Home ownership has not been an insurmountable financial hurdle for the 63.5 percent of Americans that own their homes according to US Census data, but coming up with a down payment is still challenging
One way to do it: Take a loan for a 401(k).
What is a 401k Loan?
According to the IRS, a person can take a loan out against a qualifying account for a handful of reasons, down payments on a home being one of them. The rule of thumb is $10,000 or 50 percent of the vested balance, whichever is greater. These loans cap at $50,000 which is often enough to cover a down payment for a modest home.
According to personal finance blog Family Financier, taking out a 401k loan could make sense for people with low credit scores who would be forced to pay unusually high interest rates on their mortgages.
For the average consumer, with a good credit score, a healthy 401(k), but no down payment, financial advisors usually recommend saving separately for a down payment. A 401(k) loan is usually a loser idea. Even if your 401(k) loan lowered your monthly mortgage payment, this would be offset by the payments you would have to make to your 401(k) for 15 years.
In addition, you would lose thousands of dollars in interest. In some scenarios you would lose more money in interest than you borrowed from your 401(k) during the 15-year repayment.
