***update #2 in post #1*** 401k loan being considered in lieu of bridge loan. Please let me know your thoughts

[DCLMP]

Thanks for your comments. I think this is the route they will take. They will be taking to their mortgage person tomorrow, and get those opinions on whether a bridge loan or 401k loan makes more sense. Either way, as soon as their current house closes…the loan will be paid off.

There's no credit check and no ding to your credit if you do default which I doubt they would. It takes about 28-72 hours to get the money in your checking account. Hopefully they can pay it back as soon as they sell their house.

The only risk I see in this whole thing is selling their house in this market. Also buying a house right now. I don't think the economy is that stable. That would be a bigger concern for me than taking a 401k loan.

 

[eticketplease]

The only risk I see in this whole thing is selling their house in this market. Also buying a house right now. I don't think the economy is that stable. That would be a bigger concern for me than taking a 401k loan.

The economy not being stable doesn’t pose a risk for Job loss?

You also mentioned the housing market. The longer their house is on the market, the longer their 401k funds are not making money in the market. Lots of people that are repaying their loans stop making contributions during that time giving up the chance for the 401k to grow. I’m not saying that the OP kids will be doing that.

The OP has stated that the 401K loan is what is most likely the case which is certainly fine as they are ok with taking the risks involved with that decision.

 

[Mackenzie Click-Mickelson]

Either way, as soon as their current house closes…the loan will be paid off.

If it were me I would be conservative here. Obviously they are thinking their old home will sell fast enough and they will have cash to throw at the new one but there's also what their mortgage payment will be along with insurance costs as well as the repayment of the loan and what my comment mostly is about----considering things that can go wrong with their new house.

While our new build was covered under home warranties it still had issues like grading in the backyard causing half of it to be resod and the whole thing aerated and overseeded a few other minor things as well.

My DISer friend unfortunately is finding a slew of issues with her new purchase (over the summer) of an older home that is foundation and bathroom leaking issues that the inspection didn't catch. My sister-in-law and her husband purchased a home a few months ago and just had major issues with pipes causing the toilet to backup into the bathtub, that was issues caused by tree roots in the water line into the house costing several thousand in repairs.

All that to say that while they may want to immediately pay off that loan, it's a bit more like don't count on it because if they are needing to take out the loan to even get the house what monies will they have if issues crop up. And you can't count on their existing home selling super fast and cash in hand should issues with their new house.

You're talking a sizable loan (either $50K or $100K I wasn't sure but whichever sum it is it's a lot). Just something they should keep in mind regarding how quickly they can pay off that 401K loan outside of the normal repayment terms.

 

[starry_solo]

Have they actually listed their current house for sale?

 

[Anthony1971]

Every person is different so how they decide is up to them.
The biggest consideration VS.
A bridge loan you are borrowing against a house and if something went seriously wrong one will lose the house and a credit hit.
A 401k loan is borrowing against one’s own money with serious tax consequences should something go wrong.
The 401k could add more problems if there was a problem.
The chances are low for a problem and I would hope there is none.
Personally I would borrow against the house as that is what would allow me to somewhat sleep at night.

 

[DCLMP]

The economy not being stable doesn’t pose a risk for Job loss?

You also mentioned the housing market. The longer their house is on the market, the longer their 401k funds are not making money in the market. Lots of people that are repaying their loans stop making contributions during that time giving up the chance for the 401k to grow. I’m not saying that the OP kids will be doing that.

The OP has stated that the 401K loan is what is most likely the case which is certainly fine as they are ok with taking the risks involved with that decision.

It depends on their occupation. I have zero risk of job loss. I'm going to assume they have taken that in to consideration. Not every occupation is vulnerable during a recession.

You're assuming their 401k is going to be making money. If houses aren't selling and lay offs are happening then that is kind of a mute point. In that scenario the market is selling off. I myself am very bearish on the economy.

There are risks in what they are doing, but 401k loans are not risky. Buying a new house without selling the first is risky. I would not be a buying a new home right now, but I wouldn't hesitate to take out a 401k loan if I needed to. A 401k loan is the least risky loan you could take.

If it was my kids I would tell them not to buy a new house until they sold they old one.

 

[eticketplease]

There are risks in what they are doing, but 401k loans are not risky. Buying a new house without selling the first is risky. I would not be a buying a new home right now, but I wouldn't hesitate to take out a 401k loan if I needed to. A 401k loan is the least risky loan you could take.

I agree 401k loans are the LEAST risky loan option.

