A big concern and caution is to ensure that contributions to retirement don’t halt at the time of borrowing against it. If that happens, it can become quite detrimental to your overall retirement plan. So, it’s imperative to weigh the amount of money borrowed from your 401(k) to make sure your overall retirement plan is not jeopardized.
A word of warning is to make sure you can handle the payments on the 401(k) “loan”, plus the mortgage payments and any additional debt such as student loan payments. It is very wise to make sure you have an emergency fund as a new homeowner. Almost everyone who has owned a home can share stories about how issues arise in the home that need attention and not always at the most opportune times- i.e. a roof leak, water heater repairs, etc.
If a potential buyer is tight on cash in hand, but is certain he can handle the loan payments, taking a loan from his 401(k) could be a smart idea. It could set him up for lower monthly housing costs. In addition, if he buys a home and does some upgrades to it that creates immediate equity, this can be a great investment.
It is definitely becoming more common and has not been seen as a negative by lenders. If you are seriously considering this option, there are a few questions you should ask yourself:
- What are the payback terms if you change jobs?
- Can you afford the loan repayments in addition to the new mortgage payments?
- When are you planning to retire? Is your retirement plan going to be negatively impacted by borrowing from your 401(k), or will you have time to rebuild it?
- Would having this cash allow you to have a larger down payment and therefore not need mortgage insurance? Would this in turn save you money?