First Person: I Borrowed from My 401(k) to Finance a Home

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After renting everything from a roach-infested apartment in a college town to an older home with lead paint in an industrial town, I was fed up with being a renter. When I moved to Florida several years ago, I found a new-construction apartment building with lovely units. Still, I wanted to own my own home. Since I didn't have enough money for a down payment on my first home, I decided to borrow from my 401(k). Borrowing from my retirement fund could have been a terrible financial mistake that would haunt me for years. Instead, it helped me make my dream of homeownership become a reality. According to a recent article by Kiplinger's, 9 percent of recent home buyers tapped their pensions or 401(k) plans for a down payment on a home.

Locking into low rates

One of the reasons it made sense to jump on the chance to buy a home was the fantastic interest rates. I still remembered when my parents had double digit interest rates on their Maryland home. Since I was in my 30s, I knew I'd have time to pay back the money into my 401(k) without jeopardizing my future retirement. Besides, owning a home could become part of my overall retirement plan.

Borrowing up to half my balance

Since I had a balance of $40,000 in my 401(k) plan, I was able to borrow $20,000 to put toward my home. I didn't need the full $20,000 for the down payment, but I wanted to be able to afford new furniture, flooring and other accessories. If I didn't borrow from myself, I would have used credit cards. I probably saved thousands of dollars in interest fees to credit card companies by simply paying myself back.

Having a secure job

I would not have made the decision to borrow from my 401(k) during the Great Recession because of my job insecurity. However, at the time when I took out the 401(k) loan, my job was extremely secure. My company simply took out the money automatically from my paychecks to repay the 401(k) loan.

Paying off the loan

My company would not let me make extra payments to pay off my 401(k) loan, although I could have paid off the entire balance. I had to wait until I could save up my tax returns and bonus checks in order to pay off the 401(k) loan balance. I was able to pay it off in 2 years instead of 5 years.

I never would have become a homeowner if I didn't have access to a 401(k) loan. After two years, I was able to sell my home for a profit of about $25,000. I know for a fact that the money in my employer-sponsored retirement account did not have the same great returns in those two years. In fact, I lost money in the retirement account. Even though it worked out great for me, I wouldn't borrow money from my 401(k) again. Now I save money in a "new home" savings account that is not as complicated to access.

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More from this contributor:

How I Recovered after Losing $100,000

Planning for a Simple Retirement

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