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How to Withdraw from Your 401k for a Down Payment

  • 3 years ago
  • Blog
  • 1

If you’re wondering where to get money for your down payment, you aren’t alone. Home prices have increased. Along with this price increase, comes an increase of the amount needed to put an ideal 20% down for your new home. If you’ve been working for many years, you most likely have a healthy amount of money saved up in the form of a 401K. One way to have an appropriate down payment amount is to withdraw from your 401K.

Is it worth it?

The tax benefits of putting money into a 401K are lost when you pull money out early. You need to have a healthy retirement plan as part of your long-term goals. You don’t want to be left with less than what is needed to live comfortably during retirement. The good news is: There is a way withdraw from your 401K for a down payment without jeopardizing your retirement goals!

401K Loan Vs. Withdrawal

You can either withdraw from your 401K, or you can take out a loan from it. Withdrawing is not ideal, and you can end up being taxed a phenomenal amount. A loan is a more feasible option. It’s basically borrowing money from yourself. After all, you’re the one who put that money there. It was your efforts to begin with that allowed you to have this savings. When you borrow instead of withdraw, you will be paying yourself back the principal and interest, instead of paying a bank. Borrowing will come with many repayment options, whether you prefer making a lump sum or payments. The interest rate will be comparative to mortgage interest rates, only slightly higher.

When your 401K is worth at least $90,000 or more, you are able to borrow up to half of that amount or $50,000 – whichever is less. Having a down payment using this money can avoid paying years of required mortgage insurance. Even while making your monthly mortgage payment on top of a 5 year loan payment towards your 401K, doing this will still likely save you more money long-term than having to pay the mortgage insurance.

An Option Worth Considering

If you are able to make payments both on a mortgage and a 401K loan for the next five years, it’s an extremely viable option. If you are getting an FHA loan and only need a small down payment, this option makes a lot of sense for you. A larger loan payment can affect can still affect your mortgage qualification, so be sure to talk to your realtor and lender before diving in.

Withdraw from your 401k for a down paymentIf your 401K loan is only about $5,000, then your payments will be around $100 monthly. This will not have a large effect on your ability to get qualified for a mortgage loan. If your loan amount is around $20,000 – $30,000, that amount will increase to around $400 – $600 per month. That’s a big difference, and can affect your qualification depending on your income and current debt, along with the price range of your ideal home.

All things considered, this can be a great option for a lot of home buyers. If you are selling your own home at the same time, paying back the 401K loan will be even faster. If you’re thinking about withdrawing from your 401K or would like to know if it is a good option for you, we can help. Call us today and we will go over the best options available for you. Let’s get you that perfect home for you and your family!

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