| Should I draw against my 401k to pay off 2nd mortgage? |
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dsm93talon
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| Should I draw against my 401k to pay off 2nd mortgage? |
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Hey everyone! hoping someone could give some advice here.
I'm 27 and have a pretty stable job that I will most likely be with for at least the next 5 years. I have a house worth about 170k, at top of the market I bought @ 210k
I used a 2nd mortgage @ 42k to avoid PMI & cover the down payment. Recently my 401k has bounced back pretty nicely and it's back up close to it's pre-recession value of 41k
I owe 40k on the 2nd mortgage
my 401k is worth about 41k right now.
I'm fighting with myself about doing this, it seems a good idea to me. I want to sell off my whole 401k, pay off the 2nd mortgage, and then immediately refi my house.
If I'm thinking about this properly, it should take care of the junk 40k that I lost, get my house back on track with the market and put some more cash flow into my budget; which I plan to use for replenishing my 401k over the next 3 years or so. I am very diciplined and know I can pull this off so long as I keep my current job which I am almost 95% certain won't be a problem.
The main thing is that the 2nd mortgage is at 9.8% and won't adjust for 3-4 years still and I want to get out of paying almost 10% interest on junk money that isn't worth anything.
Any advice would be appreciated!
yo
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Wed Sep 23, 2009 6:53 pm |
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coaster
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If there's any other way, I'd suggest the other way. The main problem is that when you take money out of a retirement plan, the most valuable thing lost is time, and that you can never replenish. 
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Thu Sep 24, 2009 12:02 am |
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oldguy
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quote:
my 401k is worth about 41k right now.
Even if you can get a hardship authorization to sell the 401k, you still pay income taxes and the 10% penalty - so you will net only about $24,000, depending on your state tax rate.
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Thu Sep 24, 2009 12:26 am |
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Nick Brian
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That's a misfortune coming for you. You are stuck in the middle from both bargains. Any direction you go it'll yield less than it's supposed to. I suggest don't think of it any more. It's already gone.
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Sat Sep 26, 2009 10:01 pm |
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Newstockslive
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Yes that's correct you would not have enough money after taxes and penalties to completely pay off your second mortgage. If you were to take a loan from your 401k the limit is 50%.
If your not having a hard time paying your mortgage then leave the 401k alone. If you work in an incentive compensation driven job like sales and your pay has been reduced due to the economy then cahs in the 401k, pay down the mortgage and refinance to lower your monthly payment.
Good luck
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Sat Sep 26, 2009 11:48 pm |
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jennquilter
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Yeah, the early withdrawal penalty is federal taxes (which varies with your tax bracket) state taxes, and a 10 percent penalty. Your employer would withhold 20% of the amount you take from the 401K account, and you would owe the rest at tax time.
I'm guessing you won't want to do this since it won't actually pay off your 40k second mortgage, but I should also mention that you can only cash out a 401K when you are 59 and 1/2 years old (in which case there is no fee, just regular taxes) or when you quit your job. If you are with your current employer, you don't even have the option to cash out.
You can get a 401K loan to pay off the second mortgage with some accounts (all 401Ks don't have this option so you'd have to check with your company to find out your options) and then you would have a much lower interest rate, and the interest you pay will go right back into the account, which is great.
However, you have to pay the loan back within 5 years, and if you don't pay it back in time it will be like you cashed out in the first place and you'll be charged all the federal and state taxes and the 10 percent penalty as I mentioned before. ALSO (this is important to your situation) you can only borrow $50,000, or 50% of the account balance, whichever is less. Meaning you can only borrow $20,000, if you have the option with your 401K plan to do this at all.
I'm guessing you won't want to do this, but thought I'd tell you some of your options anyhow.
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Sun Sep 27, 2009 1:19 am |
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dsm93talon
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what if there was no penalty?
what if I can withdrawal it as a loan and simply pay myself back?
yo
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Thu Apr 14, 2011 11:03 pm |
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oldguy
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quote:
my 401k is worth about 41k right now.
The general market (SP500 Index) has returned 20% per yr since you wrote your post 1 1/2 years ago. So your $41,000 is probably about $54,000 today, plus the contributions made by you & your employer over that year and a half.
You would have missed out on that if you had cashed out in 2009. The same thing would have happened if you had borrowed against the 401k, you would have paid maybe 5% for the loan but you would have miissed the 20% return.
