If you are in the market for a new home and are thinking of using your 401k to buy a house, there are some things that you need to know.
First, you need to know if your plan will allow you to take a loan or distribution at all. A loan form a 401k is an optional feature, so not all plans will allow it. To find out if your retirement plan does, check your summary plan description, your plan website, or ask your employer. A distribution will only be available to you if you meet the plan’s distribution requirements which will generally mean you have reached retirement age or are no longer employed with that company.
If your plan does allow you to take a loan that’s one thing. But the term of the loan is quite another. Most plans that allow loans will let you repay the loan plus interest back to yourself over a maximum 5 year period. Many plans, but not all, will allow you to repay the loan over a 30 year period if it is used for the purchase of your primary residence. This is a huge difference, as the payment on a 5 year loan and a 30 year loan will be very different.
Expect to pay an interest rate of around prime + 1%, but rates are set by your plan so yours may vary. The good new is that this interest goes back into your account. The bad news is that by taking a loan from your 401k this money is not in the market so you could be losing out on a return that is important for your 401k plan balance.
When using a 401k to buy a house, expect to provide some paperwork to your plan administrator to prove that you are purchasing a home. That is normal and is usually not a huge deal. A purchase agreement may be enough, but check with your employer to see exactly what will be needed.
Using a 401k to buy a house may or may not be a good idea. It really depends on your situation. If you are buying an asset that will enhance your retirement wealth a case could be made for this purchase. If you could afford to make your down payment in another way, however, you may be better off funding your home another way.
Applying for a 401k loan is usually done online or with a simple loan application with your employer. Either way, you could expect the loan to be funded within about 2 weeks from the date of request, though your plan may vary a bit from this.
Your loan repayments will be made on a per payroll basis and must be made in an amortized manner. If at any time you are ready to pay back the outstanding principal balance of your 401k loan you can do that and avoid future payments. This also gets your money back in the market and growing for your retirement.
Your 401k balance is just one option that you have to buy a house. Consider your options carefully to make the choice that is right for you.