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Retirement Plan 401(k)

What happens if I take out a loan on My 401(k) Affect My Mortgage?

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

By Matt Ryan Webber

Updated August 11 2022

Facts verified by Amanda Jackson

If you’re in need of accessing some of the money that you’ve built up in your 401(k) then you could take advantage of a temporary loan that you will repay with the money you earn from your paychecks. In fact, borrowing from your 401(k) frequently is the best option to access money than using higher-interest loans such as the title loans, payday loans, or even personal loans.

If you’re thinking about a 401(k) loan, you might wonder how it will affect other debts such as your mortgage. The short answer: It isn’t. No matter if you’re qualifying as a homeowner or paying one down or not, a 401(k) won’t affect other debts.

This article will discuss how 401(k) loans work and provide benefits and cons to take into consideration.

The most important takeaways

An 401(k) loan can provide an opportunity to access your account’s money for short-term liquidity.

401(k) loans also have no effect on your mortgage regardless of whether it’s your current mortgage or one that you are seeking.

You can make use of the 401(k) loan for a variety of purposes, such as for an down payment on a home.

Be sure to pay off the 401(k) loan quickly. The longer you wait to repay the loan the more likely you’ll lose out on the potential accrued interest.

401(k) Loans and Mortgages

A 401(k) loan has both positives and negatives to be considered. If you use it wisely, it can be an easy method to get funds to cover immediate expenses. However, withdrawing funds of your retirement account could have long-term effects on the worth of the portfolio. The longer you keep your money not being invested, the more you lose the benefits of compound interest.

The 401(k) loan has interest which is paid into your account, but it doesn’t require any kind of lender or review of credit histories. By law, you can borrow up to either $50,000 or the greater of either $10,000 or 50 percent of the account value.1

Receiving the loan through your 401(k) is not a taxable event in the event that the loan limits and repayment rules are not adhered to. The loan will not impact your credit score and has no effect upon your home mortgage. It won’t affect the rate or terms of your current mortgage or play a role in the process of applying for the next mortgage.2

In fact, you can get an 401(k) loan to use as a down payment for the purchase of a home.

401(k) loans will not impact your mortgage. They permit you to draw the funds you have saved up to meet short-term requirements. There is no obligation to repay the loan if you want to keep your tax advantages and avoid penalties.

401(k) loans and Real Estate

It is possible to make use of a 401(k) loan to finance the purchase of real estate. The rules regarding 401(k) loans are different when you use the loan to buy a house.

The norm is for 401(k) loans to be repayable on an amortized basis, or with fixed repayment dates in regular installments, with a minimum of five years. If the loan is used for the purchase of a primary residence, the repayment period could be extended. Your plan administrator determines the guidelines for how long.2

However, it is not likely to make sense to use a 401(k) loan to completely finance a purchase for a residence since, in the majority of instances the regular mortgage loan will offer greater financial benefits. First, you are unable to deduct your interest payments on 401(k) loans as you are able to with mortgage interest. Additionally, borrowing funds out of the 401(k) for a period of time long enough to repay a house might significantly reduce your investment’s value over the long run.

Another way a 401(k) loan can play a role in buying real estate is when you utilize the money to cover the closing or down payment expenses. Since it’s a 401(k) loan isn’t technically a loan–you’re merely withdrawing your own funds, after all–it has no influence on either your debt-to income ratio or your credit score, both of which are crucial factors lenders look at.

Can the 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 impact on your debt-to-income ratio or your credit score, which are two of the major factors that influence mortgage lenders. In fact, some home buyers use 401(k) loan funds as the down payment for a home.

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

An 401(k) loan has upsides and disadvantages that you should consider. If it’s a good option for you will depend on many aspects of your financial situation. These loans can be a valuable source of low-cost cash for urgent needs. However, they can decrease the worth of your retirement account when you fail to pay on time payments.

Can I make use of the 401(k) loan for a down amount?

You can use the 401(k) loan for a down payment, and doing so won’t affect your debt-to-income ratio. Just make sure that you are able to pay off the loan on your 401(k) account in a timely manner. The longer it takes you to pay back your loan the more likely you’ll miss out on the power accrued interest.

The Bottom Line

In some cases it is possible to get an 401(k) loan can be an effective way to get access to short-term liquidity. 401(k) loans also have no effect on your mortgage. In fact, getting the 401(k) loan can be a good way of raising an amount to pay for a downpayment on the purchase of a house. Keep in mind that one disadvantage for the loans are that they take the funds you invested and you be left out of the benefits of compounding until you repay the loan.