Taking out 401K loan to purchase home. Good idea or Bad?

Question

I'm moving to a new city for work and I'm holding on to my current property as a rental, a good chunk of my savings is going to getting the property up to par prior to tenants moving in. After the repairs I wont have enough to put even 5% down and cover closing costs.

I'm on the fence about taking from my 401K for the down payment and closing costs for a new property or renting for a year and saving as much as I can in hopes of having enough to increase my down payment for a property next year. Any advice?

George Blower · Answer

@Cole Burley

Here are the general considerations regarding 401k loans.

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Kurt Traynor · Answer

@Cole Burley many different thoughts on this so you will get many answers, just need to do what is right for your situation.  Similar to what @George Blower described was my situation.  I took out a $30k loan against my 401k at 5.7% with an initial $100 fee.  I invest they VoYa in a 2040 fund and there’s no early payment fees, I am set up on a 36 month payment which is deducted From my W2 jobs, pay check.  I took that money and purchased a flip property in October and will close Feb 1, giving me back my initial $30k plus profit.  I’m going to reinvest that initIal $30k into another property.   During which my day job pays off the $30k loan.

Negative to this Strategy is that my returns of my fund were about 17% due to the hot stock market.   So yes it is kicking the can but without doing this I’d still be “saving” instead of Acting and ramping up a business.

Check with your employer about 401k loans, instead of pulling it out.  Pulling out cones with fees but borrowing is borrowing from yourself.

Nick Barlow · Answer

@Cole Burley taking out a loan varies by plan. The two I have experience with allows you to choose payback terms:monthly starting at 12 and up to 60 months, in one month increments.

There is a loan origination fee ($75 was my case) and you pay interest, like any loan...but this get paid back to yourself.

There are fees if you DONT pay it back. Otherwise, it’s virtually a pre-approved Loan,50% of your 401k balance or $50,000 (whichever is less).

If you no longer work at the employer next year, for any reason, you’ll have to repay in full.

I have used 401k loans to make down payments before and would do it again, with the caveat that the deal would have to make sense with the timeline available. I think I’m 5-7 yrs from FI, and I wouldn’t take a 60 month loan when I think I’m 2 years from FI for example.

I would recommend you consider those numbers in your due diligence and see if it makes sense for you. I hope this helps, good luck!

Josue Vargas · Answer

Have you thought of taking a HELOC on your property?  Is flexible enough you can take it for 30 years with a very low payment.  There are restrictions of how much you can take (or minimum) depending on how much you owe, and interest rates could be somewhat below 10% range.  If you rent your property (hopefully you get good cash flow), plus savings avoiding renting for a year, may be a good deal to take the HELOC.  Also, if you avoid renting a place for yourself you have the flexibility to wait for a good deal avoid any rush.  If you are renting, there is the lease term and other timing stuff you need to take in consideration.

Brad M. · Answer

@Cole Burley I wouldn't. I see it as robbing Peter to pay Paul, dismantling the west wall to repair the east wall, trying to cover yourself with a short sheet, cutting off your nose to spite your face, or kicking the can down the road... take your pick.

Is FHA not an option?

Cole Burley · Answer

Account Closed I am staying with the same company. Would it be beneficial to stop contributing to 401K and move those funds to a IRA going forward?

Account Closed · Answer

@Cole Burley Are you familiar with a self-directed IRA? It’s unclear whether or not you are relocating to a new city with your current company or with a different company. The latter will give you an opportunity to roll your 401(k) into a self-directed IRÁ and use a portion of it for your new acquisition.

John Teachout · Answer

In our market, we don't supply a fridge or washer/dryer. Just a range. (and dishwasher if there's a space for one)

Brad M. · Answer

@Cole Burley Just so you're aware. PMI drops off once you've paid 22% of the loan (assuming the value remains constant). There are other scenarios, but that's the most straight forward answer.

Cole Burley · Answer

@John Teachout The property is in good shape overall. The big hit is coming from foundation repair and appliances (refrigerator and washer / dryer). We knew we would need to have the foundation done in the next year or so but now that we have to move I wanted to get it taken care of before a tenant moves in. Other than that its just a little drywall repair (cracks in the walls from foundation movement) and painting. We also just upgraded our windows a few months ago (before we knew we would be moving)

Taking out 401K loan to purchase home. Good idea or Bad?

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