Buying a home is an investment that comes with several financial responsibilities. One major concern for potential homebuyers is how they will be able to afford the cost of the down payment. One possible way to help finance the price of the down payment is utilizing funds from your 401K plan if your employer offers a retirement plan, however there could be some possible risk with this option. If you are ready to buy a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, and are trying to determine the best way to fund your purchase, Foundation Mortgage can help. Read on to learn more about the pros and cons of using your 401K to help you buy a home.
Funding Your Down Payment With Your 401K Plan
If you are a homebuyer trying to figure out ways to afford the down payment of a home, you can technically withdraw money from your 401K retirement plan to acquire the necessary funds for the purchase, although there are several factors to consider with this alternative. A 401K is a retirement savings account, and the recipient can claim a tax deduction while the contributions accumulate interest over time, which means that access to funds within the account are limited. You are not supposed to withdraw from your 401K account until the age of 59 and a half years old or if you have left the job and turned 55. If you choose to withdraw from the account earlier than that, a penalty of 10% will be incurred to the amount taken out of the account. Also, because the money is no longer protected by the 401K account, it will be subject to income tax.
The Pros and Cons of Withdrawing From Your 401K For a Down Payment
Using your 401K to get a substantial amount of money quickly for a down payment can come with certain advantages and disadvantages. Some pros to using your 401K account to help buy a home include: the required repayments to your 401K plan can be automatically deducted from your paycheck, your credit score and a loan application are not required for the process, and you can gain the funds quickly, typically within the span of 10 days. Withdrawing funds from your account can also pose certain disadvantages, such as incurred fees, you will be taking money away from your retirement account, and you will be required to pay back the amount you take out. Besides taking money from your 401K, there are alternative options you could take to help with a down payment such as waiting to purchase a home until your financial situation improves, tapping into your IRA account, or applying for a mortgage with a lower down payment, such as an FHA or USDA loan.
Contact Foundation Mortgage today if you are interested in purchasing a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee.