Borrowing money from your 401k is sometimes a good idea when buying a home.A few of the pluses are: you will have more money to put down on the house, the interest rate might be lower, the payments back to the 401k are spread out over 30 years, the interest that you pay is deposited back into your account and you do not have to borrower money from your Aunt Fannie.

The minuses of doing this are: if you ever leave your job, you will have to pay the money back or take it as a withdrawal to your account. A withdrawal will create taxes and penalties if the loan is not paid back within 60 days. Even though you can roll your account into an IRA or your new employers’ 401k, you cannot roll your loan with itI think this should be allowed and they should look into changes these rules.

Also, the lender will figure the monthly payment of the 401k loan into your total debt.Therefore, it will be added into the liability section of the loan and will be included in the ratios.

You should do your homework in advance and speak to human resources about the possibilities of doing this.Ask questions like, how much can I borrow, what is the rate and monthly payment and how long does the process take. Also ask about the repayment process in case you leave and can you pre pay the loan. This way, you can decide if it is worth it and how much time you need to do so. When comparing the cost of a 401k loan and borrowing more money in the form of mortgage, you want to compare the interest rates and the monthly cost of repayment. Another thing to consider is if you can pay the loan down quickly with bonus or other money. If you can pay down the 401k loan faster than the mortgage, it might be the better choice.Ask for help from human resources and your mortgage loan officer.

Be prepared!

-Dale Siegel