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Your 401K PLAN
Thinking about tapping into your 401k Plan towards your down payment? Please read this first!
Lately, headlines have floated the idea about tapping into your 401k to cover a down payment on a home you may be considering. Maybe you’ve been wondering whether that money could get you into a home faster, especially with affordability as tough as it is.
Here’s what you need to remember. Pulling from your retirement savings is a big decision, so take time to weigh all your options first and be sure to talk with a financial expert before you do anything.
Why Using your 401k Plan can be very tempting
Many Americans have built up considerable retirement savings. The median 401(k) amount for anyone in their 40s-60s can be in the six figures.
And when you’ve got a good chunk saved and your dream home is right there, in front of you, reaching for it can feel pretty logical.
But dipping into your retirement savings to buy a home could cost you a penalty and set back your finances later on. That’s why it’s a good idea to explore other options for your down payment first. Here’s what a quote from Redfin says:
“If you’re struggling to save enough for a down payment, you may be wondering if tapping into your 401(k) is the right option. While it’s possible, doing so comes with significant risks, like early withdrawal penalties and lost investment growth. “
Before you decide, have a financial advisor help you compare the upsides to the risks. Bankrate points to a few of each:
Here are some pros: You don’t need a credit check or lender approval to withdraw your own 401k. Also, it’s fast. It could take only a few days to withdraw the money.
But here’s the thing: There is typically a cost to you. Early withdrawals usually come with a 10% penalty, plus income tax depending what you withdraw. It also has a long-term impact. If you take $10k out now, and at a 7% growth rate; you would have about $54k less than you could have had in your 401k after 25 years. Yikes! Something to consider!
Explore other options First
Your 401(k) isn’t the only way to finance a home purchase. Redfin outlines a few other options to look into before you decide what to do:
Low and No-Down Payment Loans: FHA Loans, for example, allow qualified buyers to put down as little as 3.5% of the home’s price, depending on their credit scores.
Down Payment Assistance Programs: Many national and local programs can help reduce what you pay toward your down payment or closing costs.
Be sure to make a plan, before you make a move.
No matter which route you take, talk with a financial expert first. The buyers who come out ahead build a solid plan with the right professionals before starting their journey to homeownership.
“Even if you’re convinced a 401(k) loan is the way to go, it’s important to understand the risks at the outset."
If you're considering using your 401(k) savings for a down payment, weigh all your options and I advise talking with a trusted financial advisor before you make any decisions. They’ll help you make a plan to fit your goals and your budget. And of course, I am always here to help you decide which is best for you! Just call me!
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Judy@JudithSutton.com
COLDWELL BANKER...GUIDING PEOPLE HOME SINCE 1906
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"...the right relationship means everything..."
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