Should You Use Your 401K to Fund Your Down Payment?

We know, saving for a down payment can be the most difficult part of the home buying, especially for first-timers who don’t have the proceeds from a previous home sale to help with their down payment.

You may already be saving for retirement through your 401K or IRA. If it’s your biggest source of savings, you may be tempted to borrow from yourself to get that down payment now.

But, is liquidating your long-term savings really the best choice?

For most situations, the answer is no. Borrowing from your long-term savings negatively impacts the snowball (or compounding) effect of your 401K fund growth. The big idea being the earlier you start saving – even in small amounts — the greater your gains are each year putting you that much closer to meeting your retirement goals.

So, if you pull that cash out now, you’re back to square one with less time to build that snowball. And, none of us wants to be punching the clock post-retirement. Right?

How buyers are funding their down payment

In fact, 81 percent of first-time homebuyers use some type of savings to fund their down payment, according to the National Association of REALTORS® Profile of Homebuyers and Sellers. But, a combined 20 percent of buyers liquidated part of their 401K, stocks and bonds or IRA savings. That could prove to be a costly choice in the long-term.

The most overlooked source of a down payment? Only 2 percent of first-time homebuyers used financial assistance, like a down payment program. Yet, these programs may be your best bet. If you qualify, you keep your 401K intact and get help for your down payment and closing costs. You can also combine these programs with some of your own savings as well as low down payment first mortgages. Plus, many states also have tax credits that can help you save over the life of your loan.

Before you start tapping into your retirement savings to meet your homeownership goal, investigate all your down payment options first.

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