Michaela Phillips, Guaranteed Rate, Inc.
BOULDER – Because down payment requirements are calculated as a percentage of the total price of a home, potential buyers are finding that the demand on their savings is greater than ever before, thanks to the rise in home prices across the country. Fortunately, there are creative solutions to any problem. If you have no (or not enough) down payment savings, borrowing from your 401(k) to purchase a home is something that you may want to consider.
According to the most current data available from the Employee Benefits Research Institute, 56% of 401(k) plans offer a loan provision to participants. However, there is no requirement for them to do so. If this is something you might be interested in doing, speak with your plan administrator to learn the details about your specific plan. Typically, if 401(k) loans are permitted by your employer, you can borrow up to 50% of your entire balance, not to exceed $50,000. You’re given five years to repay the entire balance, which is almost always done by automatic payroll deduction. This, of course, comes with one caveat: if you fail to make a payment for 90 consecutive days, the loan will be counted as a distribution. If that happens, the sum will be counted as taxable income, and you’ll also have to pay a 10% penalty on top of those taxes. Because payroll deductions obviously cease when you leave your employer, this means that you should be prepared to stay with your current job until the loan has been paid off.
While taking an outright distribution from your 401(k) plan is generally discouraged, there is a lot to be said for taking a loan against these savings. First, there’s no bank approval process, which means you can have the money in hand very quickly. There’s no credit check involved, and the interest rate is usually a fraction of what you would pay to other lenders for a similar loan. Keep in mind that the term, “interest rate” is used quite loosely here. The interest that you are paying is actually money that is going directly back into your retirement account.
No solution is a perfect fit for everyone, but borrowing from your 401(k) to purchase a home is a great option to have. In many cases, it can save you significant sums of money over time. For instance, if your loan-to-value ratio is just past the threshold that requires you to pay expensive private mortgage insurance, borrowing from your 401(k) to make up the difference and avoid that extra monthly cost would be a wise choice. Most people would prefer to pay that amount back to themselves each month, rather than to a mortgage insurance provider.
Financial decisions are very personal. You should always weigh out your own unique circumstances before making the decision to borrow from your 401(k), but don’t be afraid to explore this very valid option if you’re in need of a timely way to pull together a down payment for your next home purchase. If you’re interested in learning more about borrowing from your 401(k) to purchase a home, contact me at [email protected].
By Michaela Phillips, Guaranteed Rate, Inc.
Michaela Phillips entered the mortgage lending industry in 1994. Throughout her 20 years in the business she’s been one of the top producers for every company she’s worked for. As of late 2013, she’s the VP of Mortgage Lending for Guaranteed Rate, Inc., the 8th largest retail mortgage company in the country. Being a VP at Guaranteed Rate offers many advantages to her and her clients, unparalleled customer service, efficiency, and most importantly, competitive rates. She enjoys teaching her clients the pros and cons of being a Real Estate Investor, and more so, watching them build their Real Estate “Empires,” large or small, but all successful. NMLS: 312874
