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Home purchase price is 366k (foreclosed home -County assessment of home is 536k)

In bank we have 52k

Considering taking $34k out of 401k to help with down payment on home purchase. Using my 401k would (a) help us have a lower house payment long term and (b) have us avoid mortgage insurance.

If we use 42k of savings +34k of 401k would = 76k down payment and we'd keep 10k in savings.

Mortgage insurance savings would be roughly $120 per month.

My 401k would require repayment within 60 months at 540 per month. I currently contribute 440 (pre tax) per month and would stop contributing and instead pay back the 401k loan. If I stopped contributing I would be taxed on the 440 so would net more like 310 so i'd need to anti up an additional 230 dollars per month to make the 401k payment of 540.

In five years I payback the 401k and begin to contribute once more.

With 401k money, mortgage payment = 1659+230 (230 for five years then after those five years payment goes to 1659 and there's no mortgage insurance)

With out 401k, payment = 1811 + 120 mortgage insurance

This all sounds a little convoluted but I think there may be some benefit in using my 401k money. It would seem that it makes sense to tap into the 401k temporarily in order to benefit longer term on this loan. Not to mention there would be good equity in the home.

Looking to do a 30 year fixed.

I need some guidance. What am I missing here?

Member Summary
Most Recent Posts
That's a different way of looking at it. But I think most people when referring to a "50% return" are talking about the... (more)

Glitch99 (Dec. 25, 2012 @ 8:18p) |

If you think it will really appraise for 150k over the sale price, take a no points no closing cost 5 year adjustable ra... (more)

henry33 (Dec. 26, 2012 @ 12:24a) |

Thanks henry33. Sounds like a reasonable plan. Regarding the equity. Had my agent pull some comps and can see recent sa... (more)

gburciaga (Dec. 26, 2012 @ 10:43a) |

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Do you forgo your company match?
what level of market returns do you expect to lose?

Have you considered the option of postponing the purchase altogether till you have 20% saved (outside of retirement accounts)?

one big sticking point - if for any reason you leave your job (voluntarily or involuntarily), your 401k loan becomes immediately due in full or is considered a withdrawal and is subject to income taxes and penalties (assuming you are under 59.5)

If you ever leave you current job for whatever reason, you will have to pay back the entire 401K loan amount immediately. You will lose company match for 5 years. You will get double taxed on the 401K loan interest. And you will lose 5 years of 401K contribution opportunity.

If you are cutting it this close, maybe you should wait.

If your employer offers 50% matching, you are forgoing a 50% risk free return.

hello everyone.

Ellory - my employer does not match 401k or contribute at all so I don't feel like i'm loosing too much. Plus if we win the bid on the foreclosure we'd be sitting on at least 150k equity or more even. The house is beautiful, 5700 square feet and neighboring houses have sold in the 480s.
uutxs- We've been considering paying 10% down payment and paying the mortgage insurance up front as a premium. a couple lenders have offered to charge us a lump sum up front to remove the mortgage insurance.. This option pays after 4 years or so.
Andri77- I've worked for my company for 14 years now. Fingers crossed they keep me another 5 years but there's no guarantee. So you're right there is a risk. I plan to pay back the 401k as I earn my commission payments at work so really I could potentially pay the 401k back sooner but am not counting on commissions I've not yet earned.

gburciaga said:   5700 square feet and neighboring houses have sold in the 480s
TX ?

Colorado, North of Denver. The 480's are other foreclosures.

1. What's the rental market like? Would you buy the house at 366k and rent it out at today's rates?
If yes, buy.
If no, maybe you're better off renting than owning.

2. Forget the 401k and 30 year fixed. Buy it with PMI and ARM, and refi into a 30 yr fixed as soon as you've owned it long enough for the new mortgage to be based on appraisal and not purchase price.

How much have you saved in the 401(k) in the last 14 years. I guess I'd be pretty positive if you are sitting on a half mill and this is just optimizing your finances vs the $34K being 50% of your retirement savings and maybe you are overspending your lifestyle. The fact that you are payment focused should concern you.

What about other risks. 401K is bankruptcy protected. ARe you at risk to be sued? Do you have trouble meeting your payments and could wind up in foreclosure? Do you really need/want that much space? Can you afford to furnish it, heat it, pay taxes and insurance on it? How is the marriage going?

Good luck.

gburciaga said:   Plus if we win the bid on the foreclosure we'd be sitting on at least 150k equity or more even. The house is beautiful, 5700 square feet and neighboring houses have sold in the 480s.
I am not an expert here but would tone down the optimism of 150k instant equity. If this were really true, you could simply take a HELOC after everything closes and pay off the 401k loan.

