patrick.net

justwantaniceplacetostay says

I have around 120K saved up and am looking in the 600K range if at all. If I put in all that, there will no emergency fund which is what I mean by cash on hand. Its not a dire situation just that I have gotten used to always having enough and not thinking about checking account balances while paying bills and dont want to start now.

For 600+k house, I won't touch it if i don't have 200k cash or 150k + ur 50 k 401k. Personally, taking out 401 k loan is okay, the sticking point is the need to pay back immeditely with a job change. And, ur cash is tight as u haven't factored closing cost, remodeling etc.

My husband took small loan from 401k for his MBA to ease cash flow then. So, I don't think it is a bad idea if u are prepared for other changes.

Hysteresis says

at least i don't argue with spambots. you'd have to be a total retarded to do that.

Mr. Fantastic? Is that you? I've missed you!

genesplitter says

I'm in a similar position. The IRS rule is 50% of your 401k or $50k, whichever is less. You then have (up to) 15 years to pay yourself back.

There is another rule: if you change/loose your job you have to repay the whole loan practically immediately. I don't remember the exact time period, but it's 60 or 90 days. Otherwise it's considered an early withdrawal and you pay your max taxes + penalty. (All taken from your 401k).

As a matter of fact, when I think about a possibility to buy a house I definitely plan to take such a loan, with one limit: it should be below the net pay in my estimated severance package, which in my case, including also the unused vacation time should be above $50K after taxes.

justwantaniceplacetostay says

While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account and then repaying it with after-tax money. This can result in some of this money being taxed twice.

You forgot one thing. When you take a loan from your 401k you take it out of your pre-tax money and use it as after-tax money. The only thing that is double-taxed is the interest.

ddavis mentioned that our retirement may not even BE there when we need it, and I've thought of that, too. As long as we buy when prices are affordable I don't know that it's worth fretting about the relatively minor ups and downs of prices unless we are planning or needing to sell. Moving frequently makes homeownership a bad idea. But if you are able to stay put, the main thing is, buy what you can afford of course, and buy it the cheapest safest way possible. For those who have enough in their retirement to take some out, I don't think it's a bad idea to put that money into their shelter so they can buy when prices are low and get it paid off quicker, (thus paying less interest to the banks over the life of a typical mortgage).

With all the corruption and instability in this country I really have very little faith that retirement funds are safe and can be counted on. So, I've also been thinking it might be a better use of at least some of that money to buy an affordable house for cash or at least make the down pmt with it. I also plan on installing solar if I buy, as utilities are another drain on the budget. If I REALLY thought our retirement funds were going to be there, i would not be considering this as seriously.

And, what if you just use part of your retirement savings and do not take it out as a loan? Am I missing something? Sure you may pay taxes on it, (that's the penalty part, I get that), but a house IS our biggest single expense and getting to retirement age with a paid off house could be a life saver, financially.

(BTW by 'relatively minor ups and downs in prices' I am talking about truly minor stuff, not drops of another 20% or more. In some markets prices are pretty realistic again. If I buy at those prices and it loses a little more yet, I'm not worried. I am worried about a major drop only if it's still worth nothing in 20 yrs. Then we'd be talking about this really being a 3rd world country but at least we'd have a place to live I guess.)

CSC says

With all the corruption and instability in this country I really have very little faith that retirement funds are safe and can be counted on. So, I've also been thinking it might be a better use of at least some of that money to buy an affordable house for cash or at least make the down pmt with it.

There has always been corruption and instability. Making a guess is simply guessing. The market has performed the same for the past 100+ years long term. Buying a house doesn't really add any additional security.

CSC says

So, I've also been thinking it might be a better use of at least some of that money to buy an affordable house for cash or at least make the down pmt with it. I also plan on installing solar if I buy, as utilities are another drain on the budget. If I REALLY thought our retirement funds were going to be there, i would not be considering this as seriously.

So you're planning on using your house as a savings account?

