Get a loan against my 401k for a down payment?

[Penguin]

I'm looking to buy a home, but there is no way in hell I can come up with a 20% down payment. 8-10% is about all I can come up with right now (not even counting stinking closing costs).

But, like most people my age, my biggest nest egg is my 401k. I have been told (and I totally agree) that the single best investment that anyone can make is to buy a home.

So, what I'm looking for is a risk/reward kind of analysis. With a loan, I would have no PMI, a lower mortgage payment, and instant equity. However, I'm stuck spending a good chunk of my income to pay back the loan. I am assuming that the money that I loaned against is not making me any money in my investments.


So, in 4-5 years or whenever I have paid off the loan, will the sacrifice in my 401k be worse than my investment in my home?


I would love to not have to take out a loan, but then again, I don't want to be living in an apartment until I'm 40, either.

[slickdawg]

I'm looking to buy a home, but there is no way in hell I can come up with a 20% down payment. 8-10% is about all I can come up with right now (not even counting stinking closing costs).

But, like most people my age, my biggest nest egg is my 401k. I have been told (and I totally agree) that the single best investment that anyone can make is to buy a home.

So, what I'm looking for is a risk/reward kind of analysis. With a loan, I would have no PMI, a lower mortgage payment, and instant equity. However, I'm stuck spending a good chunk of my income to pay back the loan. I am assuming that the money that I loaned against is not making me any money in my investments.


So, in 4-5 years or whenever I have paid off the loan, will the sacrifice in my 401k be worse than my investment in my home?


I would love to not have to take out a loan, but then again, I don't want to be living in an apartment until I'm 40, either.


Borrow against the 401 - PMI is the biggest ripoff known to man. You can't write off PMI, it's just a big screw job.

[Frozen Sooner]

I'm looking to buy a home, but there is no way in hell I can come up with a 20% down payment. 8-10% is about all I can come up with right now (not even counting stinking closing costs).

But, like most people my age, my biggest nest egg is my 401k. I have been told (and I totally agree) that the single best investment that anyone can make is to buy a home.

So, what I'm looking for is a risk/reward kind of analysis. With a loan, I would have no PMI, a lower mortgage payment, and instant equity. However, I'm stuck spending a good chunk of my income to pay back the loan. I am assuming that the money that I loaned against is not making me any money in my investments.


So, in 4-5 years or whenever I have paid off the loan, will the sacrifice in my 401k be worse than my investment in my home?


I would love to not have to take out a loan, but then again, I don't want to be living in an apartment until I'm 40, either.

Look at it this way:

You're borrowing money to leverage an investment.

From a net worth standpoint, this is almost a no-brainer. If you expect real estate to appreciate at 5% (which is pretty conservative) and your 401(k) to appreciate at 10% (which is right about long-term market average) then here's what happens:

You buy a house for $200k, borrowing 10k from your 401(k). You borrow $180k and put $10k cash down.

Year 0-wash. Your 401(k) is encumbered by 10k. Your deposit account doesn't have the 10(k). You have a loan for 180k, and you have an asset worth 200k.

Year 1. You haven't returned the 10% on your 10k, so you're down 1k that you would have earned in the 401(k) (disregarding the interest you're paying yourself and disregarding how much you've paid off.) Your home has appreciated 5%, so it's worth 210k now, and your loan is still about 178k. So now you have 22k in equity in the house-subtract out the 1k that you didn't get in the 401(k) and you're up 1k on the year-and not only that, you get the writeoff on mortgage interest.

blah blah blah. You're a meterologist, you can do the math from here.

[OklahomaTuba]

Doesn't an FHA loan get you out of having to pay PMI??

I wouldn't touch my 401K for any reason my self. To me, that money is off limits no matter what.

[Frozen Sooner]

That's the thing, though. He's not really touching his 401(k) unless he loses his job before he pays it off. The money's still there, it's just invested in a loan to himself which he's paying himself interest on. Not only that, but it's helping to leverage a significant low-risk investment.

[OklahomaTuba]

Ahh yeah, I see now.

Very true.