We aren't arguing the value of the property here, we're talking about whether or not OP should borrow from 401k to buy a house. OP: as mentioned, you lose big if you leave your job with a 401k loan on the books. You are reducing your retirment savings. Do you have the amount of money saved that you think you should at this age? If you subtract the amount of the loan, do you have the amount saved that you should at this age?

soundtechie said:   We aren't arguing the value of the property here, we're talking about whether or not OP should borrow from 401k to buy a house. OP: as mentioned, you lose big if you leave your job with a 401k loan on the books. You are reducing your retirment savings. Do you have the amount of money saved that you think you should at this age? If you subtract the amount of the loan, do you have the amount saved that you should at this age?
For a big enough reward, the risk might be worth it. If there is a 150k instant "profit" to be realized, one could argue that the risk associated with borrowing ~35k from 401k --- if that is what is takes to make this work --- is worth it.

Andri77 said:   one big sticking point - if for any reason you leave your job (voluntarily or involuntarily), your 401k loan becomes immediately due in full or is considered a withdrawal and is subject to income taxes and penalties (assuming you are under 59.5)

This wrong information seems to get posted to every thread regarding 401k loans. With a few exceptions, when you terminate employment, you will receive a coupon book. The withdrawal is booked and income taxes are only assessed if you fail to make the payments as per the coupon book and can keep making payments as per terms of your original loan.

Here is info from Fidelity for our plan.....my wife's (at another company) is almost verbatim the same:

XXXX 401(k) Savings Plan and XXXX Retirement Contribution Plan
 Within 30 days of leaving XXXX you will receive a distribution packet from Fidelity that explains each of the options available to you for your retirment accounts — 401(k) and XXXX Retirement Contribution balances.
 NOTE: There is a 30 day hold from termination dates on all Fidelity distributions.
 To initiate a distribution from your 401(k) and/or XXXX Retirement Contribution accounts, contact the Service Center at XXXXX, Monday-Friday (excluding New York Stock Exchange holidays). Representatives are available between 5:30 a.m. and 9:00 p.m. (Pacific).
 Access to your accounts does not cease upon leaving XXXX— you can still log in from anywhere, 24 hours a day at www.401k.com.
 If you have an outstanding loan at the time of termination or retirement, you will receive a coupon book which can be used to continue to make your loan repayments.
 Contact Fidelity directly at XXXXX to update your personal information and address changes.

You can't make the downpayment, have <100k total in savings/retirement, but think a 6000 sqft house is a good idea?

By taking from 401k, you're giving up tax free compounded *growth*. That's worth more than the mortgage discount is. Wait until you saved up 20% or buy a cheaper home.

just realize that the utilities alone will be over $1k a month. $120 a month for mortgage insurance is pennies.

jd2010 said:   You can't make the downpayment, have <100k total in savings/retirement, but think a 6000 sqft house is a good idea?
I think that sums it up all. OP, do you even consider future upkeep cost of your mansion and annual property tax?

Simple. If you do not have 25% of purchase price in liquid cash outside of retirement, do not buy the property. Remember once you buy the property a lot more things that will need cash. Paying for PMI is a waste of money.removing PMI will be not that easy as told in paper when you reach 78%

gburciaga said:   Plus if we win the bid on the foreclosure we'd be sitting on at least 150k equity or more even.

That's absurd. A house is only worth what someone is willing to pay for it. The only way you're getting $150k in equity is if you have a $150k down payment.

As for borrowing from your 401(k) the answer to that is always no. Thirty seconds on google will give you a laundry list of reasons that it's a bad idea. Big houses also come with bigger expenses (property taxes, maintenance, energy bills, etc etc etc). Buy a smaller house.

sensia said:   jd2010 said:   You can't make the downpayment, have <100k total in savings/retirement, but think a 6000 sqft house is a good idea?
I think that sums it up all. OP, do you even consider future upkeep cost of your mansion and annual property tax?


Not to mention the amount of furniture you will need and you better be prepared to spend entire weekends just cleaning that thing. Not sure why you would even want that much space. Take that money and buy a nice 2000 sq ft house in an elite neighborhood. Usually high end neighborhoods have nice parks, great city services, and you will be close to fine dining, good grocery stores, and nice retail. You don't want to heat up or cool down a 6000 sq ft house. Its a big waste of space unless you have 10 kids.

