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borrowing from retirement plan for down payment?

By Terry Savage on November 24, 2015 | Housing / Real Estate

Hi Terry
I’m in the market of buying a house. I have been preapproved of a purchase price of 250,000. I have in savings around 57,000. Here is my quetion I would like to use all that for my down payment ….I would like to that a loan from my 401k at work to pay off a car loan so I can use all that savings for down payment and not take some of that saving to pay off my car which a loan officer suggested I do the bottom line is I don’t want to end up paying PMI which would last 30 years when and if I take a loan from my 401 it would be repaid in
In five years with 3% interest paid to me. By doing these things I was hoping I could bump my purchase price to 275,000….Presently my car loan is at 0%. The extra money that would be taking out of my check I can make up by working more hours.. Also by doing these things I was hoping for a purchase price of 275000.

Terry Says:  OK, this is just a personal opinion, but I think you are getting in over your head.  If you stick with a purchase price of $250,000 you will have a 20 percent down payment — and you won’t be paying PMI.  You don’t want to raid your retirement plan — because a if it is invested properly it should be earning far more than 3% per year.  And if you lose your job and don’t repay the loan, you’ll also owe taxes and a 10 percent early withdrawal penalty.   Plus, if you buy a home some unexpected expense always comes up, and you’ll have $7,000 in savings to cover those emergencies if you only pay $250,000 for a home.

Paying an extra $25,000 for a home is not going to get you anything of value that competes with the security of having a retirement plan, money in the bank, and a roof over your head.  And if you’re willing to work longer hours, by all means pay off your car loan, and feel free to make extra contributions to your retirement plan, or pay down your mortgage faster.  That is the sensible way to do this –and I’m betting it is not the answer you wanted! But I know it is the smart move for the long run.  If you don’t like the answer, wait before you buy, and save up that extra $25,000 outside your retirement plan!



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