 

[greeneyedchick]

Hello…this is related to our daughter and son-in-law.

They own a small starter home, and have outgrown it now that the have 3 boys (5, 3 and 1) and both of them work from home.

In the area we live in, bigger homes do not last long when they come on the market, usually under contract within 3-4 days.

A house just came on the market, and my daughter loves it. In cash, they have 35% of what they need for their downpayment. The rest ultimately would come from the equity in their home, once it sells.

They talked to their realtor briefly yesterday, and she is telling them that home selling now rarely comes with contingencies Ie for selling current house.

So, just looking for options to make this work! I know they could do a bridge loan. But there is also a cost associated with that process.

Another option…is they could each take out a 401k loan for $50k, and then pay it back with the interest into their 401k accounts. They are both work at the same company.

I know one of the downsides with this is if one or both of them would lose their job…very highly unlikely.
Paying 2 mortgages would be tight but doable for a couple of months.

What are other downsides of a 401k loan? If they had to pay back the loan with regular earned income, I know that is not a great deal, due to taxes. (Ie paying income tax on the money to pay back the loan, and then again paying taxes when the money is withdrawn). But…since this would be a short-term loan, getting paid off with house sale proceeds, this seems like a viable option.

Obviously, they will be talking to a mortgage loan officer tomorrow, but I’m looking for thoughts/ideas today! Thanks!

We have done it twice in order to move into a new home before selling our old one. You already mentioned the main risk is that it becomes due immediately if you lose your job. Otherwise we preferred it because we were paying ourselves the interest, rather than someone else. I also think that you only have 6 months to pay it back (I may be wrong on that). You're hedging your bets on how fast you can sell your own home.

If she hasn't put the house up for sale yet, she could apply for a home equity line of credit. I don't think there are any fees for that that unless she actually borrows from the line of credit. That way, if they do lose their jobs, they could then use the line of credit. However, once you put your home on the market, the bank will not approve a line of credit.

 

[QueenIsabella]

Nothing wrong with using a 401k loan, so long as their jobs are reasonably secure. You have 5 years to pay it back through payroll deductions, and at least when I did it, you were paying interest to yourself. I would strongly encourage them to continue to make their regular 401k deduction while doing this, if possible--this is where a lot of people hose themselves, by not continuing to save for retirement during this 5 year stretch.

I don't envy them going through the moving process with young children--BTDT, it sucks. But, you do what you gotta do.

 

[clh2]

In a very stable housing environment, having their house on the market without having an accepted offer on a new home is a traditional way of doing a move-up to a different house. In this area, there is a housing shortage of houses in all price ranges, so if your current home sells quickly, and you are not able to get an accepted offer on a new home, that also adds a level of risk and stress as well.

 

[barkley]

In a very stable housing environment, having their house on the market without having an accepted offer on a new home is a traditional way of doing a move-up to a different house. In this area, there is a housing shortage of houses in all price ranges, so if your current home sells quickly, and you are not able to get an accepted offer on a new home, that also adds a level of risk and stress as well.

I have to imagine the lack of available rentals in many regions would further stress a household. when we sold both of our prior homes there were waits between 6 and 10 months before our subsequent homes were either located or completed. no major issues with the rental markets back then so we were able to store the majority of our belongings and find rental housing. now? we constantly hear of how limited rental availability is in our area so I would not want to be in the position of being on a short timeline to locate something.

kind of a side note but I guess it might apply-one of the things that very much surprised us when we had to rent in-between our last and current house. landlords wanted something to indicate our prior rental payment history. we had not rented in almost 10 years so we had nothing (and the place we had rented from did'nt keep records that far back). we offered to provide our credit reports but landlords really wanted rental history verification. I don't know with the shortages of housing if this is a big thing now but it's something I would look into if there was any chance I was going to get into a situation where even a short-term rental might be in my future.

 

[DCLMP]

Nothing wrong with using a 401k loan, so long as their jobs are reasonably secure. You have 5 years to pay it back through payroll deductions, and at least when I did it, you were paying interest to yourself. I would strongly encourage them to continue to make their regular 401k deduction while doing this, if possible--this is where a lot of people hose themselves, by not continuing to save for retirement during this 5 year stretch.

I don't envy them going through the moving process with young children--BTDT, it sucks. But, you do what you gotta do.

When I did it I didn't have to do it through payroll deductions. I just paid through my bank I didn't even need automatic payments. I did not have to pay it back when I quit my job I was able to continue making payments until it was paid off.

