Is Using Your 401(k) for a Down Payment on a House Wise?

Oftentimes, one of the main things that can hold a family back from purchasing a home of their own is the down payment needed. Although times have changed a little and some mortgage companies are accepting smaller down payments such as 5% over the old 20%, coming up with many thousands of dollars may still be hard to manage with all the other family expenses. Does this mean that this dream can never become a reality? There are ways you can still come up with some money for your down payment.

What is a 401(k) plan?

A 401(k) is a retirement plan that is sponsored by a company or employer. This plan allows workers to take out a portion of money from each weekly paycheck, put it into a retirement plan account and earn interest that does not incur taxes until the employee reaches 65 years old.

Details of how it works: a fixed percentage of earnings go into 401(k) account and the employer makes profit-sharing contributions into the 401(k) plan. The employer, as an incentive, puts extra money into the employee's retirement account. Even if you leave the employer, the 401(k) plan account stays active and is transferred to a banking institution for the rest of your life, although it is changed to an IRA account.

Should you dip into your 401(k) to withdraw a down payment amount?

Using the funds from a 401(k) for a down payment is only a good idea if other alternatives such as paying for mortgage insurance or a second mortgage are more costly. Check with your financial institution to see what your options are and how they may help you find the money you need for a down payment. Every situation is different so you need to sit down go over your finances and see what can be done.

What options do I have in using my 401(k) towards a down payment?

There is one option you can use towards securing your down payment with the help of your 401(k) plan. It is called a "hardship withdrawal". This gives you the ability to withdraw the needed amount if you abide by certain specifications. You must know though that a withdrawal is very costly. You forgo the earnings on the money withdrawn, plus taxes and penalties on the amount withdrawn which must be paid in the same year you withdraw. Since the taxes and penalties are so severe, you should avoid withdrawal at all possible.

Another option is to borrow against your account with the permission of your employer. You do pay interest on the loan but it will go back into your account as an offset to the earnings you are giving up. As long as you pay back the money, you do not pay taxes on it. The danger of this option is if for any reason you lose your job or change employers, you must pay back the loan often within as short as 60 days or be slammed with the taxes as penalties as if you were to withdraw it.

After considering all of the pros and cons of what options you have available to you for getting help with your down payment, you may just end up thinking it is easier to just go get a second job!


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