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Question for the Money Doctors

Question submitted on May 29, 2012.

Question

My husband and I have been in a home now for almost 16 years and owe $90,000 on the mortgage. We would like to sell but because of other debts have not been able to save for a down payment on a new home. Is it a good choice to borrow from our 401K''s to make a down payment on a home given that we may also not have enough equity in the old home because of the economy?

Answer

Remember the purpose of your 401k assets - retirement. When you borrow from your 401k account, you have to repay whatever you borrowed with interest. If you are not able to pay the loan back, it becomes a distribution, which will be fully taxable plus a 10% early withdrawal penalty if you are not 591/2. In addition, those funds you borrow are only making the interest you are paying back, so it will impact the future growth of your account and, therefore, your retirement.

My advice would be to first pay down your other debts before you take on any additional debt. Also, consider that you''ll be selling into a very poor housing market and your home may sit unsold for a lenghtly period of time or you may be forced to sell at a lower price than you had planned.


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