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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 terms of your mortgage.

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 put into your 401(k) then you could make use of a short-term loan which you’ll repay with the money you earn taken from your earnings. The borrowing option from your 401(k) frequently is a better alternative to getting cash than using higher-interest loans like titles loans, payday loans, or even personal loans.

If you’re thinking about a 401(k) loan, you might be wondering how it could affect your other debts like your mortgage. The answer is simple: it won’t. Whether you are qualifying to get a loan or paying one down or not, your 401(k) won’t affect other debts.

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

Key Takeaways

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

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

You can make use of a 401(k) loan for a many purposes like the down payment for an investment property.

Make sure to pay back your 401(k) loan quickly. The longer it takes you to pay back the loan the more you’ll lose out on the potential of compound interest.

401(k) Mortgages and loans

An 401(k) loan has both positives and negatives to be considered. If it is used with care it can be an easy way to access funds to pay for immediate expenses. However, withdrawing funds from your retirement account may be detrimental to the long-term worth of the portfolio. The longer your funds are not invested, the longer you lose out on the potential to compound your interest.

The 401(k) loan has interest that is credited to your account, but it doesn’t require any kind of lender or review of credit histories. By law, you can take out loans up to the lesser of one of $50,000, or higher of $10,000 or 50 percent of your account value.1

Receiving a loan from the 401(k) is not taxable unless the loan limitations and repayment guidelines are not followed. It will not affect your credit score, and will not have any affect to your current mortgage. It will not impact the rate or terms of your current mortgage nor influence the application process for the next mortgage.2

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

401(k) loans will not influence your mortgage. They allow you to access the funds you have saved up to meet immediate requirements. The only requirement is to pay back the loan when you wish to preserve your tax benefits and avoid penalties.

401(k) loans and Real Estate

You can take advantage of a 401(k) loan to finance the purchase of real estate. In fact, the rules regarding 401(k) loans are different when you use the loan to buy a house.

The standard regulations require 401(k) loans to be repaid on an amortized basis, or with a fixed repayment schedule with regular installments for a period of less than five years. But, if the loan is used to buy a primary residence, the repayment term may be extended. Your plan administrator sets the conditions for how long.2

However, it is not likely to make sense to use a 401(k) loan to completely finance a residential purchase as, in the majority of cases it is a normal mortgage loan can provide more benefits in terms of financial benefit. For one, you cannot deduct your interest payments for 401(k) loans as you can with mortgage interest payments. Additionally, borrowing funds from the 401(k) for a period of time long enough to pay off a house might significantly reduce your portfolio’s value in the long-term.

Another way the 401(k) loan can play a role in buying real estate is to make use of the money to pay for the closing or down payment costs. Because it’s a 401(k) loan isn’t technically a loan–you’re merely withdrawing your own funds, after all–it has no impact on your debt-to-income ratio or credit score, which are important factors lenders take into consideration.

Will an loan on my 401(k) impact my mortgage?

An 401(k) loan will not influence your mortgage application. The 401(k) loan has no effect on either your debt-to-income ratio or credit score, two major elements that affect mortgage lenders. In fact, some buyers utilize 401(k) loan funds as an option to pay for a down payment on their home.

Are 401(k) loans a good idea?

An 401(k) loan has upsides and drawbacks to be aware of. Whether it’s a good idea for you depends on several aspects about your personal financial situation. These loans are a great source of low-cost cash for short-term needs. But they can reduce the value of your retirement savings when you fail to pay on time payments.

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

You can make use of the 401(k) loan for a down payment, and doing so doesn’t impact your debt-to income ratio. Just make sure that you’re able to repay your 401(k) account quickly. The longer it takes you to pay back your loan the more likely you’ll lose 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 effective way to get access to short-term liquidity. 401(k) loans also have no impact on mortgage. In fact, taking out the 401(k) loan can be a good way of raising the money needed to make a down payment on a home. Remember that the downside to this loans can be that they remove money from your investment which means you’ll not benefit from the potential of compounding your investment until you pay the loan.