how to get money from 401k to make down payment? (mortgage, credit report)

[trayanh]

I just saw this idea from somewhere, but have no idea how it works.

I've been with several companies, and each time I left I just left my 401k as it was, so basically I had several 401k accounts and had no idea how to put them together.

what should I do to use my 401k to make the down payment? normally what's the interest rate? will it affect my loan rate because part of my down payment will be from 401k?

[jobert]

wow.. really?

I would consider liquidation of your 401k to be the "nuclear option" - especially now that the market is at a lull. There are low-interest loans you can take out of your 401k, though. I think they run about 3% and can be deducted evenly for 6mo. or 12mo. periods from your paycheck (assuming your employer manages your 401k). The money will remain in your 401k acct, and will reflect market fluctuations. This may shrink your available credit, and jeopardize your loan application though. I would recommend posting this in a finance forum.

Good luck

[SickOfCalifornia]

I would also caution against using 401k money as a down payment.

First of all, if you aren't retirement age yet, and you withdraw money from your 401k, you will suffer a penalty for early withdrawal. Second, all money you withdraw will be counted as income and you will be taxed on it. So if you need, say $50k for a down payment, you will have to withdraw close to $100,000 just to cover your costs. Don't do it!

[trayanh]

I am also concerned "This may shrink your available credit, and jeopardize your loan application though" too. but I am basically losing my 401k money everyday since the end of 2007, so it would be nice I can use it now and pay interest to myself while keep my cash... let me see if I can find a finance forum here to get all the information. Thanks!

Originally Posted by jobert

wow.. really?

I would consider liquidation of your 401k to be the "nuclear option" - especially now that the market is at a lull. There are low-interest loans you can take out of your 401k, though. I think they run about 3% and can be deducted evenly for 6mo. or 12mo. periods from your paycheck (assuming your employer manages your 401k). The money will remain in your 401k acct, and will reflect market fluctuations. This may shrink your available credit, and jeopardize your loan application though. I would recommend posting this in a finance forum.

Good luck

[trayanh]

I am not sure if borrowing money from 401k is different from withdrawal.

Originally Posted by SickOfCalifornia

I would also caution against using 401k money as a down payment.

First of all, if you aren't retirement age yet, and you withdraw money from your 401k, you will suffer a penalty for early withdrawal. Second, all money you withdraw will be counted as income and you will be taxed on it. So if you need, say $50k for a down payment, you will have to withdraw close to $100,000 just to cover your costs. Don't do it!

[jobert]

The reason the interest rates are low on a 401k loan is because your 401k would be collateral, and the max you can take out would be 50% the value. If the market drops by half, and/or you default on your loan, the bank covered themselves. As for your shrinking balance, try diversifying your funds or switch your strategy. I switched to moderate-aggressive, and have had a 10% return since market peak without contributing.

[pbnj07]

Originally Posted by trayanh

I am also concerned "This may shrink your available credit, and jeopardize your loan application though" too. but I am basically losing my 401k money everyday since the end of 2007, so it would be nice I can use it now and pay interest to myself while keep my cash... let me see if I can find a finance forum here to get all the information. Thanks!

Borrowing against your 401K does not show-up on your credit report, but a mortgage lender might notice it if you're asked to submit detailed paystubs that show a line-item deduction for a 401K loan payment.

[ROY DUBOSE]

Originally Posted by trayanh

I am not sure if borrowing money from 401k is different from withdrawal.

well, there is a difference --

if you're still making contributions to a 401k via an employer, you typically can borrow the money and pay it back through payroll deductions with interest (you borrow your own money and pay it back to yourself with interest which probably beats the return you're getting now) -- downside to this is the monthly payment gets added into the ratio calculations for a loan

if you're planning on taking the cash out of previous 401k account, it's considered a withdrawal (can you say liquidation?) and subject to income tax either at the time of withdrawal or for certain next april 15th

if the lender requires reserves (ie savings or a 401k) to approve the loan, then you could have a problem too

my disclaimer -- i ain't no financial expert so it might be good to have extensive conversations with the funds manager and your loan officer

[pbnj07]

Originally Posted by trayanh

I am not sure if borrowing money from 401k is different from withdrawal.

When you borrow against your 401k, you don't have to pay taxes (or penalties) because you pay it back. With withdrawals, you incur taxes and penalties.

[trayanh]

it makes sense. I am going to put my 401k accounts together and see how I can manage these money and keep them from shrinking now....

Originally Posted by jobert

The reason the interest rates are low on a 401k loan is because your 401k would be collateral, and the max you can take out would be 50% the value. If the market drops by half, and/or you default on your loan, the bank covered themselves. As for your shrinking balance, try diversifying your funds or switch your strategy. I switched to moderate-aggressive, and have had a 10% return since market peak without contributing.