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90% of people who are looking to buy their first home are not doing something that might be a good option when mortgage interest rates are on the rise.

Now Imagine you want to buy your first home, have a good job, and have been adding money to your 401K plan but just do not have enough money for a down payment for a home. I am going to talk you through the options that you may have by utilizing your 401K funds as a down payment and paying yourself back at the same time.

Hi, I’m John Herman of PropertyUp and I help buyers and sellers in the Northwest Suburbs of Chicago, I am not a financial advisor, I am only providing information to you so please verify any information with your Administrator of your 401K

According to Bankrate.com Right now only about 10% of Americans have used their 401K or IRA’s in order to make a down payment on their first home,

Now typically if you withdraw money out of your account prior to age 59.5 you have to pay ordinary income tax and a 10% early withdrawal penalty on the distribution HOWEVER There are a few exceptions and one of them is the “first time homebuyer” exception. If you are purchasing your first home, you are allowed to withdraw up to $10,000 from your 401K or IRA and avoid the 10% early withdrawal penalty. The good news is if you are married you can each withdraw $10,000 from your separate accounts without paying the penalty of $20,000 total. Let’s say you have only $10,000 in your 401k, as of this date you can use the entire amount as a downpayment! By the way, the good news is that doing this has zero impact on your credit score. Also, remember you will be making extra payments to pay back the $10,000 withdrawal to yourself along with your new mortgage

For you parents out there, another great and much lesser know known option is you can help your kids buy a house the same way. You do not have to be a homebuyer. You can qualify for the early withdrawal exemption if you are helping your spouse, child, grandchild, or parent to buy their first house.

If you do not have a 401K yet here is a general example of the benefits: Say you are a 25-year-old who earns $50,000 a year and you add 10 percent annually in a traditional 401(k), you would amass a balance of about $537,000 at retirement which would provide roughly $2,650 in monthly retirement income. So just set it and forget it!

Getting back to the loan options, There is also a $50,000 max that you can pull from your 401K plan, and sometimes you can have the loan extended to match your 30-year mortgage, however both with the $10,000 loan and the maximum $50,000 loan you will be missing out on the all-important compounding interest benefits, so be aware of that!

Payments for the 401K loan will come directly out of your paycheck automatically via payroll deduction from your employer.

It’s also worth noting that if you leave your job or are let go, you will have to pay your 401(k) loan back within about 60 days. Otherwise, it’s considered a distribution, which triggers income taxes and possibly an additional 10% tax penalty on the loan balance

There may be loan or withdrawal options available through your employer-sponsored retirement plan. I specifically say “may” because each company’s retirement plan is different.

Thanks again for watching my name is John Herman of Property Up and I hope you found this educational and helpful please like and subscribe and remember we here at property Up are here to serve you – make it a great day!

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