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Does it make sense to use a 401k loan as a downpayment on land that you intend to build a house on?

I am currently in one house, however, I do not have much cash to make a downpayment on land that I'd like to buy to put a house on in the future.

I am sort of skeptical about where the market is anyway, these days, so I was thinking of taking some of the money from old 401k's out as a loan and getting that money out of the market, and into something I consider more stable (and in fact, appreciating in value) in the land.

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    Why are you so sceptical? Have you taken a look at SP500 chart from 2009 till today? More than 100% growth since March 2009. – littleadv Sep 12 '12 at 19:20
  • Yes, but looking back further than that, pre all the QE that went on, we're just now back to 2006 levels. – Derek Sep 12 '12 at 19:22
  • Why stop at 2006? We're now 100% above the 2002 levels. Just 10 years. Doubt land appreciates that much, even if it is less volatile. – littleadv Sep 12 '12 at 19:24
  • Right, but I don't think we're factoring in that I want the land now, while rates on the financed portion are ridiculously low. – Derek Sep 12 '12 at 19:26
  • So the point is that you: 1. Want the land, 2. Want to utilize the low rates on mortgages. Both points have nothing to do with the stock market performance:) Just wanted to clarify. – littleadv Sep 12 '12 at 19:27
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It's generally considered a bad idea to take a loan from your 401k, for the following reasons:

  1. You don't earn returns while the money is out

  2. You pay the loan back with after-tax money

  3. If you lose your job, you have to pay the money back within 60 days or get hit with a 10% fine by the IRS

It's only considered a good idea for emergencies or where you need the money to pay off high interest rate debt like credit cards. Consider the stability of your employment, the expected rate of return and explore other avenues for funds Source: MSN Money

  • I agree with most of what MSN Money provided. Personally, I would only cash out a 401(k) to stop a foreclosure or bankruptcy. Credit cards are unsecured anyway. It's not as if they will come and take all of the stuff you charged on it; but they WILL take your house. – Waddler Jan 3 '13 at 17:49

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