If I were to take one with my current employer I would have 3 months to pay it back if I separated from employment, but still not payroll deduct. If my dh took one it would have to be payroll deduct. Every employer has different plan rules even if managed by the same place like Fidelity.

I think another mistake people make is making it a 5 year loan thinking they will pay it back early. You can determine the length of loan in months. I would pick the shortest loan term with a payment that is manageable.

 

[clh2]

I have to imagine the lack of available rentals in many regions would further stress a household. when we sold both of our prior homes there were waits between 6 and 10 months before our subsequent homes were either located or completed. no major issues with the rental markets back then so we were able to store the majority of our belongings and find rental housing. now? we constantly hear of how limited rental availability is in our area so I would not want to be in the position of being on a short timeline to locate something.

kind of a side note but I guess it might apply-one of the things that very much surprised us when we had to rent in-between our last and current house. landlords wanted something to indicate our prior rental payment history. we had not rented in almost 10 years so we had nothing (and the place we had rented from did'nt keep records that far back). we offered to provide our credit reports but landlords really wanted rental history verification. I don't know with the shortages of housing if this is a big thing now but it's something I would look into if there was any chance I was going to get into a situation where even a short-term rental might be in my future.

There is virtually no short-term rental business in our area…even has a tight regular rental market, and dang…it is an expensive market as well. I’m somewhat appreciative that we do not have room to take them in for any amount of time. I love them dearly, but had the kiddos over yesterday…I’m exhausted!

 

[tvguy]

It’s your own money. Many people do take out 401k loans. This is not some rare phenomenon. It actually pretty common. If you think you’re going to lose your job or quit then don’t do it. That is also dependent on the plan. Some plans will allow you to continue to make payments if you change jobs. I would always read the plan rules before doing anything.

Yes it is common. It is also common for it to become an issue because a VERY high percentage of those 401k loans don't get paid back. Every financial adviser I know would list a 401k loan as the LAST option they would consider, with some considering it a deal breaker.
My former employer has announced a rollout of AI software that will eliminate entire departments in 2025. A lot of those impacted have 401k loans that will be due immediately when their employment ends.

 

[tvguy]

Around here generally it's more expensive to do renovations to a house, extensive enough that is, than to buy new. A lot does depend on how old the house is as you need to consider bringing up to code. Renovating a kitchen is not the same as adding square footage to increase the size of the house to accommodate growing out of it. Even our 2014 new build house likely has some things already not to present day code.

Frankly the costs sunk into the house my in-laws purchased a bit before the pandemic was not a smart choice. They would have been better off to have bulldozed the house and started new OR brought it all down to studs and started new rather than doing upgrades here and there, the largest being making the walk-out basement livable for one of the daughters and her husband to move in. This was also the same several years before the pandemic on my husband's grandmother's 1940s house as it would have cost several hundred thousand to expand slightly the house in square footage primarily due to bringing up to code.

Is the 35% of the down payment based off of 20% down payment? Granted we did new build but I honestly don't know anyone who has put 20% down in recent years. Granted it's a different situation than the OP's family because ours was about rent vs save to get that 20% but our financial advisor discussed with us about thinking about how long that could be and how increased costs could make that a never-ending chase to get to that as costs increase year over year.

Wow, that seems like a rare housing market. We looked at moving versus adding-on to make our house the same square footage (in the same area, same type house). It was a quarter of the cost of moving when you factored in real estate commissions, moving expenses, and the larger base property tax rate that moving to a different house would trigger versus adding on.
Doing a complete remodel later, including taking two of the three bathrooms to the studs, the kitchen to the studs, removing popcorn ceilings, all new doors, all new flooring, adding insulation . Contractor figured just under 5% of the project cost was code upgrades. As I recall almost all those upgrades were to the electrical wiring (GFCI) in the kitchen and bathrooms from the code in 1979 when the house was built. Oh, and $25 for a carbon monoxide detector.

 

[DCLMP]

Yes it is common. It is also common for it to become an issue because a VERY high percentage of those 401k loans don't get paid back. Every financial adviser I know would list a 401k loan as the LAST option they would consider, with some considering it a deal breaker.
My former employer has announced a rollout of AI software that will eliminate entire departments in 2025. A lot of those impacted have 401k loans that will be due immediately when their employment ends.

If they don't pay it back immediately they will owe the tax. Not the end of the world. I'm not sure how it's worse than taking out any other kind of loan if you need to take a loan. If you lose your job you are going to be in world of hurt anyway.

