Should I borrow from my 401k to buy a house and/or pay off student loans?

[cincystache]

Hi MMM community. I might be in need of a solid face punch here but would like some advice.

My wife and I currently rent a great (inexpensive) apartment but live far from my job (about 30-45 minutes by car each way)

I am interested in a townhome listed at $95,000 and could probably get it for$ 88,000. It is 2 miles from where I work (so I can walk/bike) and we can sell one of our two cars. It is in a good neighborhood and completely refinished, good schools, finished basement, blah blah. We would plan on staying there for at least 7-10 years, possibly more barring any unforeseen circumstances or change in job. HOA fee is 212 per month and taxes are 100 per month, I'm guessing utilities would be about 100-200 per month. My wife is flexible on her job and would probably work from home if/when we have children (hopefully soon).

My first question:
Should I take a loan from my 401k right now to cover the down payment and buy the townhouse? I hate the thought of PMI and I don't think it is a terrible time to reduce allocation to equities (don't yell at me for timing the market, I'm just saying). I could sit tight and keep renting while I save up a downpayment or look for cheaper rentals near work but rentals in this area are over $1000 per month plus utilities and I'm tired of wasting time and money being a car clown.

Second question:
Along the same lines, would it be wise to borrow from my 401k to pay down our student loans? I'd rather pay interest to myself than whatever lender we are paying back and again, I don't mind taking a step out of equities the next year or two.

Should I do one, the other, neither, or both?


Long term my plan is to live frugal, carry zero debt (including the townhouse) and max out all retirement accounts every year then put the rest into taxable index funds. The HOA kinda stinks but I guess there is no such thing as free housing (?)

Thanks in advance,
M



Expenses:
$800: housing (includes all utilities)
$1700: everything else
TOTAL EXPENSES:$2500


Income:
Day job: 3500 take home per month
side job(s): 200 take home per month
wife's job: 1,350 take home per month


Debt:
2,800 (0% credit card hack until July 2016, will pay this back before interest rate hike)
23,800 (4.85% student loan paying 233 per month currently)

Assets:
Roths: 44,500
401Ks: 48,500
Trad IRAs: 5,700
other retirement: 15,000 (can't sell)
Emergency Fund: 5,000
Taxable investments: 1,000

[GetSmart]

Hi Cincy - Just a few questions to think about.
Is the 800 in housing current or projected on new townhouse?  How much will this change?
What will the cars fetch if sold?  And what are the associated car costs that will be saved?
What will the closing costs be?
How much time do you think you have between offer and closing dates?
What have you been doing with the $2550 difference in expenses vs. take-home? Is that recent or projected after purchase?
What would the PMI be if you only put down 5% ? and for how long ?
Isn't there a way of taking out part of the Roth for a first-time home purchase?  Does this still exist?
What are the payback terms on the 401k loan?

Sorry for so many questions, but I think if you answer these you just might find the money you need :)

[desk_jockey]

When you take a 401k loan will you lose the ability to contribute to the 401k and receive the match until the loan is paid?   If so the answer is no loan.  If not the answer is probably still no. 

Regarding the student loan repayment, your current interest may be a tax deduction so effective net interst is lower.  With a 401k loan you would be forgoing long term stock market and exposing yourself to tax consequences if you lose or change the job and cannot immediately repay the loan.

Regarding the house, you have net $3,200 outside of retirement accounts.  That's probably not enough room for contingency even with 100% financing.   Unless the house is a steal, I suggest you save until it hurts for the next 18 to 24 months and then reevaluate your position to buy.

[frugaliknowit]

No, no, and NO!!

You are not "financially thick" enough to buy a home.  There will be other expenses to owning the townhome besides the monthly.

Stick with rental until your balance sheet is appropriate.

[Numbers Man]

I don't like your plan. The HOA fees for the townhome are ridiculous. Stay a renter and don't borrow from your 401(k).

[GetItRight]

I took a 401k loan, but it was to pay down a 16% interest student loan and part of my what I had to do to get refinanced at lower interest rates. At the time I also had about 5x the SL debt you do. I still contribute to the 401k enough to get the match while repaying the loan. In your case I would not consider a 401k loan. You have a decent interest rate on the SL debt, try refinancing with Citizens Bank or Earnest to get a lower rate if you want to optimize.

It looks like you have pretty good cash flow and are looking at reasonably priced homes. You're under a year to paying off your debt if you just buckle down and do it. Then add another 6-12 mos and you'll have a 20%+ down payment for a house. I personally would never buy into a HOA, but clearly some people like the added expense and restrictions or they wouldn't exist. I would not do the 401k loan for either purpose in your case, you have the cash flow that with a little discipline and patience you'll be ready to proceed soon, and without the burden of unbacked debt.

[rmendpara]

Unless this home is priced SIGNIFICANTLY below market, I wouldn't take out assets in income-producing assets to take out a mortgage.

With a net cash flow of 2.5k/month, it looks like you could easily save up the cash within 1 year.

Even if house prices go up 5% by next year, you could probably realistically find a comparable home that's also closer to work for 110k or less and fully afford the down payment.

Is there more to the story which would support stretching your budget and retirement accounts to buy this specific house now?

[charis]

I disagree that you can't buy a home for $88,000 with your cashflow.  How much would your monthly housing costs be total after buying? How much can you get for your car?  But I would pay PMI before taking out a 401K loan.  If you aren't willing to do that, you need to stay put and save up for the down payment.

[Cwadda]

Another vote for just sticking to saving up. You're basically at a 50% savings rate and that's fantastic. Once the debt is taken care of you'll start building cash for a home quickly. To expedite the process you can focus on reducing expenses further :)

[cincystache]

Thanks for all the replies! Its great to get more opinions. It seems consensus is to stay the course and be patient.

I'm thinking we will max out our IRAs and then put all excess cash flow into paying off debt until it's gone.

Will keep commuting and enjoying the low rent.

Any other ideas?


Here is some more info...

Cars are each worth around 3,000

I will not touch my Roth for a house as I can't replenish those funds once they are gone.

401k payback term is 60 months for a general loan or 120 for a house loan. $80 one time processing fee, no prepayment penalty.

There is no match offered for my 401k so I wouldn't miss that. I can also still contribute to 401k after I take the loan

If I lose my job I can continue to pay the loan back by check (instead of payroll deduction) for the remainder of the duration.