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      Retirement Plan 401(k)

      Will 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
      Fact checked by Amanda Jackson

      If you’re looking to access some of the funds you’ve accumulated in your 401(k) it is possible to use a short-term loan which you pay back with money taken from your earnings. Borrowing out of your 401(k) frequently is a better alternative to getting funds than using higher interest loans like title loans, payday loans, or even personal loans.

      If you’re considering taking out 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 for a mortgage or are paying it down in the future, the 401(k) doesn’t impact other loans.

      We’ll go over what 401(k) loans work and give you the pros and cons to consider.
      The most important takeaways

      A 401(k) loan can provide a way to access your account funds for liquidity in the short term.
      401(k) loans also have no impact on mortgage payments, whether it’s your present mortgage or one you are applying for.
      It is possible to use the 401(k) loan for a many purposes including an down payment on a home.
      Make sure to pay back the 401(k) loan quickly. The longer you take to repay the loan, the more you’ll miss out on the benefits to compound your interest.

      401(k) Loans and Mortgages

      The 401(k) loan has both advantages and disadvantages that you should consider. If you use it wisely it could be a simple method to get funds to cover short-term expenses. However, withdrawing funds of your retirement account could affect the value of your portfolio. The longer your funds are not being invested, the more you miss the benefits of compound interest.

      An 401(k) loan has interest that is paid to your account, but it doesn’t require the involvement of a lender or an examination of your credit history. Under the law, you are able to get a loan up to $50, or greater of either $10,000 or 50 percent of the account value.1

      Receiving an loan through the 401(k) is not tax-deductible except if the loan restrictions and repayment rules are violated. The loan will not impact your credit score and has no effect on your mortgage. It won’t affect the terms and rates of your current mortgage or affect the process of applying for the next mortgage.2

      In fact, you can get the 401(k) loan to use as a down payment for the purchase of a house.

      401(k) loans will not affect your mortgage. They let you access the funds you have saved up to meet urgent needs. The only requirement is to repay the loan if you want to keep your tax advantages and get rid of penalties.
      401(k) Loans and Real Estate

      You may use the 401(k) loan to finance the purchase of real estate. The rules apply to 401(k) loans are different when you use the loan to purchase a home.

      The standard regulations require 401(k) loans to be repayable on an amortized basis, or with a fixed repayment schedule with regular installments spread with a minimum of five years. But, if the loan is used to purchase an primary residence, the repayment term may be extended. Your plan administrator sets the guidelines for the length of time long.2

      However, it seldom makes sense to take advantage of the 401(k) loan to completely finance a purchase for a residence, because in most circumstances the regular mortgage loan offers more financial benefits. For one, you cannot deduct your interest payments from 401(k) loans as you are able to with mortgage interest. Furthermore, borrowing money from the 401(k) for a period of time long enough to repay a house might significantly reduce your investment’s value over the long run.

      Another way in which the 401(k) loan can play a role in buying real estate is when you make use of the money to pay for the down payment or closing costs. Because it’s a 401(k) loan isn’t technically a debt–you’re withdrawing the funds from your own account in the end–it doesn’t have any influence on either your debt-to income ratio or your credit score, which are crucial factors lenders look at.
      Can a loan to my 401(k) affect my mortgage?

      A 401(k) loan will not affect your mortgage or mortgage application. A 401(k) loan has no impact on your debt-to-income ratio or credit score, two major factors that influence mortgage lenders. In fact, some home buyers utilize 401(k) loan funds as the down payment for a home.
      Are 401(k) loans a good idea?

      An 401(k) loan has upsides and downsides to consider. If it’s a good option for you is contingent on a number of factors about your personal financial situation. These loans can provide a good source of cash at a low cost for urgent needs. However, they could reduce the worth of your retirement account when you fail to pay on time repayments.
      Can I use the 401(k) loan for a down cost?

      You can make use of a 401(k) loan for a down payment, and doing so won’t affect your debt-to-income ratio. Just make sure that you’re able to repay your 401(k) account quickly. The longer you take to repay your loan, the more you’ll miss out on the potential of compound interest.
      The Bottom Line

      In certain situations, a 401(k) loan can be an effective way to get access to short-term liquidity. 401(k) loans also have no impact on your mortgage. In reality, taking out a 401(k) loan can be an excellent way to raise an amount to pay for a downpayment on a home. Keep in mind that one disadvantage of these loans can be that they take the funds you invested which means you’ll be left out of the benefits of compounding your investment until you pay the loan.
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