Author Topic: 401(k) withdrawal for down payment on a first home  (Read 3066 times)

Sulame66

  • 5 O'Clock Shadow
  • *
  • Posts: 55
401(k) withdrawal for down payment on a first home
« on: June 09, 2017, 01:08:30 PM »
I reached out to my HR department which gave me this info:

I can withdraw $3,431.18 for a partial withdrawal. If I do this, I then become eligible for a hardship withdrawal of about $23,000. However, for a primary residence loan, I can withdraw $21,755.99.

I'm not sure where these #s come from. I also remember something about needing to vest for 5 years before I can take it out, but I've only been here 3.5 years. I also don't understand why I can take out money for a hardship withdrawal when there's no hardship, but if I just want the money for a down payment it's a loan

Are these all just scams / terrible ideas?

And on this topic: what % down should I put on my first home, and why?

protostache

  • Pencil Stache
  • ****
  • Posts: 873
Re: 401(k) withdrawal for down payment on a first home
« Reply #1 on: June 09, 2017, 01:12:54 PM »
You can take loans for up to the lesser of 50% of your plan balance or $50,000. Most plans limit the number of loans you can take and how frequently you can take them. Generally loans have to be repaid within 5 years, but a loan for a primary residence can have a longer period. While it's not actually defined in law (that I know of) most companies want it repaid within 20-25 years.

401(k) loans are risky because if you leave the company they are within their rights to demand it be paid back immediately. Most companies don't do that and offer to service the loan until it's done, but it's something to be aware of.

Sulame66

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: 401(k) withdrawal for down payment on a first home
« Reply #2 on: June 09, 2017, 01:18:24 PM »
My company can demand I repay a loan immediately even though 1) I'm fully vested in it and 2) it's my own money? I mean, they've donated 3 matches of 4% over 3 years. Before I vested, that was their money. After vesting, it should be mine. And even if it's still 'their' money, 90% of the money in my 401(k) is my own ...

So, basically, I'm just taking out a loan against myself, giving myself a monthly payment with interest that I'm losing, all so I can get into a home a little bit sooner ... instead of growing a nest egg in the bank, also losing interest on any investments I would have done instead

Seems like a lose-lose or a win-win depending on your viewpoint

protostache

  • Pencil Stache
  • ****
  • Posts: 873
Re: 401(k) withdrawal for down payment on a first home
« Reply #3 on: June 09, 2017, 02:43:02 PM »
My company can demand I repay a loan immediately even though 1) I'm fully vested in it and 2) it's my own money? I mean, they've donated 3 matches of 4% over 3 years. Before I vested, that was their money. After vesting, it should be mine. And even if it's still 'their' money, 90% of the money in my 401(k) is my own ...

So, basically, I'm just taking out a loan against myself, giving myself a monthly payment with interest that I'm losing, all so I can get into a home a little bit sooner ... instead of growing a nest egg in the bank, also losing interest on any investments I would have done instead

Seems like a lose-lose or a win-win depending on your viewpoint

It's absolutely your money once it's vested. However, once you're no longer an employee of the company the company may not want to service your loan anymore. It's one more thing they'd have to pay their third party administrator to do.

SquirrelStache

  • 5 O'Clock Shadow
  • *
  • Posts: 59
  • Age: 39
  • Location: US of A
Re: 401(k) withdrawal for down payment on a first home
« Reply #4 on: June 12, 2017, 11:46:55 AM »
I took out a $20k loan over 5 years for the down payment on my house, and honestly I wish I hadn't done it. I could've just saved for an extra 6ish months and got the same amount. My interest rate is 4% but my 401k is earning a lot more than that right now, so I'm losing money. Having to deal with a lower paycheck due to the loan payments is also annoying.

Bottom line, if you can save the money instead, I would do that.

Just my 2 cents.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: 401(k) withdrawal for down payment on a first home
« Reply #5 on: June 12, 2017, 11:52:58 AM »
I ran the numbers 8 ways to Sunday and couldn't make it work out for me. I ended up going with an FHA loan; the full  MIP was less than the interest rate on a 401k loan--I think I had to include a return of 5% in the market for that to work out--but it still held true.