Prepaying your loan doesn't change the fact that the value of the house fell by $40,000 - it is still a loss. So you would not be helping your situation - ie, your Net Worth would stay the same.
assets
house $170k
401k $41k
minus liabilities
$170k loan
$41k loan
Net worth = $1000
Or - assets
house $170k
401k $1000
minus liabilties
$170k loan
net worth = $1000
The point is - the answer is the same no matter where you move your money around.
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Fri Apr 15, 2011 12:02 am |
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coaster
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Oldguy, please check your messages.
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Fri Apr 15, 2011 5:12 am |
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coaster
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quote:
Originally posted by oldguy
The general market (SP500 Index) has returned 20% per yr since you wrote your post 1 1/2 years ago. .
I think it should be made clear this is a short-term aberration (annualized) and doesn't represent the long-term historical return.
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Fri Apr 15, 2011 5:15 am |
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dsm93talon
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ok so let me rephrase the question now that I have way more info and am better understanding of our plan; it has since changed between my original post any now.
Yes oldguy, you're correct, my 401k is now worth about 54-55k or so. I am able to draw out as a LOAN, roughly 26k with no penalty sans losing my job before paying back the loan to myself in which I will have to fully repay if that were to occur.
I have 20k in cash
putting the two together, I can completely obliterate our 2nd mortgage and be left with a 26k loan to my own 401k at 2% i believe it is. I do plan on staying @ my current position for at least another 3-5 years and yes, my job is stable and yes, I know this for sure.
I am able to repay 26k easily within a 2 year period.
The main reason for thinking about this is purely to rid myself of this mortgage of which I have no gain. My RE value dropped just a bit more than 50k so basically I'm sitting on 40k of worthless money, hence the need to rid myself of it asap. I'd rather pay myself back than a bank plus I really am trying to cut my losses in paying tons of interest on a loan which carries no actual value anymore, this 2nd mortgage is basically a 10% car loan for which I can take a tax break on, whoop de doo.
Am I making sense here or is this a bad idea?
yo
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Fri Jun 03, 2011 5:26 am |
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dsm93talon
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and to clarify on the net worth thing which we could debate in another thread if you want... I don't care one bit about what value the house brings to my net worth, I just want this mortgage gone and the cashflow from it's demise.
I've already accepted the $ as gone, I just want to move on now, and quickly... I have bigger fish to fry than this crap but I need the cashflow that's locked in the monthly payment to this junk mortgage and would rather not wait 5 years to get it if I can do it in 1 or 2 years this way.
yo
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Fri Jun 03, 2011 5:40 am |
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oldguy
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quote:
Am I making sense here or is this a bad idea?
Bad idea, all emotion driven. The fact that the loan is tied to an underwater house has nothing to do with it, it's just a loan same as any other loan.
And if you borrow from the 401k, you are taking that money out of service - it has been earning about 25%/yr for the past 24 months - what was wrong with borrowing at about 7% (your HELOC after-tax cost) and investing the borrowed money at 25%?
As for a 2% 401k loan that you think of as "paying yourself" - why not pay 15% or 20% for the 401k loan so that you will payself even more and build your 401k? Oh wait, that sounds silly doesn't it? 
Put your $20k on the HELOC principal, you will pay it down in about 2 yrs by sticking with your current payments. And if you have a paid-down car, maybe you could get a loan from a credit union for 5.5%, and add that equity to the HELOC pay down?
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Fri Jun 03, 2011 3:29 pm |
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dsm93talon
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nope that makes sense, thanks for the gut check
we drive crappy cars, trust me nobody's going to loan me money against either of them, no personal loans if I went that route I'd rather just do what you say and put my 20k to the 2nd mortgage and pay on my current schedule I've created.
the idea behind the 401k loan to finance the rest of my 2nd mortgage payoff was that it would still work the full 10-12% i've been averaging while it sits in the market simply by using it to help pay off the 2nd mortgage (@ 10%) plus the imposed 2% interest I have to pay to put the $ back into the 401k.
the whole 10% not paid is 10% saved kinda thing ya know?
yo
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Fri Jun 03, 2011 3:49 pm |
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ttammie98
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I agree with the other posters. You will have to pay a penalty to withdraw money from 401 k. It's not worth it.
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Mon Jun 06, 2011 3:54 am |
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