Borrow from 401k to eliminate PMI?

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I'm thinking about borrowing about $12,000 from my 401k and applying that money to my mortgage. At that point I would own about 78% of my house, allowing me to be rid of PMI. Any advice on if this would be a good idea or not is appreciated. Thanks in advance.

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Would be helpful to know how much equity you have already. Would the $12k make up the entire 22% or is it 5%, 10%, etc? It would also help to know how much your PMI is per month and how you would otherwise invest the money in your 401(k). Also, how quickly would you be able to repay the loan? Any fees for taking the 401(k) loan? Is $12k all you have in your 401(k)? Why would you take more out than it would take to get to the 20% equity required to drop PMI? How long would it take you to pay down your mortgage to a lever where you could drop PMI if you REALLY tried?

In general 401(k) loans are a very bad idea.

jones2380 said:   At that point I would own about 78% of my house,

Assuming this is a typo and you would OWE on about 78% of your house?

jones2380 said:   I'm thinking about borrowing about $12,000 from my 401k and applying that money to my mortgage. At that point I would own about 78% of my house, allowing me to be rid of PMI. Any advice on if this would be a good idea or not is appreciated. Thanks in advance.It comes down to how much the PMI will save you (net of any loan fees, plus the savings from the mortgage itself)), verses what you expect your current 401k investment to generate for a return. You need to think as an investor from the 401k's perspective - are there other preferred investments than the "guaranteed" return from investing in the mortgage.

But remember, if you leave your job, the loan is due immediately. Don't get stuck in a corner.

And also remember, your math may not be the same as the lender's math. Make sure the lender will actually remove the PMI before following through with this plan.

jones2380 said:   I'm thinking about borrowing about $12,000 from my 401k and applying that money to my mortgage. At that point I would own about 78% of my house, allowing me to be rid of PMI. Any advice on if this would be a good idea or not is appreciated. Thanks in advance.

Could be a very good idea, if the numbers add up (as someone has asked about).

Not up on the rules, but there is a 5 yr mark and possibly an appraisal involved.

Marginal interest rates associated with the elimination of PMI can be very high. It can very well make sense to get a loan to pay this off early. OP should give more numbers and we can see if this is the case here.

Currently I own about 10% of the house so borrowing the 12k of the 50k from my 401k would put me owning about 22%. PMI is fairly cheap at $50 a month, but obviously I would rather that money just went toward the principal. If I really buckeled down I think I could probably pay the mortgage down in about 4 or 5 years to get rid of the PMI. I'm also looking at refinancing but again I'd really like to avoid the PMI and switch to a 15 year fixed from my current 30 year fixed. I think if I took out the loan, refinanced to a 15 year fixed I could almost have the same monthly payment and a better intrest rate. Currently my intrest rate is 6.3% on my mortgage and my FICO is 780 so I'm sure I will be able to get a better rate. Thanks again for the responses!!!

Glitch99 said:   jones2380 said:   I'm thinking about borrowing about $12,000 from my 401k and applying that money to my mortgage. At that point I would own about 78% of my house, allowing me to be rid of PMI. Any advice on if this would be a good idea or not is appreciated. Thanks in advance.It comes down to how much the PMI will save you (net of any loan fees, plus the savings from the mortgage itself)), verses what you expect your current 401k investment to generate for a return. You need to think as an investor from the 401k's perspective - are there other preferred investments than the "guaranteed" return from investing in the mortgage.

But remember, if you leave your job, the loan is due immediately. Don't get stuck in a corner.



This may or may not be true depending on who services your 401k and what terms your employer established with them....my employer will give us a coupon book if we leave employement with them and we can continue to make payments.

"If you leave XXXX, go on leave, or are transferred to a non-US site, you may continue to make loan payments directly to Fidelity via coupon book"

cristinaaaron said:   Glitch99 said:   jones2380 said:   I'm thinking about borrowing about $12,000 from my 401k and applying that money to my mortgage. At that point I would own about 78% of my house, allowing me to be rid of PMI. Any advice on if this would be a good idea or not is appreciated. Thanks in advance.It comes down to how much the PMI will save you (net of any loan fees, plus the savings from the mortgage itself)), verses what you expect your current 401k investment to generate for a return. You need to think as an investor from the 401k's perspective - are there other preferred investments than the "guaranteed" return from investing in the mortgage.

But remember, if you leave your job, the loan is due immediately. Don't get stuck in a corner.



This may or may not be true depending on who services your 401k and what terms your employer established with them....my employer will give us a coupon book if we leave employement with them and we can continue to make payments.

"If you leave XXXX, go on leave, or are transferred to a non-US site, you may continue to make loan payments directly to Fidelity via coupon book"
After 60 days, the loan is considered a distribution and subject to taxes and early withdrawal penalties. It doesnt matter who services the 401k nor what terms your employer has with anyone.