Sulame66

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: 401(k) withdrawal for down payment on a first home
« Reply #6 on: June 13, 2017, 09:52:12 AM »
So my instincts told me that it's probably a bad idea, and it seems like that's the consensus of the overwhelming majority of 3 here. I could just save an extra 6 months or so, but that's a long time when your lease is up and going up 15% (thanks DFW inflation!) and there's seemingly no end to this bubble

Fishindude

  • Handlebar Stache
  • *****
  • Posts: 1840
Re: 401(k) withdrawal for down payment on a first home
« Reply #7 on: June 13, 2017, 09:57:48 AM »
Bad idea.  Leave the 401K alone, it's for retirement.
Save a 20% home down payment outside of your 401K.  Any less than 20% and you'll pay a premium on your loan for PMI private mortgage insurance.
Much smarter to continue to rent until you have your funds in order.
« Last Edit: June 13, 2017, 12:04:00 PM by Fishindude »

Rosy

  • Handlebar Stache
  • *****
  • Posts: 1826
  • Location: Florida
Re: 401(k) withdrawal for down payment on a first home
« Reply #8 on: June 13, 2017, 10:29:11 AM »
Bad idea.  Leave the 401K alone, it's for retirement.
Save a 20% home down payment outside of your 401K.  Any less than 20% and you'll pay a premium on your load for PMI private mortgage insurance.
Much smarter to continue to rent until you have your funds in order.

+ 1

I like how everyone is answering so cool, calm and collected and most of all math savvy.

One other point not yet discussed - houses are expensive, moving can be expensive and every new home purchase comes with either additional expenses or other unforeseen extra expenses. Do you have at least an extra 15K plus set aside to handle that?
If you cannot handle the DP at present, can you really manage high mortgage payments and the expenses of homeownership in another six months?
If there is a bubble where you are, then wouldn't it be better to wait until the bubble bursts and then make your purchase?
Just something to consider.

I can understand your impatience, but if you are considering even a slight shift to the MMM lifestyle - then do not do things that make no financial sense or as in this case - will actually hurt your finances and ability to save for FI for years to come.

FireHiker

  • Pencil Stache
  • ****
  • Posts: 831
  • Location: So Cal
Re: 401(k) withdrawal for down payment on a first home
« Reply #9 on: June 13, 2017, 03:07:13 PM »
We did it for ours, back in our pre-MMM/pre-FIRE awareness days. My husband took $50k out of his and I took $42k out of mine. We currently have $76k outstanding on these loans, but with our current savings rate we should have them paid off no later than mid-2019. Aside from our 3.25% mortgage it is our only debt, and at least the interest (4.25%) does go back to ourselves...but my 401k has been much better than 4.25% over the past four years, and we missed out on those earnings. Ugh.

I think there may be scenarios where it makes sense, but generally not. In our case, we had 4 days overlap between closing on the new house and selling the old one (with a considerable amount of equity). We needed the $92k to get us up to 20% down on the new house. If we (and I say we, but fully acknowledge that it was mostly me) had been smart, we would have turned around and paid the loans back off ASAP after selling the previous house. That was the original plan. We didn't; instead, I pushed to put in a swimming pool at our new house. This was 4 years ago, 2.5 years before I discovered MMM and FIRE, so there isn't much to do about it at this point other than cringe, shake my head, caution others, and pay the damn loans off. Fortunately we are on target for FIRE in 7-13 years even with this part of the picture, because we are both high-earners.

So, I would probably not recommend going this route. I will say, if you do, make sure you confirm with your employer whether you'd have to pay it off immediately if you stopped working there. That is not the case with our employer; we verified this and I have a former co-worker who confirmed this was true after he left the company. It is definitely a risk to be aware of though.

