DOWN PAYMENT DILEMMA
There are several factors that contribute to the cost of purchasing a home. 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. 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 conflicted.
BORROWING VERSUS WITHDRAWAL
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. An individual can borrow against a 401k account balance or withdraw the money straight from the account. A 10% penalty is also imposed if the withdrawal is made before the age of 59.5.
LOAN LIMITATIONS
Potential home buyers may be able to take out a loan from a 401k account. A loan from your 401k should not affect your borrowing power, and you don’t need to qualify because you are borrowing from yourself. Loan amounts are typically limited to 50% of the balance., and they must be repaid within five years. Another option is a simple withdrawal; a 10% penalty applies, but the value is usually unrestricted.
DOWN PAYMENT OPTION
Saving for a down payment can be challenging. Using your 401k to help may be a great option. Speak with your financial advisor and see if this is the right financial move for you.
Saving for a down payment can be challenging. Using your 401k to help may be a great option. Speak with your financial advisor and see if this is the right financial move for you.