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Saving for a Down Payment? Your 401(k) Might be the Answer

Saving for a Down Payment? Your 401(k) Might be the Answer

Saving for a Down Payment Using Your 401(k)Shopping for a new house is an exciting process and feeling comfortable looking within a particular budget is usually how most people approach it. However, what happens if your dream home, in the Chicago Dearborn Park neighborhood or elsewhere becomes available and it’s just slightly out of reach in terms of cost? It would be disheartening to let that option go due to not having a large enough down payment, but what if the funding could be secured after all?

Some individuals who utilize their company’s 401k don’t realize that they can actually draw upon that money to fund a down payment on a home. By borrowing against oneself, a prospective homebuyer might come up with the money to make their dream home a reality.

How A 401k Loan Works

Assuming there’s a large enough balance in your 401k account, you might have the option to take a loan against it to fund your home’s down payment. By contacting your HR department, you’ll be directed toward the necessary forms to fill out to make the request. Different plan administrators have different stipulations in terms of how much you can borrow and how long you have to pay the balance back.

In many cases, the interest rates are very low and the payments are deducted directly from your paycheck. Since this loan is handled through a retirement account and not a traditional lender, the loan will not show up on the borrower’s credit score. Another benefit is that it does not count toward your debt when calculating your debt to income ratio.

Some Points To Consider

Taking a loan from a 401k account sounds like an easy answer for individuals who don’t quite have enough money for a down payment, but there are some consequences to consider. Assuming the loan is paid in full and on time, the option of taking out this kind of withdrawal is well worth it. Getting a dream house that once seemed beyond reach is usually a smart trade off for the small amount of interest the loan requires.

Yet homeowners need to realize that taking money from a 401k can have expensive consequences if it’s not paid back. Getting fired or laid off might make the entire balance of the loan due immediately, and not repaying the loan in full will make it subject to the taxes that come with an early withdrawal.

Borrowers also need to remember that not only does the home’s mortgage need to be considered, but their take home pay will now be smaller due to the repayment of the 401k loan. Make sure that you can absorb the cost of both payments over an extended period of time.

Some homeowners aren’t willing to take the risk of a 401k loan, and instead opt to purchase a less expensive home or explore loans that require less money down.

Run Some Calculations First

Taking out a loan on a 401k can be a great option if liquid assets aren’t quite where they need to be to afford your dream home, but make sure you run all of your numbers carefully. Not only does a new mortgage bring a host of expenses, but repaying a large 401k loan can add several hundred dollars of overhead each month. As long as this won’t create a financial burden, explore how a 401k loan could help achieve your dreams of home ownership!

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