Schaefer Light

  • Handlebar Stache
  • *****
  • Posts: 1087
Re: 401(k) withdrawal for down payment on a first home
« Reply #10 on: June 16, 2017, 08:35:33 AM »
Bad idea.  Leave the 401K alone, it's for retirement.
Save a 20% home down payment outside of your 401K.  Any less than 20% and you'll pay a premium on your load for PMI private mortgage insurance.
Much smarter to continue to rent until you have your funds in order.

+ 1

I like how everyone is answering so cool, calm and collected and most of all math savvy.

One other point not yet discussed - houses are expensive, moving can be expensive and every new home purchase comes with either additional expenses or other unforeseen extra expenses. Do you have at least an extra 15K plus set aside to handle that?
If you cannot handle the DP at present, can you really manage high mortgage payments and the expenses of homeownership in another six months?
If there is a bubble where you are, then wouldn't it be better to wait until the bubble bursts and then make your purchase?
Just something to consider.

I can understand your impatience, but if you are considering even a slight shift to the MMM lifestyle - then do not do things that make no financial sense or as in this case - will actually hurt your finances and ability to save for FI for years to come.

What ^ said.  Take it from someone who knows.  I bought a home before I should have simply because the interest rates were low at the time.  In hindsight, I should have waited until I had at least an extra $20k saved up.  There are so many unexpected expenses that come up when you buy a home.  I had to live paycheck to paycheck for several months, and I was making a good salary at the time.  A job loss back then would have been devastating.

I also tend to agree that we're in a housing bubble right now (at least in certain areas).  If you wait until after it bursts, you might be able to get a great deal.

Jtrey17

  • 5 O'Clock Shadow
  • *
  • Posts: 84
Re: 401(k) withdrawal for down payment on a first home
« Reply #11 on: June 16, 2017, 03:58:12 PM »
But do you love the pool?? I ask because I'm thinking of putting one in my backyard...
We did it for ours, back in our pre-MMM/pre-FIRE awareness days. My husband took $50k out of his and I took $42k out of mine. We currently have $76k outstanding on these loans, but with our current savings rate we should have them paid off no later than mid-2019. Aside from our 3.25% mortgage it is our only debt, and at least the interest (4.25%) does go back to ourselves...but my 401k has been much better than 4.25% over the past four years, and we missed out on those earnings. Ugh.

I think there may be scenarios where it makes sense, but generally not. In our case, we had 4 days overlap between closing on the new house and selling the old one (with a considerable amount of equity). We needed the $92k to get us up to 20% down on the new house. If we (and I say we, but fully acknowledge that it was mostly me) had been smart, we would have turned around and paid the loans back off ASAP after selling the previous house. That was the original plan. We didn't; instead, I pushed to put in a swimming pool at our new house. This was 4 years ago, 2.5 years before I discovered MMM and FIRE, so there isn't much to do about it at this point other than cringe, shake my head, caution others, and pay the damn loans off. Fortunately we are on target for FIRE in 7-13 years even with this part of the picture, because we are both high-earners.

So, I would probably not recommend going this route. I will say, if you do, make sure you confirm with your employer whether you'd have to pay it off immediately if you stopped working there. That is not the case with our employer; we verified this and I have a former co-worker who confirmed this was true after he left the company. It is definitely a risk to be aware of though.

Dicey

  • Walrus Stache
  • *******
  • Posts: 8583
  • Age: 60
  • Location: NorCal
Re: 401(k) withdrawal for down payment on a first home
« Reply #12 on: June 19, 2017, 01:07:25 AM »
But do you love the pool?? I ask because I'm thinking of putting one in my backyard...
We did it for ours, back in our pre-MMM/pre-FIRE awareness days. My husband took $50k out of his and I took $42k out of mine. We currently have $76k outstanding on these loans, but with our current savings rate we should have them paid off no later than mid-2019. Aside from our 3.25% mortgage it is our only debt, and at least the interest (4.25%) does go back to ourselves...but my 401k has been much better than 4.25% over the past four years, and we missed out on those earnings. Ugh.

