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Sine_Qua_Non
Sine_Qua_Non SuperDork
3/6/24 2:09 p.m.

My sister is trying to get a house but is short on funds to meet the 20% down payment. I suggested that she use her 401k money. She needs $40k for the down payment. She only has $20k plus will likely need more for closing cost as well. Did anyone here go this route of getting a 401k loan for this or withdrawal from it. Good or bad choice here? She really wants to get a house now before prices jumps even more soon. She has $140k in her 401k so far. 

1988RedT2
1988RedT2 MegaDork
3/6/24 2:18 p.m.

Your sister's age might have some relevance here.  Also, good job?  Other debt? 

classicJackets (FS)
classicJackets (FS) SuperDork
3/6/24 2:18 p.m.

If it were me (and it's not), I wouldn't borrow from my retirement years for some money now. She should be able to put less than 20% down.. PMI sounds scary, but I'm the past ours was between $50 and $90/month. 

 

Don't blame her for wanting a house, but would suggest trying to avoid that by going to maybe 10% down. Last time we got approved for a house, with fees and everything the costs were favorable at 10% down than 20%.

 

There's a lot to be said here, but basically the extra payments per month from doing only 10% down would have been equal to the extra 10% cash out of pocket at something like 11 years into the mortgage. So it would have been beneficial for us to keep the larger pile of cash for the first 10 years. (We got outbid)

jharry3
jharry3 Dork
3/6/24 2:21 p.m.

Huge penalty for taking out 401K money plus you pay tax on the amount taken out.

Borrow against the 401K or save up longer if 20% down is the only way to get a loan.

Driven5
Driven5 PowerDork
3/6/24 2:40 p.m.

What is the reason she needs (or thinks she needs) the full 20% down?

https://www.nerdwallet.com/article/mortgages/how-much-down-payment-for-house

The only option worse than a 401k loan, is a 401k distribution. If <20% down is an option, which it should be for the vast majority of buyers in the US, just accept the PMI/MIP. The real debate, assuming both are applicable, would be conventional vs FHA. Conventional lets you cancel PMI once at 20% equity, while FHA keeps MIP for the duration of the loan... Although there are other considerations there as well.

wae
wae PowerDork
3/6/24 2:46 p.m.

I haven't thought about this for a very long time but I was under the impression that if you took a loan against your 401k, the balance becomes due immediately if you are no longer employed by that employer for any reason. 

RacetruckRon
RacetruckRon SuperDork
3/6/24 3:04 p.m.
classicJackets (FS) said:

If it were me (and it's not), I wouldn't borrow from my retirement years for some money now. She should be able to put less than 20% down.. PMI sounds scary, but I'm the past ours was between $50 and $90/month. 

^This.  Not sure what her situation is with the 20% but if her lender is requiring 20% I'd find a different lender or just put down 10%, pay PMI for a few years and have a chunk of cash for impending repairs.  I put 5% down on my first house 5 years ago and was paying $100 a month for PMI on a $200k house. PMI kinda sucks but it's better than waiting and getting priced out of home ownership. I've seen that happen to a couple of my friends already who were intent on saving for 20% down.

alfadriver
alfadriver MegaDork
3/6/24 3:15 p.m.

Another +1 for the lower down payment and the plan on refinancing. Multiple times as the market changes. I have no idea how many times we refinanced, but the last one ended up shortening the total time by 5 years. (25years from start va the nominal 30)  

ClearWaterMS
ClearWaterMS Reader
3/6/24 3:28 p.m.

remember that PMI is tax deductible like mortgage interest assuming your sister makes below the income threshold.  

Additionally, the monthly cost of PMI + the extra amount borrowed over the life of a 30 year loan is very likely to be less than the cost of a 401k loan repayment which has to be paid back in 5 years time and a $25k which will be $400+ a month.  that $400 a month says nothing of the loss opportunity cost of not keeping that money invested for 5 years.  

The Principle and interest delta between a 160k and 180k loan is about $141 a month.  

mtn
mtn MegaDork
3/6/24 3:39 p.m.

Does she have an IRA (Roth or Traditional)? Or an old 401k that could be rolled over into an IRA?

 

You can make a $10k withdrawal from your IRA for a home purchase if you're a first time buyer. If it is traditional you'd owe all taxes on it as income. 
 

But I agree with Clearwater. I wouldn't take from my retirement unless it was really the only option. 

codrus (Forum Supporter)
codrus (Forum Supporter) PowerDork
3/6/24 4:11 p.m.

A loan is better than taking a distribution, because the money you put back in remains tax-deferred.  That said, one risk with a 401(k) loan is that sometimes there is a clause in the loan saying that if you lose the job that the 401(k) is tied to then you need to pay back the loan immediately, which is a nasty one-two financial punch.

Also check carefully with the lender first, because they ask you if you if any of the money in the down payment is borrowed.  I don't know if a 401(k) loan counts as "borrowed" in this regard, but it's possible that it might not count as "cash deposit" for the lender's purpose.

Assuming the above issues are resolved, I think a small 401(k) loan to help purchase a first house is a reasonable tradeoff to make.  The thing to remember though is that you can borrow money for almost any purpose you can think of -- except retirement.  That one you have to fund yourself.

