The Most Expensive Loan You’ll Ever Take Is the One Against Your Own Retirement

This article is for general education only and is not tax, legal, or financial advice.

A common decision point for homebuyers is not whether to invest or pay down a mortgage early — it’s a much more specific question: a 401(k) loan vs PMI.

In practical terms, buyers are asking whether it makes sense to borrow from a 401(k) or TSP to increase a down payment and avoid private mortgage insurance.

The problem is that this framing hides the real cost.

This article examines the true economic tradeoff between PMI and retirement loans, using realistic assumptions: a median-income household, a modestly priced home, and the timing of retirement borrowing in the early versus middle years of a career.

The focus here is not optimizing returns or gaming the system. It’s understanding which costs are temporary, which are permanent, and which ones compound quietly in the background.

This analysis builds directly on an earlier piece that examined investing versus paying down a mortgage at median income. If you haven’t read that article yet, it provides useful context for the assumptions used here:

Investing vs. Paying Down Your Mortgage: What Actually Matters at Median Income

Track One: The Non-Negotiable Baseline — Employer Match Comes First

Before comparing down payments, PMI, or retirement loans, one rule must be stated clearly.

Assuming the household is current on required bills and not in a crisis situation, you should always contribute enough to capture the full employer retirement match.

This is not a philosophical position. It’s math. And it is math that works regardless of market conditions, housing cycles, or interest rates.

• Household income (Year 1): $60,000
• Employee contribution: 4% ($2,400/year)
• Employer match: 50% up to 4% ($1,200/year)
• Total annual retirement contribution: $3,600

That employer match is an immediate, guaranteed return that no mortgage strategy can replicate.

In plain terms: every $1 contributed (up to the match limit) instantly becomes $1.50 before any market return.

What That Actually Becomes Over Time

Method note:
This model uses a standard growing-annuity approach with:

• 6% total contribution (employee + match)
• 3% annual salary growth
• 7% nominal investment return
• Contributions made annually at year-end (conservative assumption)

Year	Approximate Account Value
5	~$22,000
10	~$56,000
20	~$180,000
35	~$656,000
40	~$947,000

This growth occurs without increasing savings rates, without market timing, and without surplus cash.

Track Two: Using Retirement Money for a Down Payment

Borrowing from a 401(k) or TSP is often framed as “borrowing from yourself.” Mechanically, that’s true.

But economically, something very painful happens.

The loan balance is removed from market exposure during the years it is outstanding.

You repay the loan with interest—but the missed compounding during that time is permanent.

401(k) Loan vs PMI — What the Tradeoff Really Looks Like

The practical question for many buyers is straightforward:

In a 401(k) loan vs PMI decision, is it actually cheaper to borrow from a 401(k) or TSP to increase a down payment and avoid PMI?

Answering that requires looking beyond the monthly payment. A 401(k) loan vs PMI comparison is not just about cash flow — it is a comparison between a temporary insurance cost and a permanent interruption of market exposure.

The table below places a 401(k) loan vs PMI on the same footing by using a modest home purchase and realistic assumptions. It isolates which costs naturally expire and which ones permanently reduce long-term wealth by interrupting compounding.

Scenario	Cash Used	Estimated PMI	PMI Total	Lost Retirement Value (Loan in Year 5)	Lost Retirement Value (Loan in Year 20)
5% down (PMI)	$8,750	~$111/mo	~$12,700	$0	$0
10% down (PMI)	$17,500	~$105/mo	~$9,400	$0	$0
15% down (PMI)	$26,250	~$90/mo	~$5,500	$0	$0
401(k) / TSP loan	$20,000	$0	$0	~$75,000	~$15,000

Note: PMI costs shown reflect total payments until cancellation at 80% loan-to-value and do not continue for the life of the loan. These figures reflect modeled outcomes under the assumptions above. Actual results will vary by market returns, loan timing, amortization schedule, and individual retirement plan rules. The purpose here is directional comparison, not personalized projection.

The Real Cost of “Opportunity Cost”

In this example, a $20,000 retirement loan at 6% over five years results in roughly $3,000 of total interest paid back into your own account.

But under the same assumptions used throughout this article, that five-year interruption in market exposure reduces eventual retirement wealth by roughly $75,000. That leaves you about $72,000 short, even after accounting for the interest you paid yourself.

Another way to understand this is to ask what interest rate would produce the same outcome. A five-year loan of $20,000 that generated $75,000 in interest would imply an effective annual cost somewhere around 50% per year. That rate never appears on a statement, but the math shows up at retirement.

Why Timing Matters (But Doesn’t Change the Conclusion)

A retirement loan taken earlier removes dollars during the most powerful compounding years.

A retirement loan taken later removes dollars that have already completed much of their growth.

That’s why:

• A Year-5 loan is extremely expensive
• A Year-20 loan is less expensive—but still expensive compared to paying PMI
• PMI is finite in both cases

PMI ends. Lost compounding does not.

Withdrawing Funds Permanently (Versus Borrowing)

This is where the picture becomes especially bleak. If we ignore taxes (because the math is bleak enough before we even involve the taxman), that 20k withdrawal in year 5 is about $170,000 lost permanently. And taking it in year 20? That still costs you roughly $25,000–$30,000 in future retirement value.

While survival does mean that withdrawing/spending funds pre-retirement may sometimes be necessary, trying to fund a larger down payment with retirement funds just to avoid PMI does not make sense. If the decision is: we either buy this home or wait, you need to sit down and seriously consider future you (quite difficult to do) with clear assumptions. Assuming you’ll be making 5x your salary in 5-10 years is not a realistic assumption for most of us.

Order of Operations (Decision Ladder at Median Income)

Core Conclusion

Borrowing from retirement to avoid PMI often feels cheaper because the cost is invisible.

PMI is costly and frustrating—but temporary. A retirement loan doesn’t feel as painful up front, but its cost is permanent.

This is the part that often surprises people.

Borrowing $20,000 from a 401(k) or TSP to increase a down payment may feel like a small, temporary decision—especially when the loan is “paid back to yourself.” Under the same long-term assumptions used throughout this article, a repaid retirement loan taken early in a career can still reduce eventual retirement wealth by tens of thousands of dollars.

By contrast, a permanent withdrawal of that same $20,000 in the early years—money that never returns to the account—can reduce eventual retirement wealth by roughly $170,000 over a full working life.

By comparison, PMI on a modestly priced home is a finite, declining cost. It ends when equity builds or values rise. The opportunity cost of lost retirement compounding does not quietly disappear—it compounds in the opposite direction.

That is why, for most median-income households, avoiding PMI by borrowing from retirement is often far more expensive than simply paying PMI for a limited period while leaving retirement assets invested.

For most median-income households, the math is not ambiguous:

Retirement comes first. Structural housing decisions come next. Optimization comes last.

 

About Me — Doug Berry, MBA, REALTOR®

The Bow Tie Agent

I’m a REALTOR® with Better Homes & Gardens Senter, REALTORS® who focuses on helping clients understand the real-world side of homeownership—especially the decisions that affect long-term stability. With an MBA and experience as a lender with USDA Rural Development’s mortgage programs, I approach the process the same way I do with clients: clearly, calmly, and without sales pressure.

If you have questions, need help figuring out where you are in the process, or want a second set of eyes before making a move, feel free to reach out:

📧 Doug@senterrealtors.com

📞 325-338-9734

🌐 www.dougberry.realtor