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Columns | Go Far With Kovar

How Should I Fund a
Mortgage Down Payment?

by Taylor Kovar

Hey Taylor - I'm about $1,000 short on the down payment for my house and I'm wondering which way I should go about getting the money. One option is to take out a small loan, and the other is to borrow from my 401(k). I'm 19 years old, this is my first real estate purchase, and I have about $8,000 in my 401(k). What's the best option? - Chris

Hey Chris - Congrats on the house! That's an exciting purchase for someone your age. I hope you enjoy the adventures that come with owning a home!


To be perfectly honest, I don't love either option. In general, I think people should always have the cash to cover the down payment on a home. Since your home isn't going to produce returns in the near future (unless you're planning to rent out a portion or sell it right away), these are borrowed funds that won't generate any new wealth.

That said, I still think the loan is the best choice in your situation. Both options can work, and while I don't recommend you borrow for the down payment, I think you should always avoid getting into the habit of borrowing against your retirement. That's money you only want to see grow as you get older, and starting at 19 you're in an excellent position to have plenty of savings down the road. Keep putting money into that account (and consider rolling it into an IRA at some point), and you'll be very happy with yourself in 40 years.

If you won't have any trouble making monthly payments and you get a good rate, you could take out a loan and leave your 401(k) out of the equation. However, you need to be really, really sure you can get that loan paid off quickly. You don't want to lose too much to interest, and you definitely don't want to fall behind and hurt your credit. If there is a chance this loan will become more burdensome than beneficial, then it probably isn't the right time for you to be buying a house.

There are short-term reasons why this is a worthy debate - taking out a loan or borrowing from a retirement account both make sense in different situations. Because of the long-term implications, I lean toward the standard loan, but you need your short-term circumstances to factor into the final decision as well.

Hopefully this helps and it all makes sense. Glad to see you're being thoughtful with your money, and I hope everything with the house works out for you!

Taylor Kovar May 18, 2018
More "Go Far With Kovar"

Disclosure: Information presented is for educational purposes only and is not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. To submit a question to be answered in this column, please send it via email to Question@TaylorKovar.com, or via regular mail to Lessons on Wealth, 106 E Lufkin Ave., Lufkin, TX 75901.

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