Glitch99 said:   cristinaaaron said:   Glitch99 said:   jones2380 said:   I'm thinking about borrowing about $12,000 from my 401k and applying that money to my mortgage. At that point I would own about 78% of my house, allowing me to be rid of PMI. Any advice on if this would be a good idea or not is appreciated. Thanks in advance.It comes down to how much the PMI will save you (net of any loan fees, plus the savings from the mortgage itself)), verses what you expect your current 401k investment to generate for a return. You need to think as an investor from the 401k's perspective - are there other preferred investments than the "guaranteed" return from investing in the mortgage.

But remember, if you leave your job, the loan is due immediately. Don't get stuck in a corner.



This may or may not be true depending on who services your 401k and what terms your employer established with them....my employer will give us a coupon book if we leave employement with them and we can continue to make payments.

"If you leave XXXX, go on leave, or are transferred to a non-US site, you may continue to make loan payments directly to Fidelity via coupon book"
After 60 days, the loan is considered a distribution and subject to taxes and early withdrawal penalties. It doesnt matter who services the 401k nor what terms your employer has with anyone.


That's not true....it is up to terms negotiated by your employer with the 401k servicer (basically whether your employer is willing to continue to absorb additional servicing costs for an ex-employee.....many employers want you off their plan after you leave and allowing this benefit is contrary to that goal). Several companies do require that loans are repaid within 60 days, but many do not. As long as you are not in default of repayment, it is not considered a distribution. I have a former co-worker friend who left 2 years back and is still paying a 401k loan he took out with my present company without incurring penalty.

http://www.investmentnews.com/article/20101031/REG/310319976
"The client's first step should be to find out if he or she can continue repaying the loan. For example, if a severance package keeps the client on the payroll for a while, he or she still can make payroll deduction payments. Even absent such an arrangement, some plans will, on request, give a departing worker a coupon book for remaining installment payments of the 401(k) loan and accept a series of personal checks. If that's impossible, the client must decide whether it makes more financial sense to repay the loan or to pay the tax. "

Here's an old businessweek article which discusses this briefly:
http://www.businessweek.com/1996/35/b3490120.htm

Here's another:
http://genxfinance.com/the-401k-loan-how-to-borrow-money-from-yo...

Here's same situation from HP 401k plan (not my employer):
http://www.hpalumnipedia.com/wiki/Leaving:_Rollovers:_401%28k%29

Okay So I took out the loan and started the refi process it looks like I'm going to save a ton of money!!!It's early yet, but basically I'm going from a 30y fixed to a 15y fixed I have to pay back about $250 a month to my 401k and my morgtage payment will drop about $200 a month. I couldn't believe I was going to knock off 10 years of my loan and walk away with a lower monthly payment! It's somewhat difficult to fig exactly how much I'm going to save (because of no PMI) but with the refi and if I only make min. payments vs whats left on my current morgtage w/ only min. payments it's about $75K!!! The Refi was thru M&I @ 3.25% I don't have an exact number on closing costs yet but she said to plan on between $1500-$1800! Thanks again everyone for your posts!!!

jones2380 said:   Okay So I took out the loan and started the refi process it looks like I'm going to save a ton of money!!!It's early yet, but basically I'm going from a 30y fixed to a 15y fixed I have to pay back about $250 a month to my 401k and my morgtage payment will drop about $200 a month. I couldn't believe I was going to knock off 10 years of my loan and walk away with a lower monthly payment! It's somewhat difficult to fig exactly how much I'm going to save (because of no PMI) but with the refi and if I only make min. payments vs whats left on my current morgtage w/ only min. payments it's about $75K!!! The Refi was thru M&I @ 3.25% I don't have an exact number on closing costs yet but she said to plan on between $1500-$1800! Thanks again everyone for your posts!!!
Note that a major part of your savings possibly is due to the lower interest rate due to refi. What was your rate on the original 30 year mortgage? Also, the $250 payment to 401k may not be for the full 15 years.

Have PMI rules changed in a last couple years? I canceled my PMI with the minimum which was only 80%, not 78%. Also it took about 3 months total from making the first phone call to the bank after reaching 80% to start the process to the PMI finally dropping off. If you're refiing this may not be an issue though.

elist said:   Have PMI rules changed in a last couple years? I canceled my PMI with the minimum which was only 80%, not 78%. Also it took about 3 months total from making the first phone call to the bank after reaching 80% to start the process to the PMI finally dropping off. If you're refiing this may not be an issue though.

At 80% you can request PMI be dropped. At 78%, they are required to drop it. I think.

double post... sorry...

triple post... sorry... mod plz delete

You can refinance with 85% LTV and no PMI (4.25-4.375% 30year fixed). This will be a much better option IMHO. Borrowing from your 401K can be a pain to pay back if you have to leave the company. Just my $.02

Why not stop making 401(k) contributions and send all extra to your mortgage? Or just contribute up to the match?

0% balance transfer if you have that available. Even at the 3% fee for a year this would be worthwhile.



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