by Christy Bieber | June 17, 2021
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You may regret making the choice to raid your retirement funds.
When you're trying to buy a home, it's best to make a 20% down payment. Doing so allows you to avoid having to buy private mortgage insurance (PMI). PMI ensures lenders don't end up with out-of-pocket losses if they have to foreclose. Unfortunately you cover the expenses of PMI, although it provides you with no personal protection.
A 20% down payment is also useful because it:
Unfortunately, coming up with 20% down can be difficult for many home buyers. And, in fact, even finding the money for a smaller down payment can be a challenge if you're in an expensive market.
If you decide now is a good time to buy a home but struggle to come up with the cash to make a down payment, you may be tempted to borrow against your 401(k). After all, if you have a lot of money sitting in this account, it may seem like an attractive source of funds that could solve your down payment issues.
But, before you decide to move forward with a 401(k) loan, it's essential to consider both the pros and cons of this financial move.
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There are some definite advantages to accessing 401(k) funds to cover the down payment costs for a home purchase.
Unfortunately, while the benefits of a 401(k) loan may make it sound attractive, there are considerable downsides to consider as well.
In many cases, the short repayment timeline -- which leads to high payments -- coupled with the risk of penalties if you can't pay back the 401(k) loan make borrowing from your 401(k) a bad idea. That's especially true when you also factor in the lost opportunity for gains in your retirement savings account.
We have resources that may provide an alternative to taking money out of your 401(k). These include:
However, you need to consider your individual situation when deciding what's right for you. If you have no other options and you need to take a 401(k) loan to qualify for an affordable mortgage and be able to buy a home, then you may decide it's worth doing. Just be sure you can make the payments and be aware of the considerable risk you're taking on before you act.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
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