Many Homebuyers Tapping Into 401(k)s

Following recent talk of 401(k) debit cards and tighter credit, it was bound to happen that homebuyers would turn to their 401(k) to help finance a home purchase, despite warnings against doing so from most financial advisers.

While borrowing against a 401(k) plan typically costs prime plus 1.5%, putting the current rate at 6.5%, the time and investment opportunity lost can significantly reduce the account over the long term, according to the Contra Costa Times.

“Borrowing against your 401(k) is a very dumb idea,” said Jim Titus, a financial consultant with Charles Schwab. “No. 1 is the opportunity costs of borrowing. You end up losing the [tax-deferred growth potential] when you take the money out of your 401(k), and the interest you pay back [on the loan] is unlikely to earn as much of a return as your 401(k) investment.”

Nonetheless, other financial advisers believe that now is a good time for buyers to enter the real estate market, because prices are depressed, having declined very steeply in the markets hurt worst by foreclosures and the subprime crisis. In some cases, home purchasers don’t have any recourse but to tap into their 401(k), since lenders are now imposing stricter requirements as well as higher down payments. In addition, unlike other 401(k) loans that have to be repaid in five years, there is no time limit for loans used to purchase a primary home.