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Retirement Planning 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 terms of your mortgage.

By Matt Ryan Webber

Updated August 11, 2022

Facts checked by Amanda Jackson

If you need to access some of the funds you’ve built up in your 401(k) then you could use a short-term loan which you pay back with money from your pay. Borrowing out of your 401(k) often can be a better alternative to getting 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 may be wondering how it might affect other debts such as your mortgage. The answer is simple: it isn’t. If you’re eligible as a homeowner or are paying it down in the future, the 401(k) will not affect your other loans.

This article will discuss the way 401(k) loans work and detail advantages and disadvantages to be considered.

The most important takeaways

An 401(k) loan can provide the ability to access your account’s funds for short-term liquidity.

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

You can make use of a 401(k) loan for a number of uses including the down payment for the purchase of a house.

Try to repay you 401(k) loan quickly. The longer it takes you to pay back the loan the more you’ll lose out on the power accrued interest.

401(k) Loans and Mortgages

An 401(k) loan has both positives and negatives to be considered. If you use it wisely it could be a simple option to borrow money to meet the costs of a short-term project. However, taking funds out of your retirement account can have long-term effects on the worth of the portfolio. The longer your funds are not invested, the more you miss the benefits to compound your interest.

The 401(k) loan has interest which is paid into your account, but it is not any kind of lender or review of credit histories. The law allows you to take out loans up to $50, or greater of $10,000 or 50% of the account value.1

Receiving a loan via the 401(k) will not be taxable unless the loan limitations and repayment guidelines are not adhered to. The loan will not impact your credit score, and will not have any impact to your current mortgage. It will not affect the rate or terms of your current mortgage nor affect your application for an additional mortgage.2

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

401(k) loans will not affect your mortgage. They let you access the funds you have saved up to meet immediate needs. There is no obligation to pay back the loan if you want to keep your tax advantages and avoid penalties.

401(k) Loans and Real Estate

It is possible to use a 401(k) loan to finance the purchase of real property. Actually, 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 repaid on an amortized basis or with a fixed repayment schedule in regular installments, with a minimum of five years. However, if the loan is used for the purchase of an primary residence, the repayment term can be longer. Your plan administrator determines the terms for how long.2

However, it seldom makes sense to make use of the 401(k) loan to completely finance a purchase for a residence, because in most circumstances it is a normal mortgage loan can provide greater financial benefits. One reason is that you can’t be able to deduct the interest you pay from 401(k) loans as you can with mortgage interest payments. In addition, borrowing money 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-term.

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

Will the loan on my 401(k) affect my mortgage?

An 401(k) loan will not impact your mortgage application. The 401(k) loan has no impact on your debt-to-income ratio or credit score, two big elements that affect mortgage lenders. Some buyers use 401(k) loan funds as the down payment for a home.

Are 401(k) loans a good idea?

The 401(k) loan has upsides and downsides to consider. The decision to decide if it’s the right one for you will depend on many aspects about your personal financial situation. These loans can provide a good source of low-cost cash to meet short-term requirements. But they can reduce the value of your retirement savings when you fail to pay on time repayments.

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

You may use the 401(k) loan for a down amount, and this doesn’t impact your debt-to income ratio. Just make sure that you can repay the loan on your 401(k) account promptly. The longer it takes you to pay back your loan the more you’ll miss out on the potential to compound your interest.

The Bottom Line

In some cases 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 reality, taking out a 401(k) loan can be a good way of raising the money needed to make a down payment on a home. Remember that one of the drawbacks of the loans can be that they drain funds from your investment and you not benefit from the potential of compounding until you have to repay the loan.