Pull Out Money From 401k to Buy New Home

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rsilver41
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Pull Out Money From 401k to Buy New Home

Post by rsilver41 »

So I have been running the numbers non-stop on my situation and just want to get some other opinions.

Current house is worth $310k. I have about $130k equity in it. I just refinanced it to a 2.75% 30 year loan that makes the total payment $1350 and I can rent it out easily for $2.4k a month. With this kind of cashflow we want to hold onto the property for the long term as a way to diversify our portfolio.

My wife and I are looking to build a new home that would cost about $430k. I have about $40k in cash now and could be up to 10% or more with no problem by closing. I don't think I can get up to 20% though. We both got Covid this year and did have a reduction in work for about 4 weeks. So technically this qualifies me to pull out funds or take a loan from my 401k. I am thinking about taking out (or taking a loan) $50k from my 401k to have 20% down for the new house in order to avoid PMI. We have a pretty good savings rate and easily can save about 3K a month in our budget. I believe that that amount of monthly cashflow, the rental income, and how low rates are right now, that this is a wise move.

So my question: Would you take out funds from 401k to have 20% down and avoid PMI? Or would you just close with 10% down, pay down the mortgage to 20% ASAP and then refi?

Thanks for any input!
EnjoyIt
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Re: Pull Out Money From 401k to Buy New Home

Post by EnjoyIt »

I hate to say this but the correct answer is “C.” Wait until you have 20% and don’t touch the very valuable 401k.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Mlm
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Re: Pull Out Money From 401k to Buy New Home

Post by Mlm »

I would save until you have 20% to put down. Interest rates are not going anywhere, except maybe down.
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WoodSpinner
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Re: Pull Out Money From 401k to Buy New Home

Post by WoodSpinner »

OP,

How secure are your jobs? Main downsides of a 401k loan is it becomes due if you are laid-off and you loose your opportunity cost of investing and compound growth.

WoodSpinner
Frugalbear
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Re: Pull Out Money From 401k to Buy New Home

Post by Frugalbear »

Absolutely not...

Reasons:
Compound interest
Uncertain times-possible job loss
Creating a bad habit of borrowing from future self
Frugalbear
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Re: Pull Out Money From 401k to Buy New Home

Post by Frugalbear »

WoodSpinner wrote: Fri Aug 28, 2020 9:04 pm OP,

How secure are your jobs? Main downsides of a 401k loan is it becomes due if you are laid-off and you loose your opportunity cost of investing and compound growth.

WoodSpinner
Plus, if you do lose your job, you typically need to have that loan paid back in X time or risk penalty.
Topic Author
rsilver41
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Re: Pull Out Money From 401k to Buy New Home

Post by rsilver41 »

Thanks for the feedback. Job is pretty secure. Will likely make a good amount more money in the next year as well. I would never usually consider a 401k loan or withdrawal outside of the really unique benefits that the Cares Act made possible for this year. I could withdrawal the funds penalty free, spread out the tax burden over three years, and have the option to pay it back and have no tax burden. The other thought was just get a HELOC on current house new house with 20% down.

I get the compound interest thing as well...it has been were a bunch of my struggle is. At the same time, I can make an argument for seeing it as just moving the funds into real estate and making it possible for us to get our first rental property up and going.

Thanks all.
cogito
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Re: Pull Out Money From 401k to Buy New Home

Post by cogito »

If you have to do this, 10% + PMI on a second home is not exactly wise, but is a far, far better option than cashing out retirement. Even moreso if you're in a non-recourse state, as it sounds like you're about to become doubly house-poor.
Madboggle
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Re: Pull Out Money From 401k to Buy New Home

Post by Madboggle »

I am not an expert on this but if you take a loan from 401k, aren’t you paying it back with your taxed dollars? Effectively you paying 2 times the tax on the amount you borrow?
HalfMillionaire
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Re: Pull Out Money From 401k to Buy New Home

Post by HalfMillionaire »

I will provide a counter-point - hope it helps.

I did take out 50K for my mortgage. I figured that I am paying interest to myself - and I really did not want to pay PMI - and my job was pretty secure. My 401K provider did not charge any fees for the process - the interest rate was steep - but again - I am paying myself so that's not a worry.

I have not regretted doing so. Have already paid much of the loan back.

