Should You Borrow from Your 401K for a Home Loan?

Many people chose to set up a 401K when they start working full time because it allows you to put away money before taxes. However, if money becomes tight and you need it to pay for a home loan, it becomes tempting to borrow from the account. There are both pros and cons of borrowing from your 401K. The best thing for you to do is to know your options and weigh them out.

The Positives of Borrowing from Your 401k

Since a 401K is tax free money, most people have an abundance of cash if you have been putting money into it for several years. This money can be borrowed and put into a home loan easily if you are willing to pay back the loan with interest to your 401K. Being able to get your hands on the money that you need is what makes taking the money from your 401k such an attractive feature. Some people don't start planning far enough in advance to have the money that they need for the house that they want so with out taking the money from the 401k it can be harder to get the house that they want.

The Negatives of Borrowing from Your 401k

If you don't pay back the interest on your loan in the specified term, you will be charged additional interest and also you will be forced to pay taxes on that amount. This completely defeats the purpose of ever putting money into your 401K. Another con is it is drastically cutting into your retirement fund. When you start a 401k you are planning for the future, that way you will have money that you need for when it comes time to retire. All too often people see the dollar signs adding up and they want to take the money to use for stuff they want now. This can greatly affect your future because once you retire you will not be getting the same amount of income that you are used to so if you want to keep up with that standard of living you need to be prepared.

Making a Choice

If the positives outweigh the negatives of your particular situation, it could be beneficial to borrow from your 401K. However you should consider all the options that you have before you choice doing one or the other. Making the wrong choice can be very harmful to your financial well-being. Do as much research on your options as you can and be prepared to make a decision based on how it will affect your future. Make sure you talk to a professional to learn which option fits you best.