 

No Time
No Time UltraDork
3/6/24 4:19 p.m.

I'm sure the rules have changed so this may not be applicable, but we had an FHA loan before and the MIP was tax deductible.

Repayment for 401k loans come out of after tax dollars and typically include paying yourself interest, so it's not going to save any significant amount over making a smaller down payment or going FHA. 

Sine_Qua_Non
Sine_Qua_Non SuperDork
3/6/24 10:47 p.m.

She makes $120k a year. She wants to avoid the PMI and keep her mortgage payment under $2k a month. The house cost $400k in NJ. She thinks the market is going to go nuts again and the bidding wars will return. She doesn't like the higher interest either but she hopes it will fall in the next few years. 

SV reX
SV reX MegaDork
3/7/24 2:09 a.m.

20% of $400K is not $40,000.  It's $80,000.

SV reX
SV reX MegaDork
3/7/24 2:27 a.m.

I don't see how she's gonna keep her mortgage payment under $2000 per month. With only $20,000 down, it's gonna be a stretch to keep it under $3000.

classicJackets (FS)
classicJackets (FS) SuperDork
3/7/24 7:36 a.m.

https://m.mortgagecalculator.org/

This is the site I use for expectations, maybe it's not the best - but Michigan has high property taxes that dramatically swing mortgage costs.

 

At 20% down I see $2500/month and at 10% down I see >$2900/month.  

 

porschenut
porschenut Dork
3/7/24 7:44 a.m.

She needs to hire an accountant or financial advisor.  And take a more realistic view of house values and trends over the last 5 years.  Personally I think the craziness in value increases is over and prices should be more stable for a while.  Add in the fact that inflation has leveled out, and layoffs are increasing.  I think a lot of flippers may get their knickers in a twist over the next 2 years.  With that income doubling the savings account should be pretty fast and watching for deals during that time might be a valuable education.  But in the end paying a pro for a quantifiable evaluation is money well spent.

SV reX
SV reX MegaDork
3/7/24 8:01 a.m.
classicJackets (FS) said:

https://m.mortgagecalculator.org/

This is the site I use for expectations, maybe it's not the best - but Michigan has high property taxes that dramatically swing mortgage costs.

 

At 20% down I see $2500/month and at 10% down I see >$2900/month.  

 

OP isn't talking about 20%, or 10%. The $20,000 he is talking about is 5%.  That pushes the payment higher.

Add in the PMI (required at 5%) and the payments will be more like $3300.

Sine_Qua_Non
Sine_Qua_Non SuperDork
3/7/24 8:22 a.m.
SV reX said:

20% of $400K is not $40,000.  It's $80,000.

Our Grandparents is giving her $20k in cash. It was money left over from the college education fund. 

SV reX
SV reX MegaDork
3/7/24 8:27 a.m.

In reply to Sine_Qua_Non :

Ok, but it's still no where close to 20%.  
 

She's gonna need PMI, and her payments are gonna be over $2000

STM317
STM317 PowerDork
3/7/24 8:31 a.m.

My gut says that she would be stretching herself pretty thin to afford this place, if at all. There's a $50k cap on 401k loans. So, max she could have available for downpayment/closing/moving/furnishing the new place is $70k.

 

Zillow has a pretty helpful mortgage calculator that lets you play around with the numbers

If we assume $60k down (saving $10k for closing/moving costs), median NJ property tax rate of 2.25%, and lowball the annual insurance @ $100/mo we get the following:

 

Buying a home is typically the biggest purchase a person will make. At current interest rates, she would end up paying over the life of the loan, $340k principal + $475k interest + $60k down = $875k for this $400k property. That's a ton of money to commit to spending because of FOMO.

STM317
STM317 PowerDork
3/7/24 8:40 a.m.

If we increase the downpayment with your grandparents' gift, it's still not close to $2000/mo.

$20k cash on hand + $50k 401k loan + $20k gift = $90k down

And that gives us:

 

If her target mortgage payment is $2k, and she puts everything she has available into the downpayment at $90k, she's looking at houses that are $295k or less:



 

mfennell
mfennell HalfDork
3/7/24 9:17 a.m.
Sine_Qua_Non said:

She makes $120k a year. She wants to avoid the PMI and keep her mortgage payment under $2k a month. The house cost $400k in NJ. She thinks the market is going to go nuts again and the bidding wars will return. She doesn't like the higher interest either but she hopes it will fall in the next few years. 

I think STM317 laid it out pretty well.  Those numbers will never work.  I'm guessing that she hasn't considered taxes and insurance.

Ian F (Forum Supporter)
Ian F (Forum Supporter) MegaDork
3/7/24 9:42 a.m.

Property taxes should be looked at ASAP as they vary wildly in NJ.  Those alone can easily be $1000/mo. 

Driven5
Driven5 PowerDork
3/7/24 10:53 a.m.

It's even worse than it looks too... None of those numbers include the payments on the $50k 401k loan. If we assume it has a 5 year payback requirement, that's pushing towards another $1k/mo beyond the above numbers.

The cost of PMI would be much less month to month, and the growth of leaving that money invested should be much more than PMI costs in the long run. I have yet to see one good argument for taking 401k loan (let alone distribution) money to get to 20% rather than PMI.

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