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If you are in the process of purchasing a home and haven’t been able to save the necessary down payment then it is important to research alternative sources of down payment funding to choose the most affordable method. While some prefer to secure a second mortgage and private mortgage insurance, others, like me, prefer cutting the expense of PMI. If you are asking yourself “can I use my 401k to buy a house” it is time to start researching your options. Always compare the cost of using your retirement account balance to other sources of funding and make the best decision based on tax implications and financing rates.

Is It Better to Use 401K Funds or Secure a Second Mortgage?

When I bought the house that I currently live in, I decided to use a second mortgage in order to avoid PMI. You may be wondering though whether home financing or withdrawing from your retirement 401k is better, there is not one right answer. The answer to this question depends on what the current rates are for second home mortgages, how much you would pay monthly for private mortgage insurance, and whether or not you would be penalized for withdrawing from your account.

Retirement savings accounts are designed to be used for retirement. Using your 401k may save you money now, however, choosing to withdraw as an alternative down payment source will cost you quite a bit of money. Not only will you forgo the earnings you would have made from the money withdrawn, you will pay taxes and penalties based on the amount of money you withdraw. The IRS does classify paying for a down payment on a home as a “hardship withdrawal”.

Before you turn to this solution, calculate how much you will be penalized and how this may affect your taxes and the performance of your 401k.

Alternatives to Withdrawing

If you can avoid withdrawing from your 401k it is strongly recommended. Another approach to withdrawing is borrowing against your 401k. You will need to check with your employer to see if they permit account borrowing. If they do, you pay a low interest rate on the loan but this interest goes back into account. Technically you are taking a loan out from yourself and paying yourself back. You will not have to worry about taxes because the money you receive is not taxable.

Wise investors look for creative ways to fund their large purchases. I think that saving for a down payment is still the best solution as I wouldn’t want to touch the money in my 401k. However, if you are considering the benefits of using your retirement savings to buy a house, consider borrowing instead of withdrawing. Make a wise move that will help you long-term.

You also may be interested in:

1. Advantages And Disadvantages Of Cashing Out 401k To Pay Off Debt
2. What is a 401k Plan and How Does it Work
3. What Is The Maximum 401K Contribution Per Year and Why Has It Stayed the Same?