Borrowing from a 401k can be an option but should only be used as the very last resort. The loan itself is tax-free and penalty-free, but only if you pay it back on time. You have to make payments within 5 years. Because of the shorter period, depending on how much you plan to borrow, the monthly or quarterly payment can be quite high. So consider your current financial situation to see if you can afford high payments like that. If you fail to pay back the loan, the unpaid amount will be treated as a distribution. Hence, income taxes will apply. If you are younger than 59 1/2 years old, an additional 10% penalty will also apply.
That depends on a number of factors. Keep in mind that a 401k is primarily(or wholly) pre tax dollars and 401k loan payments are made with after tax dollars which sets you up for double taxation when you withdraw money from your 401k.
It is certainly an option for those 401(k) plans that allow borrowing and it is typically limited to the lower of $50,000 or 50% of your vested account balance. The dilemma lies in the fact that the lending institution (for the mortgage) is going to view the $50,000 loan as just that, a loan, and with a new mortgage, they may consider this to be too much financing. Although the $50,000 can be borrowed without any formal collateral, it still shows up as a debt and at a bare minimum, you will be required to pay this back from your payroll over 60 months, at a reasonable interest rate, which in today's environment, could be extremely low. Before borrowing from a mortgage broker or bank, check with them to see how they would view the loan from the 401(k) plan. Knowing it will not be collateralized to the mortgage, they may just approve it if your peronal cash flow is sufficient to cover both the loan from the 401(k) plan and the primary mortgage on your new residence. Good luck
WalletHub Answers is a free service that helps consumers access financial information. Information on WalletHub Answers is provided “as is” and should not be considered financial, legal or investment advice. WalletHub is not a financial advisor, law firm, “lawyer referral service,” or a substitute for a financial advisor, attorney, or law firm. You may want to hire a professional before making any decision. WalletHub does not endorse any particular contributors and cannot guarantee the quality or reliability of any information posted. The helpfulness of a financial advisor's answer is not indicative of future advisor performance.
WalletHub members have a wealth of knowledge to share, and we encourage everyone to do so while respecting our content guidelines. Please keep in mind that editorial and user-generated content on this page is not reviewed or otherwise endorsed by any financial institution. In addition, it is not a financial institution’s responsibility to ensure all posts and questions are answered.
Ad Disclosure: Certain offers that appear on this site originate from paying advertisers, and this will be noted on an offer’s details page using the designation "Sponsored", where applicable. Advertising may impact how and where products appear on this site (including, for example, the order in which they appear). At WalletHub we try to present a wide array of offers, but our offers do not represent all financial services companies or products.