401k Loan for Home Purchase: Is It Worth It?
Using retirement funds for a down payment is increasingly common, but the hidden costs may outweigh the benefits.
Key Takeaways
- 1401k loans for primary residence can have 15-year repayment (vs 5 years)
- 2Still limited to 50% of vested balance, max $50,000
- 3First-time homebuyers may qualify for hardship withdrawal without penalty (but with tax)
- 4Lost compound growth over 15 years is substantial—$50,000+ on a $30,000 loan
- 5Housing market downturns can leave you underwater with depleted retirement
- 6Consider whether you can truly afford a home if you need to raid retirement
The Rules for 401k Home Purchase Loans
The IRS allows 401k loans for buying a primary residence with some special provisions:
- Maximum loan: 50% of vested balance, up to $50,000
- Repayment period: Up to 15 years (vs 5 years for other loans)
- Interest rate: Plan sets rate, typically prime + 1-2%
- Must be for primary residence only (not investment property)
- First-time homebuyer exception: Some plans allow hardship withdrawal
- IRA exception: Can withdraw $10,000 penalty-free for first home (but owe tax)
The True Cost Over 15 Years
Let's see what a $30,000 401k loan for a down payment really costs over the extended repayment period:
| Cost Factor | Amount |
|---|---|
| Loan Amount | $30,000 |
| Interest Paid (5.5% over 15 years) | $13,392 |
| Total Repaid | $43,392 |
| Lost Market Growth (7% avg) | $52,877 |
| True Opportunity Cost | $82,877 |
| Cost per Year of Homeownership | $5,525 |
Comparing Down Payment Options
Before using your 401k, compare it to other ways to come up with a down payment:
| Option | Pros | Cons |
|---|---|---|
| 401k Loan | No credit check, lower rate | Lost growth, job change risk |
| Gift from Family | No repayment needed | May affect loan eligibility |
| PMI (Lower Down Payment) | Keep retirement intact | Higher monthly cost |
| Down Payment Assistance | Free or forgivable money | Income/location limits |
| Save Longer | No borrowing needed | Takes time, prices may rise |
| Roth IRA (Contributions) | Tax/penalty free withdrawal | Limited amount |
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Risk Factors to Consider
Using retirement funds for housing comes with unique risks:
- Housing market decline: Could be underwater on mortgage while repaying 401k
- Job loss: Loan accelerates to 60-90 days if you leave employer
- Interest rate risk: 15 years of repayment during rising rate environment
- Retirement shortfall: 15 years less compounding is significant
- Life changes: Divorce, disability, or death complicate everything
- Dual debt: Mortgage + 401k loan = reduced financial flexibility
When a 401k Loan for Housing Makes Sense
In limited situations, this strategy can work:
- Extremely stable employment (government, tenured, etc.)
- High 401k balance where loan is small percentage (<10%)
- High-cost area where ownership clearly beats renting
- You'll maintain full 401k contributions during repayment
- No other debt and strong emergency fund in place
- Housing market fundamentals are sound
The Affordability Question
If you need to borrow from retirement to afford a down payment, it's worth asking: can you truly afford this home? House-poor buyers often struggle with maintenance, property taxes, and unexpected repairs. A home you can't afford damages both your present and your future.
Diversify Your Retirement, Not Deplete It
Instead of using retirement funds for a home down payment, consider diversifying your 401k into more stable assets like gold. This approach:
- Keeps your retirement funds working for you
- Provides a hedge against market volatility that could affect both your home value and 401k
- Offers physical asset diversification alongside real estate
- No loan to repay if you lose your job
- Tax-deferred growth continues uninterrupted
Frequently Asked Questions
1Can I use a 401k loan for a second home?
The extended 15-year repayment is only for primary residence. A loan for a second home or investment property has the standard 5-year maximum repayment, making it much harder to manage.
2What about the Roth IRA first-time homebuyer exception?
You can withdraw up to $10,000 of Roth IRA earnings penalty-free for a first home (lifetime limit). Contributions can always be withdrawn tax and penalty-free. This is often better than a 401k loan.
3Should I use 401k loan vs PMI?
Often PMI is cheaper. PMI typically costs 0.5-1% of loan annually and goes away at 20% equity. The lost 401k growth typically exceeds PMI costs over time.
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