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Borrowing from Your 401(k) to Buy a Home

Borrowing from Your 401(k) to Buy a Home

In general, borrowing from a 401(k) happens when you really need the money. The loan should be short-term, and certainly less than a year, and you should know that you’ll be able to pay it back from your salary.

401(k) loans also tend to happen in hard times, which is also when the stock market is falling. That limits the damage to the growth of your 401(k). It might even mean that you’re able to put those funds to better use than keeping them in a declining investment fund.

The other time that people borrow from their 401(k) is to purchase a home. The rules for these loans are different. You’ll have more time to pay them back. For a second home or an investment property, the repayment period won’t be more than five years. For a primary residence, you’ll need to ask the fund’s administrator. They’ll have some flexibility.

But borrowing against your 401(k) to purchase a home is rarely a good idea. The long repayment terms mean that your retirement fund can suffer a big hole. The interest payments aren’t tax deductible in the same way as most mortgage interest expenses. The usual limit of $50,000 is unlikely to be enough to make a serious dent in the amount you need to buy a home, and the accumulation in a 401(k) doesn’t match the time people buy a home. The average age of a first-time home buyer is 34. The median 401(k) balance between the ages of 30 and 39 is just $16,500.

While you can use a 401(k) to help fund the purchase of a home, you’ll usually be better off applying for a mortgage.

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