Should You Borrow from 401(K) to Pay Off Second Florida Mortgage Loan?

As potential homeowners are aware of, there are numerous ways to finance one’s Florida mortgage. For example, what about taking out a certain sum of money (e.g. $50,000) from your 401(K) in order to pay off a second home loan.

Is this ever a good idea?

On the surface, borrowing from your 401(k) seems like a win-win situation: You don’t have to qualify for the loan, the interest rate is good (usually prime or just above prime), you are paying interest back to your self rather than to a lender, and by borrowing, rather than taking an early withdrawal, you avoid the 10-percent penalty.

Sounds good, huh?

But let’s look at what the future holds. The most damaging disadvantage of borrowing from your retirement plan is the loss in future growth of your retirement fund. Borrowing dramatically affects your bottom line. For example, let’s say you borrow $50,000 that you pay back in five years with 7-percent interest.

Your 401(k) is earning 10 percent. You are eligible to retire in 20 years. Your fund will be short a net $110,673 at retirement due to the Florida mortgage loan. Run the numbers yourself on Bankrate’s “Should I borrow from my 401(k) plan” calculator.

If that’s not bad enough, let’s consider one of life’s inevitable curveballs. If your job gets eliminated, that Florida home mortgage then becomes due in full and you are unable to repay the loan, then the loss increases to $431,404 because of taxes and penalties.

Look at that figure again. Such a $50,000 loan seems a little more costly now, doesn’t it? As people are living longer and relying on retirement funds more and more, raiding funds set aside for the golden years becomes less and less wise.