How exactly do you plan on withdrawing funds? Selling off parts of your house as needed when the bills come due?

ThreeBays says

rockyroad says

not smart; u r paying back 401k loan (denominated in pre-tax dollars) with after-tax dollars. you are losing 30% or so depending on ur bracket.

That doesn't sound right. Could you elaborate?

My understanding is that you borrow X and pay back X - that is no net loss for you.

But you also have to pay back interest Y. I am not sure about the tax treatment on Y. If it is treated as a post-tax contribution, then you don't have any loss on that either (401k accounts can hold post-tax contributions which are not double taxed). If it is treated as capital gains, then you will be essentially double taxed on Y.

The money borrowed from 401k is pre-tax; the money paid back is after-tax. It's not a straight 1-to-1 trade. Think about it another way; even at 0%, if you swap out your entire 401k balance with same amount in your checking account, it's still at 30% (or ur tax bracket) loss to you.

rockyroad says

The money borrowed from 401k is pre-tax; the money paid back is after-tax. It's not a straight 1-to-1 trade. Think about it another way; even at 0%, if you swap out your entire 401k balance with same amount in your checking account, it's still at 30% (or ur tax bracket) loss to you.

For example: you have $1,000 in 401k. You earned $1k from your job, and it's all deposited into 401k, no taxes taken out.

Now You borrow the entire amount (not possible with most accounts, but for sake of this discussion). And assume the interest rate is 0%, make math simple and show you how bad of a deal this is.

You are paying back this loan with after-tax money. So, you earn $1k, but only $600 or so is used to repay the loan. Tax is taken out first. So, it's gonna take $1300 to repay your 401k loan of $1000. (i'm using 30% tax bracket; but it's a bad deal in any bracket)

https://news.fidelity.com/news/publishedarticle.jhtml?guid=/FidelityNewsPage/pages/pitfalls-of-a-401k-loan

ThreeBays says

Say you want to buy a car for $1000.

You can pay with $1000 from your savings account (which cost you $1300 pre-tax).

Or you pay with $1000 from your 401k, then pay back $1000 from your savings to the 401k (which is also $1300 pre-tax).

In both cases the car costs you $1300 pre-tax money.

Incorrect. You need to take this one step further.

In above example, $1000 from 401k, if untouched, when I withdraw is taxed ONCE. So I earned $1k, and when I retire after taxes, I get $700 from 401k. (assuming 30% tax). So I put in $1000 to get $700 back at retirement (assuming no appreciation).

However, if I borrowed $1k from 401k and fully repaid it with taxed money ($1300). Now, when I retire, that $1k from 401k gets taxed AGAIN. So now, I have to earn $1300 to get $700 back at retirement (assuming no appreciation).

401k loan is not a loan. It's an way to get taxed twice!

Rockyroad,

While the money does seem to get taxed twice, you missed the point that you got to spend untaxed money when you took out the loan.

wrong wrong wrong. don't gloss this over.

ThreeBays says

He later pays back his loan for $1000. Result = checking $0, 401k $1300.

He pays back his loan for $1000, by earning $1300!!!!

At retirement, if loans paid in full, you should have the same balance in both cases. But the key is in your scenario B, Bob had to earn $300 dollars more to arrive at the same balance.

You know I'm right... why are you fighting it?

ThreeBays says

He later pays back his loan for $1000. Result = checking $0, 401k $1300.

where did he get this $1000 to repay the loan? he paid taxes on this $1000 right? so he had to earn $1300 pretax to have $1000 to pay the loan?

have a good weekend.

Hysterisis. you, and Suze Orman, are both wrong.
ThreeBays is right.
Try a simple thought experiment, as follows:
Borrow $1000 from your 401k and put it in a black box.
Put $1000 from your pay and put it in another black box.
Shuffle the boxes.
Take all the money out of one black box.. and REPAY the 401k loan.
Take all the money from the other black box, pay the loan interest and pocket the rest to spend or not.
NOW ANSWER THIS QUESTION:
Did you lose any money except the tax ultimately due on the interest paid?