I think there may be scenarios where it makes sense, but generally not. In our case, we had 4 days overlap between closing on the new house and selling the old one (with a considerable amount of equity). We needed the $92k to get us up to 20% down on the new house. If we (and I say we, but fully acknowledge that it was mostly me) had been smart, we would have turned around and paid the loans back off ASAP after selling the previous house. That was the original plan. We didn't; instead, I pushed to put in a swimming pool at our new house. This was 4 years ago, 2.5 years before I discovered MMM and FIRE, so there isn't much to do about it at this point other than cringe, shake my head, caution others, and pay the damn loans off. Fortunately we are on target for FIRE in 7-13 years even with this part of the picture, because we are both high-earners.

So, I would probably not recommend going this route. I will say, if you do, make sure you confirm with your employer whether you'd have to pay it off immediately if you stopped working there. That is not the case with our employer; we verified this and I have a former co-worker who confirmed this was true after he left the company. It is definitely a risk to be aware of though.
Facepunch.
Facepunch.

I took out a $20k loan over 5 years for the down payment on my house, and honestly I wish I hadn't done it. I could've just saved for an extra 6ish months and got the same amount. My interest rate is 4% but my 401k is earning a lot more than that right now, so I'm losing money. Having to deal with a lower paycheck due to the loan payments is also annoying.

Bottom line, if you can save the money instead, I would do that.

Just my 2 cents.
A very wise 2 cents, indeed. I borrowed a mere $6k from "myself" to bridge from one house to another. I doubled my money on the second property in only four years. I paid off the loan within one year, so it's all good, right? Hardly. I fucking hated every minute I had that loan! I felt like an indentured servant. Though I am FIRE now, in part because of favorable Real Estate purchases, I consider that loan the worst financial mis-step of my entire journey to FIRE.

FireHiker

  • Pencil Stache
  • ****
  • Posts: 831
  • Location: So Cal
Re: 401(k) withdrawal for down payment on a first home
« Reply #13 on: June 19, 2017, 12:18:04 PM »
But do you love the pool?? I ask because I'm thinking of putting one in my backyard...
We did it for ours, back in our pre-MMM/pre-FIRE awareness days. My husband took $50k out of his and I took $42k out of mine. We currently have $76k outstanding on these loans, but with our current savings rate we should have them paid off no later than mid-2019. Aside from our 3.25% mortgage it is our only debt, and at least the interest (4.25%) does go back to ourselves...but my 401k has been much better than 4.25% over the past four years, and we missed out on those earnings. Ugh.

I think there may be scenarios where it makes sense, but generally not. In our case, we had 4 days overlap between closing on the new house and selling the old one (with a considerable amount of equity). We needed the $92k to get us up to 20% down on the new house. If we (and I say we, but fully acknowledge that it was mostly me) had been smart, we would have turned around and paid the loans back off ASAP after selling the previous house. That was the original plan. We didn't; instead, I pushed to put in a swimming pool at our new house. This was 4 years ago, 2.5 years before I discovered MMM and FIRE, so there isn't much to do about it at this point other than cringe, shake my head, caution others, and pay the damn loans off. Fortunately we are on target for FIRE in 7-13 years even with this part of the picture, because we are both high-earners.

So, I would probably not recommend going this route. I will say, if you do, make sure you confirm with your employer whether you'd have to pay it off immediately if you stopped working there. That is not the case with our employer; we verified this and I have a former co-worker who confirmed this was true after he left the company. It is definitely a risk to be aware of though.

Well...we do like having the pool, but if we were to go back and do things over again, knowing about MMM/FIRE as we do now, there's no way we would have done it!! Ah, hindsight... Since we can't go back in time, we do make sure to enjoy the pool as much as possible (our neighborhood doesn't have a "good" community pool option otherwise we never would have put one in). What I DO love is that my five year old is a better swimmer than I am, and that she dives down to 7 feet to get things off the bottom of the pool like it's nothing. If you have the cash available and REALLY want one, that is different, but damn I wish we had paid the loans back first and then saved up for it if we really wanted to put one in.