Should You Use a 401(k) Loan to Buy a House? Pros, Cons, and Rules

In this episode of Money Girl, host Laura Adams addresses a pressing financial dilemma faced by many first-time homebuyers: whether to take a loan from a 401(k) to fund a 20% down payment on a home. Wendy, a 29-year-old single professional with a stable job, seeks advice on using her 401(k) to buy her first home, despite knowing it's generally unwise to tap retirement funds. Laura explains the mechanics of 401(k) loans—how they work as self-loans with interest, the IRS limits (up to $50,000 or half the vested balance), repayment terms (typically five years, longer for homes), and the risks involved, including taxes and penalties if the loan isn't repaid on time or if employment ends. She outlines key pros like fast access, no credit check, and low interest rates, but emphasizes major cons: lost investment growth, non-deductible interest, and the risk of turning the loan into a taxable withdrawal. Laura also explores alternatives such as FHA loans (3.5% down), first-time homebuyer programs (3% down), and using Roth IRA funds (up to $10,000 penalty-free). She stresses that for someone as young as Wendy, leaving money invested could yield far greater long-term returns—potentially over $325,000 in 40 years at a 7% return—making the trade-off worth careful consideration. Ultimately, she advises saving more, buying a less expensive home, or exploring other options before touching retirement savings.