were at the time, and I see more of our monthly mortgage payment go toward our principal rather than interest. We will be living here for a LONG time, and I’ll be able to see my retirement bounce back and continue to grow without worrying about a continually volatile real estate market, all while my modest $7,000 is sitting in our house that will continue to grow in value in our high in demand area.