401k Withdrawal for a house?

You get double taxed that way. You pay it back with after tax dollars, and are taxed again when you withdraw it.

Loans are paid back with before tax dollars, usually deducted from your paycheck before you even get it.
If a loan is paid back from after tax dollars, typically the plan you borrowed the money from is outside your employer plan, for example an annuity. But the loan is not considered a distribution from the plan, so the loan money you received was money that you were not taxed on. If you default on the loan, that is when the IRS considers the loan a distribution and it becomes taxable. If you then pay the loan back, the company that issued the annuity has to keep track of the payments you made after the default and they cannot tax you on that amount later.


Also I heard that you get to use mortgage payments as personal deductions against your income taxes (true or false ?)

The interest paid is deductable, and since the initial mortgage payments are mostly interest, the is more of a tax benefit for the first half of the mortgage term.