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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!
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