Think twice before borrowing from 401(k) for a home down payment, advisors say

investmentnews.com:

The average price for U.S. houses sold during the second quarter was nearly $500,000 — that, coupled with the highest mortgage interest rates in over 20 years, could make a 401(k) loan appealing for buyers.

Whether that’s a good idea is another matter. In the best-case scenario, financial advisors say: It’s complicated. For most people, their answer tends to be: Don’t even think about it.

“This is a very challenging market for home buyers and retirement savers alike. But often overlooked are the trade-offs when purchasing a home, as the average home price today mortgaged over 30 years at 6% totals $925,000,” said Laura Lynch, also known as “The Tiny House Advisor,” who specializes in financial planning for people interested in tiny houses. “And this does not include the carrying cost of owning that home, such as the taxes, insurance and maintenance,” Lynch said in an email.

Deciding whether a 401(k) loan could be the right choice should include consideration of a client’s values, she said. “Many are prioritizing experiences over things. Others may prefer the stability and status that a home may provide.”

Historically, 401(k)s have seldom been used to help with down payments. Data from retirement record keeper Alight Solutions show that only about 1% of account owners borrow from 401(k)s to pay for housing, with average balances of about $20,000. Early withdrawals for that purpose are even less common, at about a quarter of a percent of participants, the firm said.

Figures from Vanguard’s How America Saves Report 2023 show that 12% of 401(k) participants had loans of any kind outstanding as of the end of 2022.

But it’s hard to know precisely how many 401(k) savers borrow from their accounts for the purpose of buying a