Buying a home is a big deal and sometimes finding the cash for a down payment or even the equity itself for your home purchase can be a little nerve-racking. Many new home buyers may or may not realize that they can actually borrow from themselves in the form of retirement savings, but that comes with both some risk and reward.
If you’re thinking of borrowing from your retirement, then carefully consider what you’re doing and how it will affect your future. Here are the facts:
Borrowing from a 401K
Borrowing from your retirement can be done, but it may be restricted both in the type of retirement account you have, the total amount you can actually borrow, and the terms for which it must be repaid. Bear in mind that borrowing from retirement savings and withdrawing are two completely different things.
Generally speaking, in the sense of a 401k, you may borrow 50% of your retirement savings or $50,000 (whichever is least) and must be paid back by a certain amount of time. Withdrawing on the other hand, may result in an early withdraw penalty or have significant tax implications.
Can You Afford Borrowing from Your Retirement?
Most young or new home buyers with retirement savings significant enough to consider borrowing look at the amount available to them but neglect the fact that those borrowed funds must be repaid with interest! Using retirement funds for a down payment on a home sounds like a good idea to reduce liability, increase equity, and lower your monthly payments, but comes at a cost.
Using those funds means your $1,000 monthly mortgage payment by itself would be coupled with another payment of hundreds of dollars just to repay your 401k. In other words, borrowing from retirement could mean an added monthly expense that many first time home buyers aren’t prepared for. Use an online mortgage calculator to play with the figures and see if borrowing from your 401k makes financial sense for you and your family.
Should You Borrow from Your Retirement?
In most cases, no. Keep your savings secure and keep yourself out of a potential financial bind and stick with a mortgage instrument that’s right for you. While there may very well be some instances where borrowing from your retirement makes sense, the (likely) largest purchase of your life is not one of those situations. It’s best to steer clear from borrowing from a 401k.
Of course, everyone’s finances are different and every family has different needs, incomes, and thresholds for making those financial decisions. It’s always best to consult a financial professional or your company’s 401k manager to get the best advice for how to proceed. When it comes to a mortgage, that too is best left to the loan officers.
The professional loan officers at Tidewater Mortgage Services, Inc. are exactly the folks you need to help you find a home loan or mortgage instrument that will work best for your individual circumstances. Our easy, user-friendly online application can get you pre-qualified for a mortgage in as little as 24 hours. From there, you can proceed with the business of buying your dream home.
