Many first time homebuyers are ready to take on the expense and responsibility of homeownership but lack the significant down payment that is generally required as part of a mortgage loan, or that is required in order to avoid the additional purchase of private mortgage insurance (or, PMI). While many prospective homeowners may not have a lot of cash in liquid savings, they do have alternate investment resources which inevitably leads down the train of thought in which the wonder, "what about tapping into our 401(k) or other retirement savings to use as a down payment and closing costs?" If this situation sounds all too familiar, and you are many years from your expected retirement age, ask yourself this question: Does it make sense financially to either
Yes; there are no laws or rules that prevent individuals from withdrawing money from their retirement accounts before they reach retirement age. That said, there may be some tax penalties associated with early withdrawals from retirement accounts that you’ll want to take into consideration before taking any money out of your retirement funds. 401(k) generally allow for the owner of the account to borrow money from the retirement account for the purchase of a home. These withdrawals are not subject to a tax penalty, but they are in the form of a loan, which must be repaid to your retirement account.
Borrowing money from your 401(k) to purchase a home is often a pretty quick and pretty easy process; but does it make sense for you to tap into your retirement savings to purchase a home? In order to determine what makes the best financial sense for you and your family, you’ll want to weigh the pros and cons to borrowing money from a 401(k) to fund your home purchase.
Finally, if you are borrowing money from your 401(k) in order to avoid paying for private mortgage insurance or PMI, you’ll want to calculate what your monthly PMI payment would be and whether it makes more sense to just pay that until you reach the needed equity in your home to request PMI removal.
Have you ever borrowed from a retirement account to help fund a home purchase? What factors would you suggest to others considering borrowing from a 401(k) to buy their first home? Tell us in the comments below!