Using Your 401k as Your Down Payment: Is It Worth It?

Saving for a down payment can be challenging and seeing your growing 401k sitting there may be tempting to use. While purchasing a home could be the biggest investment you will make, your 401k is key to your long-term financial plan and withdrawing now could leave you ill-prepared for retirement.

What to do 

Instead of making a withdrawal out of your 401k, one option may be to take a loan from it instead. You can borrow up to half the value of the account and while you will pay interest paying it back, you won’t pay taxes or penalties on the loan amount. As long as you can handle the payments each month (on top of your new mortgage), this option may be helpful in getting you a little bit closer to your down payment goal. Since you are technically borrowing money from yourself, the loan does not have to be approved by a bank which allows you to get the money quickly and without a credit check.

However, although this seems like an easy option, it isn’t without consequence. "While your 401(k) provider might tell you that you can borrow the money for free," explains David Blaylock, a Certified Financial Planner, "it isn't free. That money isn't earning anything until it's back in your account, plus, the interest payments aren't tax-deductible as they would be with something like a home equity loan. That's your borrowing cost." According to Blaylock, if you can’t afford it without your 401k, you probably shouldn’t be doing it.  Instead of using a 401k withdrawal or loan for down payment funds, be patient, lower your expenses, and build your savings until you can afford your dream home.