Question Details

Mark, Home Buyer in Orangevale, CA

is it sound strategy to borrow 401k money to avoid PMI?

Asked by Mark, Orangevale, CA Thu Mar 6, 2008

I plan to borrow my 10% downpayment from a 401K. This will leave me paying PMI (or increased rate for lender pd PMI).
I can double the 401K loan to make a 20% downpayment and avoid PMI. But my repayment of the 401K is not tax deductible.
Has anyone crunched numbers on this choice and is it a nobrainer? I hate to pay PMI. It is not deductible for me due to income limits. And since I can't find a piggyback for a CA loan, an increased 401K loan seems the only way to avoid PMI. But does the downside of a 401K loan make it worse than PMI? I am not thinking I can count on fast appreciation to eliminate PMI any time soon ha ha.

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I am currently in this same situation (sort of)

My PMI is 82.00 month, over sixty months thats close to $4900.00 month
A ten percent hit on me withdrawing 40 grand from 401k is $4000.00

so i will recoup the penalty over 5 years. but i will lose alot of shares of stock that may gain more than the 40 grand was worth..its just my opinion that the market is close to peaking, and i will lose much of my 401 k soon anyway.

again, this is only my situation, the main reason for my withdrawal is also to pay a claasic car off that has no tax writeoffs...and to decrease my monthly bills because im about to buy another house in another state and keep two houses...

whew!!
0 votes Thank Flag Link Tue Apr 30, 2013
FHA loan limits were raised this morning in most parts of CA to 729k.
Conforming limits were raised as well......you may have better options with your current lender.
0 votes Thank Flag Link Thu Mar 6, 2008
Hi,
This is a question for your accountant or financial planner. As all investment analysis depends on a lot of factors. What are the interest rates between the 2? What is the stability of each investment? Lots to think about. Generally, all of the articles I read always say don't pull money from your 401K as this is a retirement plan that you should invest in and forget about. I don't know if this is just a Washington State thing, but PMI is now tax deductible if your income is less than $100,000. I don't remember if this is gross or net and I also don't know if this is for an individual if you're married. If the PMI is a tax deduction, then it's just another field to analyze. Good luck!
0 votes Thank Flag Link Thu Mar 6, 2008
Hi Mark, this is a great question!

When you go to the accountant you and he/she may need to know a little about the PMI rate to help with the caclulation of what it will cost.

PMI is usually charged with 1.5% due at closing and 0.5% of the loan balance with each monthly payment.

Most lenders (this is found in the language of the lenders contract) want PMI to continue until such time as the LTV (Loan to Value) ration is 80%. The LTV is usually not aquired with appreciation but with actual debt paydown.

Your accountant, using this information sould then be able to amoratize your PMI to deterimine a date when the PMI would be paid in full. At the same time the account will be able to advise on the cost/loss of using the 401K. Assuming your company is not following the ENRON plan as mine did (to the letter even to the point of the CEO going to prison).

I hope this helps you as you move forward with your purchase
Web Reference: http://www.neflahomes.com
0 votes Thank Flag Link Thu Mar 6, 2008
Thanks Don I guess I'm hoping someone has already worked through this and can declare it a nobrainer but maybe not.

It is not as if the S&P index is exactly burning it up either...

I believe my wife and I can each take out up to $50K, and the interest we pay back goes straight to us so the "loss" is the the lost growth of the 401K, but that is perhaps dubious over the 10 year lifespan of the loan anyway.

And it is not a "stocks or real estate" question isasmuch as we're buying a house to live in not to invest per se, so the options for this discussion don't include "sit out of real estate till a better time". Just "pay PMI or use 401K money to avoid PMI".

I found an online lender who in one offering anyway basically eliminated PMI for an upfront payment equal to 32 months worth. That is looking fairly attractive... but on the other hand - 401K loan has the appeal of,,, in a worst worst case scenario... defaulting on the loan and paying interest/penalties - but not losing the home or taking a credit score hit.

It is kind of brain numbing so I'm wondering if someone else already worked all the way through this choice and has the answer.

My marginal fed tax bracket is 33%
0 votes Thank Flag Link Thu Mar 6, 2008
Good question. But that's really one an accountant has to answer, both due to the technicalities of borrowing from and repaying to a 401k, and due to your individual tax situation.

Plus there's the question of where you'll get the greatest return or, alternatively, where you will lose the least. I'm not an accountant, or even an economist, but you also have to ask yourself whether you want to borrow money from a 401k in which, depending on the investment, you may be seeing a slight to moderate growth (or even more, depending on the investment), and put that money into an asset that may, for a few years at least, be declining in value.

So, you really need an accountant to give you good advice based on your individual situation.

Hope that helps.
0 votes Thank Flag Link Thu Mar 6, 2008
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
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