You want to avoid using your 401(k) for down payment. It is basically a loan you give yourself, and you pay yourself back with interest. The money is actually removed from your 401(k) account to give to you, and you pay it back with interest with interest, all going back into your 401(k). Sounds good, except that you make no money on it while the money is gone. And you pay it back a little at a time (like any other loan), and the interest you pay over the life of the loan is not even close to the money you could have made (typically) if you left the money alone. And if you leave the company for any reason during the life of the loan, they can recall the loan, meaning you either have to pay the remaining balance, or face taxes and penalties on it, same as an early distribution.
Example - You loan yourself $5500 dollars from your 401(k), and you pay yourself back $6000 (just using as an example - the actual terms will vary). That's your money you are using to pay yourself back. The end result is the same as if you added an additional $500 of your own. But, over the life of the loan, that $5500 could have made you $1000. So in reality, you would be LOSING $500. (As I stated, these numbers are only examples, and do not represent real life figures.)
If you need the money, take a few months and save it up. If need be, suspend your 401(k) contributions for a few months, and take that money, along with any other extra you receive (tax refund, gifts, etc.), and put it into a savings account, adding more form your pay as you go. Make a budget that is tight so you can have more to put away, and stick to the budget. Before you know it, you will have the money you need for a closing.
Sounds like you have your answer - 4 of us say no. If you haven't been able to save up the money for closing costs then you aren't ready to buy a house. Borrowing from your 401k is a bad deal. Don't do it.
In my opinion, NO. You need to be able to afford both the house AND the retirement plan.
I think it's ok to stop your 401k contribution for 3-6 months tops if it allows you to have the $5500 additional cash to get into a house, but in general, you shouldn't borrow money in order to borrow more money.
If you can't afford to save money while contributing to the 401k, you are living above your means. What will you do when you need $5500 for a new furnace and then $5500 for a new roof? You need appropriate cash-flow on an ongoing basis, not just for the closing costs.
I suggest the 2 if you take part time jobs untill You have
enough money.. If that doesn't work ..
Figure out what the TOTAL 401K loss will be & then figure
the cost in interest on a loan chose the lesser of the two..
Another thing that you might want to consider....
If you leave your job, your employer may require you to pay back those funds in full, immediately, or it will be counted as a disbursement and you will be penalized and taxed on it.
BTW.....you do not pay tax on this money, the money is replaced in your account with taxed money, so you are paying taxes on it then, not when you take it out.
you might not get penalized, but you will have to pay taxes on the $5500 - how about just waiting and saving for the $5500 - do you have the down payment money also? - have you run a budget to see if you can afford all the new costs with owning ahouse?
If you don't have the money, then maybe you shouldn't buy quite yet.
