It makes sense, given the gains workers have seen in their retirement plans and in home prices in recent years, that they would consider tapping their 401(k) accounts to buy homes. And that is exactly what a growing number of workplace savers are doing, according to a new study from Fidelity Investments.
"Over the past year alone, more than 27,000 investors took loans specifically for the purchase of a home," said Fidelity, which looked at data from workplace retirement plans it runs.
To be sure, cash-poor workers who borrow to the max to buy a house can get into trouble quickly if they don't have the reserves to handle emergencies. As any homeowner would attest, the boiler will break and the roof will leak when they least expect it.
On the other hand, some workers with sizable retirement funds and little other cash may find it a reasonable way to get into a house.
Here are some considerations:
When to do it: Ironically, the best time to borrow against your 401(k) to pay closing costs or cover a down payment is when you can well afford to. Otherwise, you are stretching yourself to the point where you couldn't weather an emergency.
If you lose your job and couldn't repay the 401(k) loan, you would have to take that amount as a distribution. That would cost you income tax and a 10 percent penalty on the amount and it would also leave your retirement plan permanently lighter, as you wouldn't be able to replace that money when you got onto more solid ground.
What works best: At the margin, a 401(k) loan could reduce your monthly costs for years to come. Mortgage borrowers who put less than 20 percent down are required to buy mortgage insurance, and that's not cheap.
A family with excellent credit putting $20,000 down on a $400,000 home would be expected to pay an extra $184 a month for that insurance, reports HSH.com, a mortgage research firm.
Furthermore, a mortgage lender might not qualify you for a loan if you had to borrow the down payment from a parent or someone else, but would if you were just borrowing from yourself.
Math wins: Sometimes the math suggests borrowing is the way to go. Some workers closer to retirement might find themselves retirement-plan heavy with their eyes on a retirement home. To buy it, they might have to sell investments and eat a sizable capital gains tax. Or a younger worker who has made a lot on stock funds in a 401(k) in recent years might want to temporarily tap that money to get established as a homeowner.