 

[Mackenzie Click-Mickelson]

Wow, that seems like a rare housing market. We looked at moving versus adding-on to make our house the same square footage (in the same area, same type house). It was a quarter of the cost of moving when you factored in real estate commissions, moving expenses, and the larger base property tax rate that moving to a different house would trigger versus adding on.
Doing a complete remodel later, including taking two of the three bathrooms to the studs, the kitchen to the studs, removing popcorn ceilings, all new doors, all new flooring, adding insulation . Contractor figured just under 5% of the project cost was code upgrades. As I recall almost all those upgrades were to the electrical wiring (GFCI) in the kitchen and bathrooms from the code in 1979 when the house was built. Oh, and $25 for a carbon monoxide detector.

You'd need to look at it from what the previous posters were suggesting which was to just renovate the existing house to make more adequate room for the family with young kids. That is also why I put in the description extensive enough.

Many houses are expensive here relative over time and the area, I believe the median sale price for homes last year in my county was $500K. (pre-pandemic it was like 200-300K) But when you're talking about the concept of "just renovate the existing home" you miss a ton of things that can crop up from permitting, size restrictions (such as how close to the property line you can be or city restrictions or even HOA restrictions these are general ideas but all exist within places in my metro), lumber costs (which are better than the height of the pandemic but still expensive), costs of construction crews and even getting them to begin with, housing costs of where you'll live during this renovation (which adding on square footage probably means the existing house would be a mess especially for a family with young kids), storage costs for where your stuff will go during this renovation, then there's bringing up to code your house if it's old enough and even if it isn't such as HVAC system minimum requirements have changed since our house was built just 10 years ago for example, then there's purchasing of things being used for the added square footage and more. Then there's if something crops up during the renovation such as structural issues or in the case of my husband's coworkers their existing water supply was not large enough (according to the city) for the added addition or my friend who now has to completely redo two bathrooms due to a slow leak that damaged the subfloor.

But we all know you're in CA and in CA housing stuff is delusional compared to elsewhere plus we're all very aware of how your property tax situation works which is abnormal as well. I'm not suggesting that it's cheaper for me personally to go out and buy the same house or larger than what I currently have because my house was built in 2014 so it's new enough and has plenty of space with 5 bedrooms, but once you start getting decades older the chance of running into issues that balloon the project cost to just add square footage in you're often just better off buying a house that fits your needs to begin with because there's a ton of unknowns and a long schedule to make an existing home work. There's a bit of uniqueness for some still under low interest rates which may offset that.

 

[greeneyedchick]

When I did it I didn't have to do it through payroll deductions. I just paid through my bank I didn't even need automatic payments. I did not have to pay it back when I quit my job I was able to continue making payments until it was paid off.

If I were to take one with my current employer I would have 3 months to pay it back if I separated from employment, but still not payroll deduct. If my dh took one it would have to be payroll deduct. Every employer has different plan rules even if managed by the same place like Fidelity.

I think another mistake people make is making it a 5 year loan thinking they will pay it back early. You can determine the length of loan in months. I would pick the shortest loan term with a payment that is manageable.

And also make sure that there is no penalty to pay it all back at any point. As soon as we sold our house and closed, we paid back the entirety of the 401k loan.

 

[barkley]

once you start getting decades older the chance of running into issues that balloon the project cost to just add square footage in you're often just better off buying a house that fits your needs to begin with because there's a ton of unknowns and a long schedule to make an existing home work.

very true-there are so many unknowns until you start opening walls it's a time consuming gamble to renovate. I have seen some opt to go in a different direction though. with more cities allowing ADU's on single family home lots people are evaluating their real needs for 'more space' and finding that redefining existing space by moving some needs to an alternate location on-site fits the bill. with some it's b/c their jobs have become remote and existing space has been allocated to work, up here we saw a decent percentage of parents finding their kids did better with on-line vs. in person instruction so they've opted to enroll them in the public virtual schools and have had to carve out 'classroom space', with others it's a desire to have more dedicated 'chill space'. they end up doing an ADU for less than the cost of upsizing (if they can even find anything to upsize to) and it becomes the home office, classroom, family space or whatever they desire.

 

[DisneyTexan]

If they don't pay it back immediately they will owe the tax. Not the end of the world.

If they are in the 22% tax bracket and took out a $50,000 loan without repaying it, they would owe $11,000 in taxes. It may not be the end of the world to you, but its a lot of money to some people.