Borrowing Money From 401K For Home Purchase

Ask most financial advisors about borrowing from your 401(k), and. free money you’d be getting in matching funds dries up too. That’s a double whammy that you may come to regret in the future. When.

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Ask most financial planners and they will strongly advise against borrowing from your 401K to buy a second home. Borrowing from your 401K to purchase a vacation home or rental property exposes you to more financial risk. However, are there situations where taking a loan from your 401K to make a down payment makes sense?

Now that no-down-payment loans are a thing of the past, borrowing from a 401(k) has become a popular option. Some 9% of recent home buyers used funds.

Secondly, unless you use the money from your 401k loan to buy a home, you must pay the loan back within five years. If you borrow the money so you can purchase a residence, the length of the loan may be significantly longer. There are some situations where it can pay to borrow against your 401k plan, as we see next.

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IRA early withdrawals may incur no penalty if used properly to purchase a first home. In general, you can borrow up to 50% of your 401(k) balance-up to a maximum of $50,000-for any reason.

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Loans from 401(k)s usually must be paid back in five years, but your employer may give you up to 15 years to repay a 401(k) loan if you are borrowing the money to buy a home.

 · Sheila needs to borrow $1,500 to replace a broken water heater, and is trying to decide whether to draw on her home equity line of credit at a 6% rate, or borrowing a portion of her 401(k) plan that has a 5% borrowing rate. Sheila’s 401(k) plan is invested in a conservative growth portfolio that is allocated 40% to equities and 60% to bonds.

Possible consequences if you borrow from your 401k. Although paying yourself interest on money you borrow from yourself sounds like a win-win, there are risks associated with borrowing from your retirement savings that may make you want to think twice about taking a 401k loan.

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