Buying a home can be a financial stretch. With soaring home values and
rising interest rates, many potential first-time homebuyers find saving for a
down payment increasingly difficult.
For many people, the main source of savings is in the form of a 401k, and tapping into this resource for a home
purchase is one way to find the down payment necessary to finance a new
home; but should you use your 401k to buy a home? Experts are
A 401k is a retirement savings plan offered by employers which takes
pre-tax earnings and deposits them into an investment account for use in
retirement. The money in a 401k account can be accessed by either taking
out a loan against the balance or by a straight withdrawal. A withdrawal
before the age of 59.5 is also subject to a 10% penalty.
Taking out a loan from a 401k account may be a viable option for potential
home buyers. For one thing, a loan from your 401k should not count
against your borrowing power. You also shouldn’t need to qualify because you
are borrowing from yourself. The amount you can borrow is limited, for
example 50% of the balance, and typically must be repaid within 5 years.
The other option is a simple withdrawal; the 10% penalty is incurred, but
the value is not usually limited.
Saving for a down payment can be challenging. Using your 401k to help
may be a great option. Always speak with your financial advisor and see if this is
the right financial move for you.