There are some “gotchas” when you borrow from a 401(k) to purchase a home which could raise your total loan costs to a figure much higher than what you borrow.
During the period your 401(k) loan is outstanding, you’re typically prevented from making full contributions to your existing retirement plan. This means that you could forgo up to 5 years of retirement fund contributions, which could make a significant impact on you later in life.
If your employer is one that matches 401(k) contributions, you miss out on those contributions to your retirement plan as well.
The biggest risk to borrowing against your 401(k) is the one of unforeseen circumstances. should you borrow against your 401(k) and then leave the company for any reason — including being let go — you will have just 60 days to repay the entire remaining balance of your 401(k) loan. If you’re unable to make that repayment, the remaining balance is considered a taxable withdrawal and is, therefore, subject to a 10% tax.
When you borrow from a 401(k) to purchase a home, then, one of the only ways to “beat the market” is to keep your job through the period of the loan, and hope that the stock market loses massive value throughout the 5-year term of your loan. Borrowing from a 401(k) loan is a legitimate long-term risk.