It wasn’t easy deciding to go against popular advice of not borrowing from my 401K now that I’m condo hunting. When it came to saving for the down payment and closing costs I weighed three saving strategies:
- Saving aggressively in liquid savings accounts, only contributing the minimum to my 401K to receive my employer match.
- Continuing to max out my 401K and then borrow from it
- Saving the notoriously recommended 15% of my income in my 401K and the rest in liquid savings.
I did a comparison of the three strategies and quickly realized borrowing from my 401K is most advantageous.
|Strategy 1||Strategy 2|
|(1) Time to save||1.5 years||0 years|
|(2) Amount to Save*||$27,500||$25,000|
|(3) Time to repay self||0 years||5-10 years**|
|(4) Foregone 401K contributions||$21,000||$0|
|(5) Lost interest income×||$140,000||$30,000××|
|* – Strategy 1 requires more savings due to anticipated increases in housing prices|
|** – 10 years is the worst case scenario. I actually anticipate less than 5 years due to salary increases|
|×- this is an extremely crude estimate that assumes a 7% market return and no market fluctuations over 30 years|
|××- For every additional $1,000 saved towards a condo outside of my (maxed out) 401k, I’ll save ~$2,200 in potential interest|
The main risk associated with Strategy 2 would be the need to repay the 401K loan if I were to lose or change jobs else I’ll have considerable taxes and fines. I do not anticipate either but I have emergency funds in place otherwise.
Strategy 3 would obviously have pros and cons that fall somewhere between the first two strategies.
After being on the housing market for about a month I’ve learned it’s brutal out there! I may not find a place for a while since those with cash or sizable down payments scoop up places 1-2 days after listing. I’ve placed one offer on a condo and bid equally to an all cash offer so mine was not accepted.