401(k) vs. Homeownership: Who Wins the Money Race?

Picture this: two friends, Alex and Jamie, both with $50,000 in their 401(k)s. Alex decides to stay a renter and keep their 401(k) invested, while Jamie borrows $25,000 from their 401(k) to buy a home. Fast forward 20 years—who’s got more cash in the long run? Let’s break it down with some fun, real-world math and see who comes out on top!

The Setup: Alex the Renter vs. Jamie the Homeowner

  • Alex (Renter): Keeps their $50,000 in their 401(k), invested in a mix of stocks and bonds with an average annual return of 7% (a reasonable estimate based on historical market performance). They pay $1,500/month in rent, which increases 3% annually (typical for urban markets).

  • Jamie (Homeowner): Borrows $25,000 from their 401(k) for a down payment on a $300,000 home with a 30-year mortgage at 6% interest. Their monthly mortgage payment is about $1,800 (including taxes and insurance), and they repay the 401(k) loan over 5 years at 5% interest. Their home appreciates at 4% annually (based on long-term U.S. housing trends).

The Math: 20 Years Later

Let’s crunch the numbers (don’t worry, we’ll keep it simple):

  • Alex’s 401(k): With a 7% annual return, their $50,000 grows to about $193,484 after 20 years (assuming compound interest). But, Alex paid about $453,600 in rent over 20 years ($1,500/month with 3% annual increases). Their net financial gain is just their 401(k) balance: $193,484. No equity, no property—just a landlord who’s probably buying a yacht.

  • Jamie’s 401(k) and Home: Jamie’s $25,000 401(k) loan is repaid in 5 years, with interest going back to their account. Their remaining $25,000 in the 401(k) grows at 7% to about $96,742 after 20 years. Their home, originally $300,000, appreciates at 4% annually to $657,338. After paying off the mortgage (about $432,000 in total payments over 20 years), Jamie’s home equity is $657,338 - $100,000 remaining mortgage = $557,338. Total net worth (401(k) + home equity): $96,742 + $557,338 = $654,080.

The Winner: Jamie, Hands Down!

Jamie’s net worth ($654,080) blows Alex’s ($193,484) out of the water—by over $460,000! Why? Homeownership builds equity through appreciation and mortgage paydown, while rent just vanishes. Even though Jamie’s 401(k) took a hit from the loan, the home’s growth more than made up for it. Plus, Jamie’s living in their own space, free from rent hikes and landlord rules.

What About the Risks?

  • Alex’s Risk: Renting means no equity and no control over housing costs. If rent spikes or the market tanks, Alex’s 401(k) might not grow as expected.

  • Jamie’s Risk: Homeownership comes with maintenance costs (about 1-2% of home value annually) and market fluctuations. But historically, homes appreciate over time, and Jamie’s 401(k) loan was repaid, minimizing long-term damage.

The Big Picture

This isn’t just about numbers—it’s about lifestyle. Jamie’s building wealth and stability, while Alex’s stuck in the rent cycle. Borrowing from your 401(k) to buy a home can pay off big if you’re strategic and stable in your career.

Ready to Be Like Jamie?

Want to build wealth like Jamie instead of throwing money at rent like Alex? Our team at [Your Mortgage Company Name] can help you figure out if a 401(k) loan or another mortgage option is your ticket to homeownership. Reach out today—call (909) 944 - 8800 or visit https://www.tbdgmortgagefirm.com/ for a free consultation.

Let’s get you into a home that grows your wealth and your happiness!

Robert Olivas