The confusion lies with the pure fungibility of money which can get lost in the analysis.

justwantaniceplacetostay says

While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account and then repaying it with after-tax money. This can result in some of this money being taxed twice.

no, it's not double taxation. let's just call it money A and money B for the sake of simplicity.

money A goes in to the 401k account tax free. money A comes out of the 401k plan tax free and ends up as part of the down payment on the house. you never paid taxes on money A. money A is now gone into someone else's pocket. at some point you have to pay income tax on that money since you used it as regular income rather than retirement savings.

which is why you pay regular income tax on the money used to repay the loan amount.

money B goes to the 401k plan to pay back the 401k loan. this money is not pre-tax. it's taxed as regular income. it's taxed as regular income to make up for the fact that you were able to save money tax free and then use that money, tax free, to pay someone else.

Errata: I meant that RockyRoad was wrong.
Hysteresis originally raised the "double taxation" argument, and he was wrong, too.

CrapDetector says

Borrow $1000 from your 401k and put it in a black box.
Put $1000 from your pay and put it in another black box.
Shuffle the boxes.
Take all the money out of one black box.. and REPAY the 401k loan.

That's what I did in September 2008, when the sky was falling down and I did not trust the cash "vehicle" portion of my 401K. I borrowed the max which was almost the whole cash allocation, bought the most i bonds I was eligible for that autumn and again at the beginning of the next calendar year, put the rest in an FDIC deposit.

Along the way they said the gov't or fed or someone would guarantee money funds but I executed my plan before that announcement.

The I-bonds from those purchase dates have a "base rate of 0.7%" which I thought was horrible at the time but compared to FDIC insured deposits nowadays has not turned out too bad.

Pretty simple, if you are pondering on if you should take a 401K loan to put down on a house, you are already in trouble. Use common sense. Save up for a down payment. If you can't save up for a down payment and can't make the monthly payments, yes payments, mortgage, ins, prop tax, maintanence.. then don't buy a house in that price range. Simple logic, that's all. If you are interested in not throwing money away, follow these SIMPLE rules.

I'm not merely "guessing" that there's corruption; I've seen it take out the economy and wipe out some people's retirement savings.

edvard2 says

CSC

Nowhere did I say my house would be a savings acct, piggy bank, or anything of the like, nor do I plan on selling it to make money. I plan on living in it, and having it paid off, so that I don't have a house payment or rent, by the time I'm retirement age. Sooner, actually. With the largest expense wiped off the budget, I need less to live on, should the economy get worse, retirement savings get wiped out by crooks, or social security go completely away, or all of the above. I certainly don't count on that money OR a house's value being there that far in the future; I just want a place to live that is paid off so I don't lose my shelter, too, even if evrything else tanks.

wthrfrk80 says

CSC says

So, I've also been thinking it might be a better use of at least some of that money to buy an affordable house for cash or at least make the down pmt with it. I also plan on installing solar if I buy, as utilities are another drain on the budget. If I REALLY thought our retirement funds were going to be there, i would not be considering this as seriously.

So you're planning on using your house as a savings account?

How exactly do you plan on withdrawing funds? Selling off parts of your house as needed when the bills come due?

Late to this thread but for what it is worth. Please do yourself a favor and do not buy this house if you are incapable of saving the down payment yourself. It is indicative that you do not have the discipline to be a home owner.

Have you done any research on what repairs cost. You will have to be disciplined throughout your home ownership tenure, not just saving for the down payment and plunking down that 20%. You will have to be saving a percentage of the purchase price every month just for repairs. A central AC unit is $15,000, a stove is $500 to $1,000 dollars.

Add to the repairs all the new "homeowner expenses" you will have like a lawnmower, yard tools, flowers for the front yard. You could also insert, new fancy man-cave decor, but you get the idea. Whatever your idea is in your head of what you want your home to be like. That all costs money.

