Sunday, January 30, 2011

401k and IRA borrowing for a first house?

Yes, it's a long way off, but I'm planning WAY in advance for this because the San Francisco housing market is nuts. Trying to figure out if it makes sense to borrow from a 401k or IRA to help increase your downpayment for a first house.

Verdict so far: probably not for an IRA. 401k is possible, but there are many pros and cons. Putting more in 401k now reduces your current tax burden, but then you'll need to borrow more out of it later because you are not keeping as much take-home pay (and therefore you'd have less in fluid cash when it comes time to buy a house).

Obvious statement of the night: just having the cash-on-hand (say in CDs, ING Direct, other fluid assets) still seems the winner.

Useful piece of info: Looks like insurance on your loan is only necessary if you have less than 20% down. So if you go for a reasonably modest house in the Bay Area (say, $500,000 - yes, that's crazy), then downpayment would need to be $100,000 to skip the need for loan insurance, which is very important.

Something weird but potentially useful: Apparently you can have a Self-Employed 401k fund. If you can rollover into this fund for your own business, you are essentially borrowing from yourself. If this is plausible, then it might be a good option. I have no idea if you can set one of these up if you're already employed at a company, or if you can set up one with you and your wife as the sole proprietors or something. This might be worth looking into. I wonder if you have to pay business taxes though if you do this.

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