401k Loan for Condo Down Payment

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Bismarck
Posts: 13
Joined: Tue Oct 14, 2014 8:37 pm

401k Loan for Condo Down Payment

Post by Bismarck » Thu May 10, 2018 8:36 am

I’m buying a condo and most of my money is tied up in retirement accounts. To come up with a 20% down payment, I’m considering doing a 401k loan (will also roll a traditional IRA into my 401k to borrow against). Here are the pros and cons as I see them:

Pros:
Borrow money from yourself instead of the bank.
Preserve tax advantaged status of 401k/IRA money.
Pay yourself interest.

Cons:
Can create cash flow problem
Can’t prepay small portions of 401k loan, it’s all or none.
If employment is terminated, full balance is due back immediately, so will need to maintain a large balance of low risk investments to offset.


Thoughts?

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Chris
Posts: 580
Joined: Thu Jul 22, 2010 2:44 pm

Re: 401k Loan for Condo Down Payment

Post by Chris » Thu May 10, 2018 11:44 am

How quickly could you repay the loan?

EdithKeeler
Posts: 579
Joined: Sun Sep 01, 2013 7:55 pm

Re: 401k Loan for Condo Down Payment

Post by EdithKeeler » Thu May 10, 2018 12:06 pm

I’ve used 401k loans twice to buy houses. I was able to make extra payments, however, to payoff early. Worked out fine for me. I have a really stable job and no concerns about layoffs, etc.

suomalainen
Posts: 278
Joined: Sat Oct 18, 2014 12:49 pm

Re: 401k Loan for Condo Down Payment

Post by suomalainen » Thu May 10, 2018 1:01 pm

I used a 401k loan to refi my second mortgage (nobody throw eggs, I was young). My thoughts:

1) Make sure you can afford it. Presumably you will need a conventional mortgage for the balance and you'll need to account for the 401k repayment from your paycheck to apply and qualify for that loan. Sounds like you're already aware of the cash flow implications tho.
2) People say "but you're taking pre-tax money and paying it back with post-tax money". Yes. But you also get to use that pre-tax money, you don't just burn it. More of a valid point if you're buying stupid shit with it.
3) If your 401k is invested in stocks, getting a 401k loan is a bit like shorting the market, so I suppose consider your views of the future of the market or something. The way this is typically expressed is "But you'll miss out on market gains!!!" True. But only if the market gains.
4) If you have the ability to pay it off quickly if you're fired or want to change jobs, then it's ok; if not, you're creating a problem for yourself down the road (10% tax penalty plus back taxes, iirc).

So, in my case I did it because I was confident I wouldn't get fired in the 5 years of the term and I wanted to short the market. Didn't work out so well on that second point, but at the same time I was paying off an 8.25% second mortgage, so I'll take a guaranteed 8.25% return any day of the week.

Bismarck
Posts: 13
Joined: Tue Oct 14, 2014 8:37 pm

Re: 401k Loan for Condo Down Payment

Post by Bismarck » Mon May 21, 2018 7:21 am

Thanks!

The interest rate I'm paying my self is 5.75%, and I picked the max term available, 180 months. 180 months is a huge amount of time, but I don't want to create a cash flow problem. I can easily cover $134 a paycheck, and take what I have leftover to put in a bond fund to start offsetting the liability.

~1/3 of the loan is roth 401k money, so I'll be paying myself with post tax money and upping that balance, but the other 2/3 is traditional 401k, so paying myself with post tax money to pay taxes on it when I reach traditional retirement age. But tax free growth.

Augustus
Posts: 380
Joined: Sat Apr 02, 2016 10:15 am

Re: 401k Loan for Condo Down Payment

Post by Augustus » Mon May 21, 2018 8:36 pm

Real estate valuations are really high right now. Interest rates are currently planned to get hiked 3-4 more times. When they go up property values will likely drop. Be careful that you don't lose your down payment and end up underwater. E.g. prices drop 10% and it costs 10% to sell a house, means you'd break even. Any further drops mean you'd need to raise cash in order to sell.

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