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Retirement Planning 401(k)

Can a loan on my 401(k) affect my mortgage?

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

By Matt Ryan Webber

Updated August 11, 2022

Facts verified by Amanda Jackson

If you need to access some of the funds you’ve put into your 401(k) then you could use a short-term loan that you will repay with the money you earn taken from your earnings. In fact, borrowing through your 401(k) often can be a better alternative to getting funds than using higher interest loans such as title loans, payday loans, or even personal loans.

If you’re thinking about a 401(k) loan, you may be wondering how it might impact your other debts, such as your mortgage. The answer is simple: it will not. If you’re eligible as a homeowner or paying one down or not, your 401(k) will not affect your other debts.

This article will discuss the way 401(k) loans work and give you the benefits and cons to take into consideration.

Important Takeaways

A 401(k) loan can provide a way to access your account’s money for liquidity in the short term.

401(k) loans also have no impact on your mortgage, whether it’s your present mortgage or one you are seeking.

You can use a 401(k) loan for a variety of purposes including the down payment for an investment property.

Be sure to pay off the 401(k) loan quickly. The longer it takes you to pay back the loan, the more you’ll miss out on the potential to compound your interest.

401(k) Mortgages and loans

An 401(k) loan has both advantages and disadvantages that you should consider. If it is used with care it could be a convenient option to borrow funds to cover short-term expenses. However, taking funds out of your retirement account could have long-term effects on the value of your portfolio. The longer your money is not being invested, the more you are missing the benefits that compound interest offers.

A 401(k) loan has interest that is credited to your account, but it is not a lender or a review of credit histories. Under the law, you are able to borrow up to the lesser of $50, or greater of $10,000 or 50% of the account value.1

Receiving the loan via your 401(k) is not tax-deductible except if the loan restrictions and repayment rules are not followed. The loan will not impact your credit score and has no effect upon your home mortgage. It will not impact the terms and rates of your current mortgage nor affect the application process for an additional mortgage.2

In reality, you could avail the 401(k) loan to use as a down payment for the purchase of a home.

401(k) loans will not influence your mortgage. They allow you to access certain funds from your savings for urgent needs. There is no obligation to pay back the loan if you want to retain your tax advantages and get rid of penalties.

401(k) Credits and Real Estate

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

The norm is for 401(k) loans to be repayable on an amortized basis, or with fixed repayment dates with regular installments spread for a period of less than five years. But, if it is the case that the loan is used to buy a primary home, the repayment time may be extended. The plan administrator will set the conditions for the length of time long.2

However, it seldom makes sense to take advantage of a 401(k) loan to completely finance a home purchase since, in the majority of instances the regular mortgage loan offers greater financial benefits. One reason is that you can’t deduct your interest payments on 401(k) loans as you are able to with mortgage interest. In addition, borrowing money from the 401(k) for a period of time long enough to repay a house might significantly reduce the value of your portfolio in the long-term.

Another way a 401(k) loan can play part in purchasing real estate is when you utilize the money to cover the down payment or closing costs. Since the 401(k) loan isn’t technically a loan–you’re merely withdrawing your own funds and, in essence, it has no influence on either your debt-to income ratio or credit score, which are important factors lenders look at.

What happens if I take out an loan from my 401(k) impact my mortgage?

A 401(k) loan will not influence your mortgage application. A 401(k) loan has no influence on your debt-to income ratio or your credit score, which are two of the major elements that affect mortgage lenders. Some buyers utilize 401(k) loan funds as a down payment on a home.

Are 401(k) loans a good idea?

A 401(k) loan has upsides and drawbacks to be aware of. Whether it’s a good idea for you will depend on a number of factors about your personal financial situation. These loans can provide a good source of cash with low costs for urgent needs. However, they can decrease the worth of your retirement account if you don’t make timely repayments.

Can I use a 401(k) loan for a down cost?

You may use a 401(k) loan for a down payment, and it doesn’t impact your debt-to income ratio. Make sure you can repay you 401(k) account promptly. The longer you take to pay back your loan the more you’ll be unable to benefit from the potential accrued interest.

The Bottom Line

In some instances the use of a 401(k) loan can be a good way to access short-term liquidity. 401(k) loans also have no impact on mortgage. In fact, getting a 401(k) loan can be a good way of raising an amount to pay for a downpayment on an investment property. Keep in mind that the downside of these loans can be that they remove the funds you invested, so you can be left out of the benefits of compounding your investment until you pay the loan.