Having 100k in the bank would be awesome! The 52k we have currently will be a nice down payment on whatever home we purchase. The 6000 sqft house is crazy, i agree. It's about two thousand more sqft than what I was in the market for and the purchase price is 60k more than what I was looking to pay. I was feeling uncertain as to whether or not the 401k was the right move. I thought it would be worth putting it out to the public as there are always folks that can provide good feedback. We're a family of five soon to be a family of six with a dog. We have earnest money down on a short sale already but this Sprawling Ranch came on the market and I got greedy. The short sale we're waiting for is at a much better price point. I guess the real reason I thought to use the 401k is to secure a lower payment long term. I can't imagine refinancing in a few years to a lower interest rate so I thought I'd maximize our down payment up front.

Thank you everyone for the feedback. Much appreciated.




Thank you.

Wow, 5 kids. Maybe you do need the space!


Only you know the specifics of your and your partner's finances, but here are a few of the things that you will need to balance against each other in making a decision.

+If you have good credit, you could pay ~3.5% conforming for 30 years. We are going through a period of low organic inflation now, odds are that higher inflation will follow and that your mortgage payment will look small 10 years from now.
-You don't have much savings for someone who has been working 17 years. This suggests that your basic budget may be unsound; the cost of maintaining this house coud throw you over the edge.

The 401k idea would be good if you had a solid idea that you could pay it back at an accelerated rate (i.e. if you are waiting for a CD to mature, etc), but that doesn't seem to be the case here.

Can you create revenue from this house? Can you section off a portion for a roomer or for airBNB? If not, you may need to go bqck to your original planned size and price.

gburciaga said:   

Considering taking $34k out of 401k to help with down payment on home purchase. Using my 401k would (a) help us have a lower house payment long term and (b) have us avoid mortgage insurance.

If we use 42k of savings +34k of 401k would = 76k down payment and we'd keep 10k in savings.

Mortgage insurance savings would be roughly $120 per month.

My 401k would require repayment within 60 months at 540 per month. I currently contribute 440 (pre tax) per month and would stop contributing and instead pay back the 401k loan. If I stopped contributing I would be taxed on the 440 so would net more like 310 so i'd need to anti up an additional 230 dollars per month to make the 401k payment of 540.

Since you are justifying this approach using funny math, it's obviously a bad idea. $540/month for 60 months doesn't even repay the $34k borrowed, let alone the interest charges on the loan. You've clearly already decided this is what you want to do, and are using "it's just x more" and "it'll only take y time" to rationalize it as being the easy way.

unnamedone said:   If your employer offers 50% matching, you are forgoing a 50% risk free return.

People say this often, but it isn't true.

Ex. Jim makes $100,000. His 401(k) has a 50 cent on the dollar match up to 6%. His match would be worth a free $3,000.

If he has $50,000 in his 401(k) a risk free 50% return would be $25,000.
The $3000 match that he is giving up would be the equivalent of a 6% return +/- the actual investment performance.

Free money is good, but a 50% increased contribution is not the same as a 50% increased return.

BrodyInsurance said:   unnamedone said:   If your employer offers 50% matching, you are forgoing a 50% risk free return.

People say this often, but it isn't true.

Ex. Jim makes $100,000. His 401(k) has a 50 cent on the dollar match up to 6%. His match would be worth a free $3,000.

If he has $50,000 in his 401(k) a risk free 50% return would be $25,000.
The $3000 match that he is giving up would be the equivalent of a 6% return +/- the actual investment performance.

Free money is good, but a 50% increased contribution is not the same as a 50% increased return.

That's a different way of looking at it. But I think most people when referring to a "50% return" are talking about the return on that contribution, not in relation to the entire existing 401k balance. To get equal value from giving up the matching contribution, you would need to achieve a 50% return on that money,

If you think it will really appraise for 150k over the sale price, take a no points no closing cost 5 year adjustable rate mortgage, those rates are as low as 2.5% as opposed to a standard 30 year which is about 3.5%. Normally banks go by the purchase price or appraised value within the first 6 months to a year, whichever is lower, but after 6 months to a year, they will go by the appraised value. At that point you can refi to get rid of the PMI. You want to get a no closing costs mortgage because you intend to refinance soon and that typically only pushes up the rate by 1/8 or so, there's usually no pre-payment penalty. Rates would probably still be low 6 months to a year out, but if you lose your job, it would make it hard to refi. You could also take 10k out of a Roth IRA to use as the downpayment if you have one. They allow that for first time home buyers which are people who haven't bought a house in the past 5 years.

Thanks henry33. Sounds like a reasonable plan. Regarding the equity. Had my agent pull some comps and can see recent sales in neighborhood were 347 (bank owned), 484, 485, 487. So equity is more likely in the 118k range.



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