I even think that taking a loan can be a way of contributing extra to your 401K. A 50K loan will have ~3K in interest per year @6%. That is an additional 3K that you are contributing to your 401K. Sure you lose on the growth of the 50K - but whatever growth will likely be less than your PMI payments so you still come out ahead.
cogito
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Re: Pull Out Money From 401k to Buy New Home

Post by cogito »

HalfMillionaire wrote: Fri Aug 28, 2020 9:31 pm I will provide a counter-point - hope it helps.

I did take out 50K for my mortgage. I figured that I am paying interest to myself - and I really did not want to pay PMI - and my job was pretty secure. My 401K provider did not charge any fees for the process - the interest rate was steep - but again - I am paying myself so that's not a worry.

I have not regretted doing so. Have already paid much of the loan back.

I even think that taking a loan can be a way of contributing extra to your 401K. A 50K loan will have ~3K in interest per year @6%. That is an additional 3K that you are contributing to your 401K. Sure you lose on the growth of the 50K - but whatever growth will likely be less than your PMI payments so you still come out ahead.
That's a fair counterpoint, but won't OP have to cease new contributions + match until he pays back? That would be a deal breaker for me.
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rsilver41
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Re: Pull Out Money From 401k to Buy New Home

Post by rsilver41 »

cogito wrote: Fri Aug 28, 2020 9:37 pm
HalfMillionaire wrote: Fri Aug 28, 2020 9:31 pm I will provide a counter-point - hope it helps.

I did take out 50K for my mortgage. I figured that I am paying interest to myself - and I really did not want to pay PMI - and my job was pretty secure. My 401K provider did not charge any fees for the process - the interest rate was steep - but again - I am paying myself so that's not a worry.

I have not regretted doing so. Have already paid much of the loan back.

I even think that taking a loan can be a way of contributing extra to your 401K. A 50K loan will have ~3K in interest per year @6%. That is an additional 3K that you are contributing to your 401K. Sure you lose on the growth of the 50K - but whatever growth will likely be less than your PMI payments so you still come out ahead.
That's a fair counterpoint, but won't OP have to cease new contributions + match until he pays back? That would be a deal breaker for me.
My employer contributes 10% to my 401k and currently I have not been putting anything in addition in. My wife and I are 38yrs old and have IRA's that we fully fund every year and are each around $150k. The terms my 401k offered was 4% interest and payback over 60 months.
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Brianmcg321
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Re: Pull Out Money From 401k to Buy New Home

Post by Brianmcg321 »

No. Do not pull out money out of your 401k. That’s the worst choice.
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LittleMaggieMae
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Re: Pull Out Money From 401k to Buy New Home

Post by LittleMaggieMae »

So, what are we talking here... a 500K house with a 30 year loan with 50K down - so a 450K mortgage (using 3.5% interest rate). If PMI is .05% (I hear it can go as high as 1% of the loan value) of the 450K that's $2,250 per year (or 187.50 a month) Let's say the PI on 450K is about 2,000 a month so 2200.00 a month plus taxes and insurance. I guesstimate it will take about 60 payments with no pre payment to pay down the mortgage about 50K so you'd have 5 years of PMI if the house doesn't loose value over the next 5 years.

5*2250 = $11250 or so paid in PMI until you've got 20% equity and can refi to get rid of PMI. Does that sound about right?

So, it will depend on how much PMI will cost, if you think the house will go up in value over the next 5 years, if you can prepay some over the next 5 years, and where you think interest rates will be.

Is it worth it to take 50K out of your retirement fund? (I wouldn't do it.)

(I'd probably go the 10% and pay PMI. I'd rather have my 50K working for me for the next 5 years.)

It might be a moot point - lenders might require you to have 20% down on your "investment property" before they will write you a loan. The new house has to be far enough away from your current primary residence before it's considered a "second home".
soxfan10
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Re: Pull Out Money From 401k to Buy New Home

Post by soxfan10 »

Madboggle wrote: Fri Aug 28, 2020 9:31 pm I am not an expert on this but if you take a loan from 401k, aren’t you paying it back with your taxed dollars? Effectively you paying 2 times the tax on the amount you borrow?
Yes, it will be paid back in after tax dollars. That is not a disadvantage to 401k loans as all loans are paid in after tax dollars (there could be some leakage on the interest if you are able to itemize and deduct mortgage interest).
novemberrain
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Re: Pull Out Money From 401k to Buy New Home

Post by novemberrain »

Wait till you have 25% of downpayment.
20% to pay the bank. And 5% buffer
luckyducky99
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Re: Pull Out Money From 401k to Buy New Home

Post by luckyducky99 »

rsilver41 wrote: Fri Aug 28, 2020 9:45 pm
cogito wrote: Fri Aug 28, 2020 9:37 pm
HalfMillionaire wrote: Fri Aug 28, 2020 9:31 pm I will provide a counter-point - hope it helps.

