Using Your 401(k) to Buy a Home: The Real Costs and Better Alternatives

Episode Transcript

Andy: I'm Andy Webb.

Jay: And I'm Jay Day.

Andy: And this is Real Talk Real Estate. Now, things are a little different today because Jay, you're actually out on assignment. You're doing a few things. So you're not in studio with me today. You are phoning it in, but in the best way possible.

Jay: Yes, a little, a little odd. You know, we're down in South Florida doing college visits. And when I knew we were going to be out of town, I went back to thinking how Tom and I had to do this during COVID with the phone call in again, like you said, a little weird.

Andy: We're used to sitting across from you working our energy together, but we'll we'll make it work via the phone. We'll endeavor to persevere. But you bring up a point that that kind of feeds into what we're going to talk about today, because you're taking kids to see colleges. There's so much in life that you need to pay for. And that goes for buying a house. You've got a lot of things in addition to just the cost of the house. You know, there's different elements that end up getting tacked on to that final price. And how you pay for it is a big factor. And sometimes where you get that money is something you've got to think long and hard about.

Jay: Oh, yeah. I mean, so we've had people recently again, as we talk about things getting more expensive and where funds are coming from. You know, we've had quite a few buyers talking about dipping into their 401(k) to help them with their closing costs or their down payment money. And, you know, I thought it'd be good to sort of talk about that. And, you know, when we look at data, you know, it looks like most Americans have built up considerable retirement savings, you know, with the median 401(k) amount for anyone in their 40s to 60s, you know, being over in six figures. So, you know, people have a big chunk of money in there and they're talking about, you know, well, should we should we do this or should we not do this? And the bottom line is, you know, there are pros and cons to everything in life. Right, Andy?

Andy: Right. Absolutely.

Jay: So let's talk about the pros and cons. The pros, if you're borrowing money or taking money out of your 401(k), there's no approval needed. You don't need a credit check. You don't need lender approval. You can just withdraw from your 401(k).

Andy: That's your money. Yes.

Jay: The other pro is that it's fast. So it typically only takes a couple of days to get access to those funds. So, you know, those are the pros. Now let's talk about the cons. The cons, there's typically a cost. So they're early withdrawal fees and they typically have like a 10% penalty. Plus you have to pay income tax on what you take out. So that's a pretty hefty penalty and fees you're going to have to pay. And then the other con, and a lot of people don't think about this, it's not a dollar for dollar situation. You know, it can have a long-term impact. So if you take out roughly $10K now, and if you were getting about a 7% yearly growth rate, which is low but standard, you know, at least that's the minimum, you would have roughly $54,000 less that you could have had in your 401(k) after 25 years. So only taking 10,000 out now could actually end up costing you, you know, a loss of $44,000 that you would have made off of that $10,000 over a 25-year period. So that's pretty costly. You know, and again, it's up to every person. You know, everybody has a different situation. The big thing though is, you know, again, most people are not thinking about the cons. They're thinking it's quick, I don't have to deal with anything, I've got easy access to the money. But again, everyone can figure that out. Now, if you heard this and it sort of freaked you out that, you know, you weren't thinking about the long-term impact and that you were going to have to pay, you know, income tax and a penalty in addition to get that money out, there are other options that you could explore. So low and no down payment loans, you know, FHA loans, you only need to have three and a half percent down for the home's price. Again, much lower down payment amount. If you're in the military, VA, you only need zero percent down. USDA in certain areas offers zero percent down. And then there's also down payment assistance programs. So national and local programs can help reduce what you have to pay towards your down payment or closing costs. So the bottom line is you don't always have to just think about tapping into that 401(k) money. You want to talk to an agent that is going to explain your options, talk to a lender as well that's going to give you the pros and the cons of everything. And there are other programs that are out there. So you don't feel like you need to go break into that piggy bank if you don't need to. Again, it's always an option. Everyone has their personal choices of what they want to do or what makes the most sense for them. But don't feel like you're stuck and that's your only option that's out there.

Andy: Just because it's an option doesn't mean it's the only option.

Jay: Exactly. So are you ready for the house of the week? This is a good one.

Andy: I'm more than ready because you gave me a little advance notice on this and I love this property.

Jay: Oh, this is great. So 130 Geiser Way in Smithsburg hitting the market for $435,000. This is an attached home. It's a split level. First, one of the big things that you can't find in Frederick County is a single family home that has an in-ground pool. So heated, in-ground pool. If you're into pools, that's a huge savings. This home has three bedrooms, two full bathrooms. The main level is all hardwood flooring. All the bedrooms, hardwood flooring. No carpet in the house at all. So if you have allergies or anything like that, that's perfect. The basement is finished and has a rec room slash family room with a corner, massive fireplace. Very, very nice looking with stone facade and LVP flooring. The laundry is on that level and there's also a den or storage area that's finished. On the bedroom level, the primary bedroom has its own primary bathroom which has been updated and the other two bedrooms have access to a full bath in the hall. Now, the main level is very, very open. You have a formal living room or you could have it as a family room with an electric fireplace. Super cool and sleek looking. That looks right into the kitchen that has double islands. Custom cabinetry. You saw some of the pictures because I sort of teased you and gave you a little bit of a hint of what was coming on. In there, they also have cafe appliances, so high-end appliances. Very, very nice and that opens up into the dining area. In addition, this one also has a two-car garage. Talk about bang for your buck. This is a lot of house.

Andy: It's so amazing. That kitchen island, like you said, it has the double island. One has the cooktop surface on it. You can look right into the den. You can watch TV while you cook. It's got double ovens and you talked about those cabinets. They're amazing. These are high-end appliances and that's just one room. This is so much house for a very nominal fee. I love this property. Everybody needs to check it out.

Jay: Oh yeah, I was going to tell you if you didn't need to be so close to the office, this could have been the one for you guys. I could see Emma lounging out, relaxing, enjoying the pool. Again, great property. If you want to check this out, we're actually having open houses this weekend, Saturday and Sunday from 1 p.m. to 3 p.m. So again, Saturday and Sunday, 1 p.m. to 3 p.m. You can go to wfre.com, look at our house of the week. If you like what you see, pop out to see us this weekend or if you're going to be in the street and you can't make it on Saturday, you can schedule a private tour just by clicking on the button. This is a beauty. I'm sure it won't last long.

Andy: I'm Andy Webb.

Jay: I'm Jay Day.

Andy: And this is Real Talk Real Estate.