Hey all,
I'm considering borrowing from a 401(k) for a first time home purchase, wondering your thoughts. My plan would be to borrow just enough to avoid paying the PMI, and nothing more. I can borrow up to $50k from the 401k at a rate of 4.25% over 15 years. I plan to live in the place for a minimum of two years and rent one of the rooms out during that time. Afterward I would like the flexibility to move if needed and the ability to cover the mortgage, taxes, HOA and maint. cost with rent. I'm buying in Oregon.
I'm 30 years old, total net worth ~$150k combo of 401k, some individual stocks and some Roth IRA.
I listed some pros and cons that I think are valid to consider:
Pros to using 401k:
[PRO] Avoid Paying PMI
[PRO] It's a way to access pretax savings early, converting them to equity (what affect does this have if I sell in 2 years and take the cash?) Might not be able to get that money so early any other way.
[PRO] (Possibly) is a more conservative investment of my total wealth - improved overall diversification.
[PRO] Instead of paying the bank the interest, I pay myself the interest
Cons to using 401k money:
[CON] Reduces the leverage power of borrowing for the mortgage - If I borrow for the mortgage, and the property value increases, it will increase proportionally to the value of the property, not how much equity I own. If I bought a $100k property with cash and the property goes up by $20k I make $20k on that $100k investment. If I borrow for the property and it goes up by $20k, but I had only put in $20k equity, I've now doubled that $20k and the $80k that I left in the stock market has earned possibly 10% over the last couple of years.
[CON] I don't believe the interest on the loan that I am paying back to myself is tax deductible, so my total deduction amount is reduced.
[CON] I'll be paying the bank the interest
[CON] (Possible) Takes money out of the 401k, reducing potential gains that the stock market will see
Thank you very much for your time!