I did take out 50K for my mortgage. I figured that I am paying interest to myself - and I really did not want to pay PMI - and my job was pretty secure. My 401K provider did not charge any fees for the process - the interest rate was steep - but again - I am paying myself so that's not a worry.

I have not regretted doing so. Have already paid much of the loan back.

I even think that taking a loan can be a way of contributing extra to your 401K. A 50K loan will have ~3K in interest per year @6%. That is an additional 3K that you are contributing to your 401K. Sure you lose on the growth of the 50K - but whatever growth will likely be less than your PMI payments so you still come out ahead.
That's a fair counterpoint, but won't OP have to cease new contributions + match until he pays back? That would be a deal breaker for me.
My employer contributes 10% to my 401k and currently I have not been putting anything in addition in. My wife and I are 38yrs old and have IRA's that we fully fund every year and are each around $150k. The terms my 401k offered was 4% interest and payback over 60 months.
If you're not going to wait, I think the 401k loan is the best option. You are essentially borrowing from your future self, with interest paid to yourself (as opposed to buying PMI or paying HELOC interest where you pay someone else).

The loan also forces you to actually make good on paying it back, which a CARES-hardship-withdrawal wouldn't do -- so I think behaviorally it's a better option too.

The main concern is being tied to your employment with that employer. If your employment ends, the loan comes due immediately. Would you have the ability to pay it off if that happens? Otherwise it turns into a pumpkin early distribution, with taxes and penalties.

I 401k-loaned myself when I bought to avoid realizing taxable gains. My job was stable, and worst case I would have paid it off by selling out of taxable.

Edit:
but won't OP have to cease new contributions + match until he pays back?
This wasn't true for me -- I don't think it's true for any plan I've ever heard of.
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rterickson
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Re: Pull Out Money From 401k to Buy New Home

Post by rterickson »

Don't you have to own the land outright before you can get a new construction loan/mortgage?
TropikThunder
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Re: Pull Out Money From 401k to Buy New Home

Post by TropikThunder »

luckyducky99 wrote: Sat Aug 29, 2020 12:09 pm The main concern is being tied to your employment with that employer. If your employment ends, the loan comes due immediately. Would you have the ability to pay it off if that happens? Otherwise it turns into a pumpkin early distribution, with taxes and penalties.
That's not true anymore, and even before the 2017 tax cut you had 60 - 90 days. Now you have until the following tax deadline (usually October if you file for an extension). Plus, the IRS regs say an employer "may require an employee to repay the full outstanding balance of a loan if he or she terminates employment" (emphasis added). It's common for a plan to allow repayment to continue under the original terms when/if an employee leaves the company, especially when payments are made via bank withdrawal rather than by payroll deduction.
luckyducky99
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Re: Pull Out Money From 401k to Buy New Home

Post by luckyducky99 »

TropikThunder wrote: Sat Aug 29, 2020 5:39 pm
luckyducky99 wrote: Sat Aug 29, 2020 12:09 pm The main concern is being tied to your employment with that employer. If your employment ends, the loan comes due immediately. Would you have the ability to pay it off if that happens? Otherwise it turns into a pumpkin early distribution, with taxes and penalties.
That's not true anymore, and even before the 2017 tax cut you had 60 - 90 days. Now you have until the following tax deadline (usually October if you file for an extension). Plus, the IRS regs say an employer "may require an employee to repay the full outstanding balance of a loan if he or she terminates employment" (emphasis added). It's common for a plan to allow repayment to continue under the original terms when/if an employee leaves the company, especially when payments are made via bank withdrawal rather than by payroll deduction.
Oh, thanks for the clarification. My employer's plan was apparently stingy and required repayment. And yes, I should never have said "immediately".
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gr7070
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Re: Pull Out Money From 401k to Buy New Home

Post by gr7070 »

I'd much prefer C. PMI would drive me insane.

However, 10% down isn't a true killer; so long as your personal finance basics are in order... Saving for retirement properly. Proper emergency fund. House easily fits in budget. Debt-free. Insured sufficiently.
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