Borrowing From a 401(k) to Avoid PMI: What the Numbers Show

A buyer with 10% to put down on a home has two common routes. One is to put down the cash and pay private mortgage insurance (PMI) until the loan balance falls far enough. The other is to borrow from a 401(k), add the loan to the down payment, and reach the 20% that avoids PMI from the start. The 401(k) loan vs PMI calculator follows both routes month by month with the same total budget and compares net worth at the end of a chosen number of years.

Its defaults describe a $500,000 home, $50,000 of cash, a 30-year mortgage at 6.5%, PMI at 0.55% of the loan a year, and a $50,000 401(k) loan at 8.5% repaid over five years. The 401(k) money is assumed to earn 7% if left invested, and money taken out of the 401(k) in retirement is taxed at 22%. The comparison runs for seven years.

The default case

Without the loan, the mortgage is $450,000 and PMI costs about $206 a month. On the scheduled payments it lasts close to eight years, until the balance reaches 80% of the home’s original value and the buyer can ask for it to be removed. Over seven years it adds up to $17,325. With the loan, the mortgage is $400,000 and there is no PMI, but the 401(k) loan takes $1,026 a month for five years.

After seven years the loan route is ahead by $17,574 in net worth. The 401(k) itself ends $2,944 higher than if it had never been touched, because the loan’s 8.5% interest is paid back into the account and exceeds the 7% the money would have earned. That interest is paid with after-tax wages and taxed again on withdrawal, and the calculator charges for it.

Time changes the picture

Early on, much of the loan is still outstanding, so the 401(k) holds $31,146 less after two years. Once the loan is repaid the account recovers. The PMI saving stops growing after about eight years, when PMI would have ended anyway.

The PMI rate matters more than the market

PMI pricing varies widely with credit score and down payment, and it is the input that moves the result most.

The expected market return matters less than it might seem. At 4% the loan route is ahead by $27,075, at 7% by $17,574 and at 10% by $5,442. A higher return makes the money taken out of the 401(k) more costly, but over seven years it does not outweigh the PMI saved at the default rate.

Borrowing less than the full gap

A smaller loan that does not reach 20% still lowers the PMI, because a smaller mortgage reaches the 80% point sooner.

The cash flow

Every route in these tables assumes the household can carry the repayment. In the default case that is $1,026 a month for five years, on top of a mortgage payment of about $2,528, against PMI of about $206 a month on the other route. The calculator keeps budgets equal by investing the difference on the cheaper route, but a household that cannot actually spare the larger amount faces a different decision than the one modeled.

What happens if the job ends

The largest risk is the one the calculator leaves out. According to the IRS, if employment ends while a loan is outstanding, the plan generally reduces the account by the unpaid balance, which is called a loan offset. The offset is treated as a distribution: it is taxable unless the same amount is rolled into an IRA or another plan, and since 2018 the deadline for that rollover is the tax-return due date, including extensions, for the year of the offset. Most people who lose a job do not have tens of thousands of dollars spare to roll over, so in practice the offset is often taxed, and an additional tax can apply to people under 59½.

On the default numbers, a job ending after the first year of repayments would leave $41,619 of the loan unpaid. Taxed at 22%, that is $9,156 before any additional tax, more than half the PMI the loan was meant to save over seven years.

Plan limits and terms

• Size. A plan loan is limited to the lesser of $50,000 or the greater of $10,000 and half the vested balance, so the $50,000 in the defaults needs a vested balance of at least $100,000.
• Term. Loans are generally repaid within five years with level payments at least quarterly; plans may allow a longer term for buying a principal residence, which lowers the payment.
• PMI removal. The CFPB explains that the borrower can ask for PMI to end when the balance is scheduled to reach 80% of the original value, and that the servicer must end it automatically at 78%. The calculator uses the 80% date.

The calculator shows the comparison for any price, down payment, loan and PMI quote, along with the monthly cost of each route.

Assumptions

Figures computed on October 3, 2026 with the 401(k) loan vs PMI calculator: 30-year fixed mortgages at the same rate on both routes; PMI charged on the original loan until the scheduled balance reaches 80% of the purchase price; the 401(k) loan repaid in level monthly payments; equal monthly budgets, with the cheaper route investing the difference at the market return; loan interest charged at the withdrawal tax rate; no house price change. The job-loss example is a rough illustration, not a calculator output. Rules from the IRS page “Retirement plans FAQs regarding loans” (reviewed February 26, 2026) and the CFPB page “When can I remove private mortgage insurance (PMI) from my loan?”. Amounts are rounded to the dollar.