Borrowing from my 401(k)
Posted on February 16, 2011
Filed Under Investments | Leave a Comment
My wife and I are buying a rental house. Instead of a mortgage, we’re borrowing the money from my 401(k) plan at work. Normally borrowing against a retirement plan is a bad idea, but in our case it makes sense. We don’t have enough money to pay cash for the house so we have to borrow it somewhere. A conventional mortgage would cost us about 5.75% (the house isn’t our primary residence and my credit is still less than wonderful) plus various fees. Borrowing from my 401(k) will cost $187 in admin fees over the life of the loan (5 years) and 5.25%. However, the interest goes back into my account so essentially I’m paying myself interest. Of course we’ll be losing the potential gain from the amount that is no longer in the 401(k) but this should be more than offset by the rent we’ll be collecting on the house. We plan on paying around $70,000 so if we net $500/month our return will be 8% – not as good as what the stock market “could” do but probably a lot safer and certainly a lot better than what CD’s are paying.
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