My first six months of home ownership I had to repair plumbing and repair a roof. Yes I got the place inspected, my guess is the real estate agent bought off the inspector. He should have told me the roof was bad. Still things will break and they must be fixed. If you don't have an income or savings to fix things then you will have a run down shack to live in during your retirement. Remember these things depreciate. You only get the benefit of depreciation on investment properties.

Some articles say double your monthly payment to get these other expenses. I have been a home owner in the past. Count on that being true and you just might do OK. Any other assumption is a folly. Home ownership is expensive no matter what.

It's not a matter of saving up vs using retirement, it's a matter of "will that retirement money BE there when we retire, or will we wish we'e used it on something we can use, like shelter that's paid off." People think their retirement is untouchable. Remember in 2008 was it, that so many people lost a lot of their retirement in the crash? Especially stock that had been performing well, apparently. Though ours lost value it rebounded, but we had the luxury of not needing it right now. And had it not lost value, it might be worth even more than it currently is. Having recovered is not the same as if it had been performing well all along with no bust. Considering the fraud committed by the banks in mortgages alone, I do not think that the fraudsters on Wall St.can be trusted with that money.

Ijusttellthetruth says

Pretty simple, if you are pondering on if you should take a 401K loan to put down on a house, you are already in trouble. Use common sense. Save up for a down payment. If you can't save up for a down payment and can't make the monthly payments, yes payments, mortgage, ins, prop tax, maintanence.. then don't buy a house in that price range. Simple logic, that's all. If you are interested in not throwing money away, follow these SIMPLE rules.

Regardless of 401(k) loans making good financial sense in theory, the quantity of 401(k) loan defaults is still higher than normal. Many people have trouble paying them back once they take from their retirement funds.

MsAnnaNOLA says

My first six months of home ownership I had to repair plumbing and repair a roof. Yes I got the place inspected, my guess is the real estate agent bought off the inspector.

You didn't use your own inspector or get a second opinion?

All you need nowadays is Monopoly money, to put for a down payment for a house. I wouldn't touch your "Grown Ups" money.

Youre A Liar says

401k loans are ALWAYS double taxed.

No they're not. They just aren't tax deductible.

http://thefinancebuff.com/401k-loan-double-taxation-myth.html

Kinda timely thread for me.

I am (very reluctantly) considering 401k loan for a rental investment. I've been planning on buying a 2 family property next year, when I am fully ready, but a place showed up which I am seriously interested in.

Here are the numbers: $560k purchase price, rental income $60k/year. Need to put about $15k in renovations before it's rented. I am short about $25k at the moment overall, something I can save in 3-4 months.

Crazy?

someone asked me what I thought about using money from a 401K loan to "get in" on FB stock, including buy more on margin.

seriously.

I am a big advocate of paying yourself first. For most working people, the most efficient way to pay yourself first is to shelter your federal and state income from tax from a 401K account. A highly paid personnel should have a nice company match as well. From that perspectice, I believe maxing out your 401K is the best savings methodology.

Money in a 401K is still money. Pre-tax 401K is a huge benefit for upper/middle class taxpayers and by far the most lurcrative deduction out there. That is why there are withdrawals rules in place to avoid abuse becasue the pre-tax feature is so lucrative. A person who save their money in savings will have a fraction of the money from a saver who shelters it in a 401K (How the hell do you save money if the government takes 35% bite (28% fed + 9% state) from the increment). The rules currently in place are very beneficial for 401K savers. You just need to navigate the withdrawal rule to avoid the penalty and will come out way ahead than non-401K savers.

From that perpsective, pay your first in a 401K and borrow from it (for a good purpose) if neccessary.

* only applies to high bracket taxpayers.

btw, rockyroad is wrong.

CSC, I'm totally with you. I think owning a place to live in your golden years is Step 1 in retirement planning. Why fret about 401(k) and taxation in the future when you haven't even guaranteed a roof over your head for those years yet?

