Consider Your Options
Before Tapping a 401(k)

Question: I'd like to buy a home, but I don't have much cash available for a down payment and closing costs. Should I borrow the money from my 401(k) account?

-- Edwin, city not provided

Edwin: I can understand your desire to raid a retirement plan to help with the purchase of a home. Most people have their biggest source of savings in individual retirement accounts or 401(k) savings accounts. At some point or another we all think -- or wish -- we could tap into some of that money for a down payment.

But my advice is to resist the temptation. It's just not a good idea. If you borrow the money, you'll be saddled with a debt that will impact your ability to obtain and repay a mortgage. Further, if for some reason you don't repay the debt, you will face stiff penalties and be without money that you'll need during retirement.

Besides, raiding your retirement account isn't necessary in today's lending climate. Down payments of 5% are the rule for people with reasonably good credit. In some cases, mortgage brokers can arrange 100% or 103% (to cover your closing costs) financing. In addition, plummeting mortgage rates make this type of borrowing more attractive than it has been in years. Considering all these factors, it hardly makes sense to borrow from your retirement plan.

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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