first time home buyer loan from 401k: what to know before you borrow

How a 401(k) loan works

Using a 401(k) loan lets you borrow from your own retirement savings, typically up to 50% of your vested balance, capped at $50,000. You repay yourself with interest through payroll deductions, and there is no credit check. For a first purchase, some plans offer extended repayment terms.

Key advantages and tradeoffs

Pros include fast access to cash and avoiding private mortgage insurance by boosting your down payment. Cons include lost market growth, after-tax repayments, and potential taxes and penalties if you leave your job or default.

Common mistakes to avoid

• Confusing the 401(k) loan with a hardship withdrawal; withdrawals can trigger taxes and a 10% penalty.
• Borrowing the maximum instead of what keeps your emergency fund intact.
• Ignoring plan rules on repayment when changing employers.
• Skipping comparison with alternatives like down payment assistance, gift funds, or a piggyback loan.
• Overlooking closing costs and reserves required by lenders.

Run the numbers, compare mortgage options, and talk with your plan administrator and a housing counselor before deciding. Protect your long-term retirement while making your first home purchase sustainable.