Fund Down Payment w/ HELOC, Stock Purchase Plan, or 401K Loan?

[Nicholas K.]

Hi all,

Long-time lurker but first time poster :) 

I'm looking to buy my first deal and feel lucky enough to have a few options to fund a down payment. I'd like the community's advice/perspective on any of these options, just to ensure I'm not missing anything blatant.

1. Employee Stock Purchase Plan (ESPP): 15% discount at 2 buy periods per year, taking the lower of the price during the beginning and end of the period. The stock has been doing well, but I think many stocks have been doing well, and it just seems inevitable that the dip will come -- "when" is anyone's guess. I believe the 15% discount is essentially wiped off the books by the long-term capital gains taxes, so these funds are made up of the original investment and the stock gains, which has been substantial. I plan on continuing to contribute to ESPP.

2. HELOC: 7% variable rate, 20 year pay period

3. 401k Loan: 6.5% fixed rate, max 5 years. 401k investments are mostly index funds and such. 4.5% employer match. I will continue to contribute to the 401k.

Any suggestions/advice/input is greatly appreciated!

Nick

[George Blower]

Regarding funding the down payment with a 401k loan:

• You would have to confirm that your 401k plan allows for a 401k participant loan (and that you have not had an outstanding loan in the last 12 months).
• If yes, you can borrow up to 50% of the balance not to exceed $50,000.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan. Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• 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).