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Retirement Planning 401(k)

Will a Loan on My 401(k) Affect My Mortgage?

An 401(k) loan doesn’t affect the terms of your mortgage.

By Matt Ryan Webber

Updated August 11, 2022

Fact checked by Amanda Jackson

If you’re in need of accessing some of the money that you’ve put into your 401(k), you can take advantage of a temporary loan that you will repay with the money you earn taken from your earnings. The borrowing option out of your 401(k) often can be a better alternative to getting funds than using higher interest loans such as title loans, payday loans, or even personal loans.

If you’re considering a 401(k) loan, you might be wondering how it could impact your other debts, such as your mortgage. The answer is simple: it isn’t. If you’re eligible as a homeowner or paying down, the 401(k) doesn’t impact other debts.

In this article, we’ll explain what 401(k) loans work and detail benefits and cons to take into consideration.

The most important takeaways

An 401(k) loan can provide a way to access your account funds for short-term liquidity.

401(k) loans also have no impact on mortgage payments regardless of whether you have a present mortgage or one you are applying for.

It is possible to use the 401(k) loan for a many purposes like a down payment on an investment property.

Make sure to pay back the 401(k) loan quickly. The longer it takes you to repay the loan the more likely you’ll lose out on the benefits accrued interest.

401(k) Mortgages and loans

An 401(k) loan has both positives and negatives to be considered. If you use it wisely, it can be an easy way to access funds to pay for the costs of a short-term project. However, taking funds out of your retirement account could be detrimental to the long-term performance of your investment portfolio. The longer your funds are not being invested, the more you miss out on the power of compound interest.

A 401(k) loan has interest which is paid into your account, but it doesn’t require any kind of lender or review of your credit history. The law allows you to take out loans up to the lesser of either $50,000 or the higher of $10,000 or 50% of your account value.1

Receiving a loan from the 401(k) does not count as a taxable event unless the loan restrictions and repayment rules are not adhered to. The loan will not impact your credit score and has no affect to your current mortgage. It will not impact the rates and terms of your mortgage currently in place or influence the process of applying for a new mortgage.2

In fact, you can take out the 401(k) loan to use as a down payment to purchase a home.

401(k) loans will not impact your mortgage. They permit you to draw the funds you have saved up to meet immediate requirements. The only requirement is to pay back the loan in order to preserve your tax benefits and be free of penalties.

401(k) Credits and Real Estate

You may use the 401(k) loan to finance the purchase of real property. In fact, the rules apply to 401(k) loans are different if you are using the loan to buy a house.

The norm is for 401(k) loans to be paid back on an amortized schedule or with fixed repayment dates in regular installments, with a minimum of five years. But, if you use the loan is used to buy a primary home, the repayment time could be extended. Your plan administrator determines the guidelines for how long.2

However, it seldom makes sense to use a 401(k) loan to completely finance a home purchase since, in the majority of instances the regular mortgage loan can provide more financial benefits. First, you are unable to be able to deduct the interest you pay on 401(k) loans as you are able to with mortgage interest. In addition, borrowing money out of the 401(k) for a period of time long enough to pay off a mortgage might significantly reduce your portfolio’s value in the long run.

Another way a 401(k) loan can play a role in buying real estate is when you utilize the money to pay for the closing or down payment costs. Since it’s a 401(k) loan isn’t technically an obligation–you’re taking out your own funds in the end–it doesn’t have any effect on either your debt-to-income ratio or your credit score, both of which are major factors that lenders take into consideration.

Will a loan from my 401(k) impact my mortgage?

An 401(k) loan will not affect your mortgage or mortgage application. It is not a factor in your mortgage application. 401(k) loan has no influence on your debt-to income ratio or credit score, two big elements that affect mortgage lenders. In fact, some buyers make use of 401(k) loan funds as the down payment for a home.

Is it a good idea to take 401(k) loans a good idea?

A 401(k) loan has upsides and drawbacks to be aware of. Whether it’s a good idea for you depends on many aspects of your financial situation. These loans are a great source of cash at a low cost to meet short-term requirements. But they can reduce the worth of your retirement account when you fail to pay on time repayments.

Can I make use of a 401(k) loan for a down amount?

You may use a 401(k) loan for a down amount, and this doesn’t impact your debt-to income ratio. Just make sure that you can repay your 401(k) account in a timely manner. The longer you wait to pay back your loan the more you’ll lose out on the power accrued interest.

The Bottom Line

In some cases it is possible to get a 401(k) loan can be an excellent way to gain access to short-term liquidity. 401(k) loans also have no effect on your mortgage. In fact, taking out the 401(k) loan can be a good way of raising an amount to pay for a downpayment on a home. Be aware that one of the drawbacks for the loans is that they drain money from your investment and you not benefit from the potential of compounding until you repay the loan.

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