Avoiding mortgage insurance by using your 401K? Do the math first.
It’s not a sin to pull money from your 401K, but whether you decide to put down more cash to avoid mortgage insurance is entirely up to you. Here’s some information to help you decide.
When lenders consider risk on a loan, the loan-to-value ratio is one of the factors they evaluate. A loan for more than 80% of the property’s value presents a greater risk in their view. To manage that risk, they require mortgage insurance which is usually paid monthly and added to the payment.
Many 401K administrators offer programs where an employed borrower can borrower against their 401K, many times at very low interest rates. And the best thing about the loan, is you repay yourself and the balance of your 401K is never touched. Keep in mind that underwriting may count the repayment amount in your debts when qualifying.
The decision to use 401K funds should be based on the total cost of your 401K loan vs. the cost of borrowing more money, and potentially paying mortgage insurance. You should keep in mind that mortgage insurance on a Conventional can be temporary. Once you can prove to the lender that your loan is 80% of the property’s market value, they’ll allow you to drop it.
One other thing to consider is that even though most 401K loans have a 15-year term, nothing is stopping you from paying it off faster. Nothing that is, except human nature. The fees for the loan may be the deciding factor for you. Bottom line, this is something to take up with your licensed lender and real estate professional. Be sure you have written details about the 401K loan with you when discussing it with them.