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Retirement Planning 401(k)

Will a Loan on My 401(k) Affect My Mortgage?

The 401(k) loan doesn’t affect the mortgage terms.

By Matt Ryan Webber

Updated August 11 2022

Facts checked by Amanda Jackson

If you need to access some of the money that you’ve built up in your 401(k) it is possible to take advantage of a temporary loan which you’ll repay using money from your paychecks. In fact, borrowing through your 401(k) often can be a better alternative to getting money than using higher-interest loans like titles loans, payday loans, or even personal loans.

If you’re considering taking out a 401(k) loan, you may be wondering how it might impact your other debts, such as your mortgage. The short answer: It won’t. Whether you are qualifying for a mortgage or paying one down or not, your 401(k) will not affect your other debts.

In this article, we’ll go over how 401(k) loans work and provide pros and cons to consider.

The most important takeaways

A 401(k) loan can provide an opportunity to access your account funds to provide short-term liquidity.

401(k) loans also have no impact on your mortgage regardless of whether you have a current mortgage or one that you are applying for.

It is possible to use a 401(k) loan for a variety of purposes like the down payment for an investment property.

Make sure to pay back the 401(k) loan quickly. The longer you take to repay the loan, the more you’ll be unable to benefit from the benefits of compound interest.

401(k) Mortgages and loans

A 401(k) loan has both advantages and disadvantages that you should consider. If it is used with care it could be a simple option to borrow money to meet the costs of a short-term project. However, withdrawing funds of your retirement account could have long-term effects on the value of your portfolio. The longer you keep your money not being invested, the more you miss out on the potential of compound interest.

A 401(k) loan has interest which is paid into your account, but it is not any kind of lender or review of credit histories. Under the law, you are able to get a loan up to the lesser of either $50,000 or the greater of either $10,000 or 50 percent of the account value.1

Receiving a loan via the 401(k) does not count as taxable except if the loan limitations and repayment guidelines are not followed. The loan will not impact your credit rating and no impact to your current mortgage. It won’t affect the rate or terms of your current mortgage nor affect your application for the next mortgage.2

In fact, you can get a 401(k) loan to use to pay for a down payment on the purchase of a house.

401(k) loans will not impact your mortgage. They allow you to access the funds you have saved up for urgent requirements. There is no obligation to repay the loan when you wish to retain your tax advantages and avoid penalties.

401(k) Loans and Real Estate

You can make use of a 401(k) loan to finance the purchase of real estate. In fact, the rules regarding 401(k) loans are different if you are using the loan to purchase a home.

The standard regulations require 401(k) loans to be paid back on an amortized schedule or with fixed repayment dates with regular installments spread over less than five years. If the loan is used to purchase an primary residence, the repayment period can be longer. The plan administrator will set the guidelines for the length of time long.2

However, it is not likely to make sense to use the 401(k) loan to completely finance a home purchase, because in most circumstances the regular mortgage loan will offer more financial benefits. One reason is that you can’t deduct your interest payments on 401(k) loans as you could with mortgage interest payments. Additionally, borrowing funds from the 401(k) for a period of time long enough to repay a house can significantly lower your portfolio’s value in the long term.

Another way that an 401(k) loan can play a role in buying real estate is when you make use of the money to cover the down payment or closing costs. Since the 401(k) loan isn’t technically an obligation–you’re taking out your own money in the end–it doesn’t have any effect on either your debt-to-income ratio or your credit score, both of which are major factors that lenders take into consideration.

What happens if I take out an loan to my 401(k) affect my mortgage?

A 401(k) loan will not affect your mortgage or mortgage application. A 401(k) loan has no effect on either your debt-to-income ratio or your credit score, two big variables that influence mortgage lenders. In fact, some home buyers utilize 401(k) loan funds as the down payment for a home.

Is it a good idea to take 401(k) loans a good idea?

A 401(k) loan has upsides and disadvantages that you should consider. Whether it’s a good idea for you depends on many aspects about your personal financial situation. These loans can be a valuable source of low-cost cash to meet short-term requirements. But they can reduce the worth of your retirement account if you don’t make timely payments.

Can I take advantage of an 401(k) loan for a down cost?

You can use the 401(k) loan for a down amount, and this will not affect your debt-to-income ratio. Make sure you’re able to repay your 401(k) account quickly. The longer you take to repay your loan the more likely you’ll miss out on the power of compound interest.

The Bottom Line

In certain situations it is possible to get a 401(k) loan can be an excellent way to gain access to short-term liquidity. 401(k) loans also have no impact on your mortgage. In fact, taking out the 401(k) loan can be an excellent way to raise an amount to pay for a downpayment on the purchase of a house. Be aware that one disadvantage to these loans can be that they take the funds you invested and you be left out of the benefits of compounding your investment until you pay the loan.