Should I use my 401 K to buy a home?

Should I Use My 401k to Buy a Home?

Buying a home can be a financial stretch.  With soaring home values and rising interest rates, many potential first time home buyers find saving for a down payment increasingly difficult.  And in this current market, putting down a larger down payments helps give a buyer a better chance of winning a bidding war.  So they have had to become quite creative on ways to save more money for these larger down payments.

For many people, the main source of savings is in the form of a 401k and tapping into this resource for a home purchase is one way to find the down payment necessary to finance a new home; but should you use your 401k to buy a home?   Many home buyers are unaware they can do this.  And the ones that do have mixed feelings.

A 401k is a retirement savings plan offered by  employers which takes pre-tax earnings and deposits it into an investment account for use in retirement. The money in a 401k account can be accessed by either taking out a loan against the balance or by a straight withdrawal. A withdrawal before the age of 59.5 is also subject to a 10% penalty.

There some advantages of borrowing from your 401K account.  For one thing, a loan from your 401k should not count against your borrowing power. You also don’t need to qualify because you are borrowing from yourself. The amount you can borrow is limited, for example 50% of the balance, and typically must be repaid within 5 years. The other option is a simple withdrawal; the 10% penalty is incurred, but the value is not usually limited.

Saving for a down payment can be challenging. Many people do not consider using their 401 K because they believe it should be used for retirement only.  But what better retirement plan…than to have a new home to retire in? Using your 401k to help may be a great option.

As with everything, there are risks.  Before you decide to take this route. Speak with your financial advisor.  They will help you weigh the pros and cons to see if this is the right financial move for you.  If you need a list of reputable lenders who in your area who are used to dealing with 401 K’s, speak to your realtor. They can guide your in the right direction.