I say a good plan is to keep your starter home and rent it out for many years while you live in your bigger, enough-space-for-kids residence. All the while you know that when you get old and the kids are out on their own, no matter what happens to Social Security and even what happens to the house you're raising yuor kids in, you've got a residence stashed away.

I hope you really want a house with all your heart, because this all sounds really complicated. Good luck.

I have around 120K saved up and am looking in the 600K range if at all. If I put in all that, there will no emergency fund which is what I mean by cash on hand.

I had a similar problem, (albeit it a different price range). House needed work, but cost of work + 20% down + closing costs would have all but drained my savings.

After much number crunching (and some hand wringing) I decided to put down 10%, take the PMI hit and move forward.

See past disucssion

Sounds like you are in a similar situation. Play the “what if” scenario, and see how you would end up if you were to put down less than 20%. Keep in mind that, depending on weather it is a conventional loan or a government backed loan, there are different rules that impact both the cost of PMI and the length of time that it is required. Your lender should be able to fill you in on the details.

Good luck with whatever you end up doing – but I concur with the majority regarding the 401 (k). It’s risky since if you leave your current employer the loan would become payable in full in a short amount of time.

Why would you do that if you have cash?

If you have to go into 401k to make a down payment, you should rethink why you are buying. I think you are stretching yourself too thin, and if you have to pay that all back you'll really screw yourself there.

Call it Crazy says

How has your decision worked out for you so far?? Also, where did you end up buying?

so far so good... but its a bit too soon to make a final analysis. Check back in about six months.

Have borrowed from 401k for college. You only pay tax twice on interest because you are forced to pay with after tax money the interest into the 401k. As far as paying back - as true as it is you are paying with after tax money - you forget that you would have paid tax on it anyway because you would Not have put that money in a 401K. The key is to continue putting same amount of money in your 401K that you normally would and pay back the 401k borrowed money like you would a regular loan.

A 401k loan is NOT double-taxed. The people in this thread who say it is are very incorrect.

Take the money wherever you can get it if the house is cheap and will go up. Just do it. A paid for house equals less stress and a better life. You can wrinkle and die later. Young and happy you can remember fondly when everyone is old and ugly.

Call it Crazy says

Interesting..... I'm looking to do a similar deal and have been wrestling with this both ways. House needs a lot of work so I have to hold back cash for that, but trying to decide if I should put down a big chunk to get instant "equity" or put down 5% - 10% and leverage it and take the PMI hit but save my cash...

How has your decision worked out for you so far?? Also, where did you end up buying?

Same situation, I opted for 10% down...now I wish I had gone with 5% down.

The interest rates are so low right now, that even with PMI it's a fantastic deal. Especially if you can do something useful with the money, such as funding your retirement accounts or funding the improvements to the home.

Here is a scenario that convinced me:

Put 20% down, avoid the PMI and have a 3.25% loan for the 80% balance, but have "nothing" left in savings. If I take out a $50k loan to do improvements, it's going to (most likely) be a HELOC which has a higher interest rate and is variable. If instead I put 5% down and had the leftover cash, I could fund some/most/all of the improvements from cash, or effectively at the fixed + PMI rate. Once the improvements are done, I can likely get an appraisal that removes the PMI, and end up with everything financed at the 3.25% rate. In the HELOC scenario the PMI on the mortgage goes away too, but I'm stuck with the higher interest rate (and the variability) of the HELOC for the $50K part of the loan.

Basically the way I see it is that as long as you have something worthwhile to do with the "extra" money, get as big a loan as you can at today's rates, even with the PMI. This of course assumes that you have self control and don't just go spend it on a boat, or something.

Wait to do improvements if they cost $$$$$. If they are easy and cheap, do it first. Otherwise wait. Dont get googly eyed and spend away. Been there done that and could have taken all that improvement money and bought a second home and been in a sweet spot. Dont get googly eyed. You may want to trade up in 5 years and not be in big debt is good.