Author Topic: Taking 401K Loan  (Read 4685 times)

FastStache

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Taking 401K Loan
« on: December 30, 2013, 10:16:27 AM »
Does anyone have any sort of calculators on what sort of money is lost when one takes a loan from their 401K?

I'm trying to compare what money is saved/lost on using a loan from my 401K as a loan as part of a down payment on a house to avoid PMI.

BuzzardsBay

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Re: Taking 401K Loan
« Reply #1 on: December 30, 2013, 10:34:31 AM »
Don't do it.
Don't do it.
Don't do it.

I don't care what the calculations show.  Don't do it!

AlanStache

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Re: Taking 401K Loan
« Reply #2 on: December 30, 2013, 10:54:43 AM »
I think you are going to have to do the math on your own, assume average market returns and lost money due to PMI.  I took a 401k loan for part of my down payment, all worked out very well for me.  Just know what you are getting into and the restrictions on the loan.  Calculate potential net worth's with the home value increasing/staying flat and decreasing in five years.

Also because this is mmm, I am required to comment about the size of the loan vs needing pmi vs saving enough outside the 401k.  blah-blah-blah.  Do your math.  Paying rent for X more years to save enough for no loan and no pmi might not be the best option.

Also if there was a calculator online for this would you really want to plug in your real numbers?  Also I find it unlikely there is a good calculator out there as most retirement calculators cap out at 30-40% savings rate or have some other bs non-mmm restriction.

willn

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Re: Taking 401K Loan
« Reply #3 on: December 30, 2013, 02:25:33 PM »
Two suggestions on this situation:

1- Don't take the loan from the 401k.  Leave that money to grow.  Calculating the few cents advantage it might offer over a higher house payment is more than offset   by the risks it presents, one big one is that it has to be paid immediately off if you leave your job. As in, 30-60 days immediately. What if you get a better job offer? Or get laid off?

2-If you can't afford enough down payment to avoid PMI, I respectfully suggest you can't afford a house.  Save more money until you can.

Hows your savings rate? If you temporarily stop stuffing your 401k can you save enough within a year to pay 20%+ down on a house?

Allen

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Re: Taking 401K Loan
« Reply #4 on: December 30, 2013, 02:47:41 PM »
Does anyone have any sort of calculators on what sort of money is lost when one takes a loan from their 401K?

I'm trying to compare what money is saved/lost on using a loan from my 401K as a loan as part of a down payment on a house to avoid PMI.

I've never personally known someone who has taken a 401k loan and not regretted it. It's a small sample though

msilenus

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Re: Taking 401K Loan
« Reply #5 on: December 30, 2013, 03:04:52 PM »
I took out a 401(k) loan and didn't regret it.  It was basically a bridge loan.  We paid it off in full within a year.  Here's what I'd recommend:

1) Know exactly how you'd pay it off within 60 days before taking it out if you lose your job.  If you can't find a way that you're 100% sure would work, don't do it.  This can be credit cards, or family, or pretty much anything --but know exactly how you'd pull that off.
2) Know exactly how you're going to pay it off completely and quickly.  You're paying interest into your 401(k) loan with post-tax money.  You'll still be taxed on it again when you take it out in retirement.  You need to minimize your exposure to that double taxation.  Paying it off quickly is the only way to do that.  But the more important factor is your job.  No matter how secure you feel in your job right now, things can with time.  If you can't pay it off completely within two years, I think it starts to get very suspect, because I don't think anyone can be that secure in their job looking that far out.
3) Make sure it's the right call financially.  PMI could easily make it a good call.  Having figured out how fast you can pay it off, you should be able to figure out how much it will save you on PMI.  That could make it very attractive, but that needs validating.

Keep in mind that houses are big money sinks.  However much you think you need for utilities, maintenance, HOAs, insurance, furnishings, principle, interest, taxes, and any improvements you're planning on: budget a bit more than that before estimating how long it will take you to pay it off.  Most people underestimate a bit, so smart money is that you are, too.

FastStache

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Re: Taking 401K Loan
« Reply #6 on: December 30, 2013, 04:26:56 PM »
Two suggestions on this situation:

1- Don't take the loan from the 401k.  Leave that money to grow.  Calculating the few cents advantage it might offer over a higher house payment is more than offset   by the risks it presents, one big one is that it has to be paid immediately off if you leave your job. As in, 30-60 days immediately. What if you get a better job offer? Or get laid off?

2-If you can't afford enough down payment to avoid PMI, I respectfully suggest you can't afford a house.  Save more money until you can.

Hows your savings rate? If you temporarily stop stuffing your 401k can you save enough within a year to pay 20%+ down on a house?

My savings rate is now about 45-50% w/o any extra payments on any debts. 

And yes within a year I would have 20% to put the money down on a house. Getting the right house would increase my savings to the upper 50%.

I'm considering this because I do have at least 30K of equity after the selling fees from my current house as well.

msilenus

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Re: Taking 401K Loan
« Reply #7 on: December 30, 2013, 04:31:22 PM »
If you're looking at reducing 401(k) contributions to accelerate loan repayment, be sure to include the forgone tax benefit as a cost of going with the 401(k) loan.