Need financial advice 401k, IRA, home purchase)

[rcpratt]

everyone, stop with the "don't touch the 401k" BS. You guys don't understand that it's standard to borrow from a 401k to buy a house.

Standard? Do you have a source for that? I know a lot more people that didn't borrow from their 401k to buy a house than did.

taking a loan from a 401k is perfectly legit and reasonable. Yes, it is a loan, yes, you will pay interest. but you are paying interest to YOURSELF. The system is built so that the interest paid on the loan should be somewhat similar to the value accrued if the 401k was not touched. There are no penalties as long as you stick with the repayment plan (which Rage187 will do.)

I don't think anybody said it's illegitimate, although it is possibly unreasonable. Interest rates would have to be massive (they aren't) for the interest paid back (to yourself) to be equal to the average market gains on that same value over the same amount of time.

Furthermore, one could conclude that someone who (1) already has a 401k loan outstanding, (2) is considering an additional 401k loan or withdrawal, and (3) signed a contract for a new home without having the cash on hand for a down payment is clearly living beyond their means. This kind of thing is exactly why lenders are an order of magnitude more sensitive than they used to be to the origin of all large recent deposits into the pile of money that is set aside for the down payment.

 

[jaedaliu]

Standard? Do you have a source for that? I know a lot more people that didn't borrow from their 401k to buy a house than did.


I don't think anybody said it's illegitimate, although it is possibly unreasonable. Interest rates would have to be massive (they aren't) for the interest paid back (to yourself) to be equal to the average market gains on that same value over the same amount of time.

Furthermore, one could conclude that someone who (1) already has a 401k loan outstanding, (2) is considering an additional 401k loan or withdrawal, and (3) signed a contract for a new home without having the cash on hand for a down payment is clearly living beyond their means.

Wow, we disagree on a lot of things, like the definition of the word "standard." To me, a standard downpayment is 20% or more. but I would venture that more than half the people in the US over the last 10 years have had a downpayment much lower than that. So by your definition, 20% or more is not standard. I guess we can both agree that "acceptable" could have been used in its place?

I would also argue that the lost interest (which may actually be gained interest in the repayment period of the loan against the 401k) can be recuperated on the home equity over time. Now, if it's the permanent family home and never sold through retirement without a HELOC taken out for retirement expenses nor a reverse mortgage, he will never be able to use that lost interest in retirement. But in that case, he didn't miss the lost interest, so he'll be okay.

The issue here is timing. It appears that he's trying to live beyond his means. I feel that he's stretching himself too thin in an attempt to purchase a new place before house prices make his desired house unobtainable. To me the 401k loan seems like a good way to bridge the gap.

 

[alkemyst]

It's sad so many are assuming one is living beyond their means in this topic when a mortgage loan was created because of financing a home was about living beyond your means.

 

[Rage187]

Have you gone through the pre-approval process for the next place yet? If you haven't got a hard offer on your current one you may find that securing financing on the future one is quite difficult. You may have to be approved on the mortgage burden of both places.

we are approved. We also got approved from a preferred lender to take advantage of $4000 in closing costs. Interest rate is 4%, 4.1 ish actual. PMI but not LPMI.

I'm 36 for those asking. I'd move even closer to work, but I work on an island and properties in the area are $400,000 vs. $250,000 where we are looking. Plus, we are going to be 4 miles from our in laws and they watch both our kids during the day. We are moving much closer to my wife's job.

 

[ViviTheMage]

Nice, an island ...go buy that

 

[rcpratt]

It's sad so many are assuming one is living beyond their means in this topic when a mortgage loan was created because of financing a home was about living beyond your means.

Does anybody know what this means?

 

[Vdubchaos]

everyone, stop with the "don't touch the 401k" BS. You guys don't understand that it's standard to borrow from a 401k to buy a house.

taking a loan from a 401k is perfectly legit and reasonable. Yes, it is a loan, yes, you will pay interest. but you are paying interest to YOURSELF. The system is built so that the interest paid on the loan should be somewhat similar to the value accrued if the 401k was not touched. There are no penalties as long as you stick with the repayment plan (which Rage187 will do.)

Blackjack's answer is correct. Call your 401k servicers and figure out how to proceed.

And to taking out a 0% balance transfer, there's typically a ?3%? fee associated so he'll lose money.

401k loan is even dumber to take out than Equity loan....

 

[Drako]

Does anybody know what this means?

I think it means that you should ignore any financial advice Alky gives.

 

[alkemyst]

401k loan is even dumber to take out than Equity loan....

an equity loan is sometimes the only option for major medical or home repairs.

Also for home improvements it could add more equity later on.

Saying a equity loan is a dumb move almost is like saying just having a mortgage is dumb.

 

[alkemyst]

I think it means that you should ignore any financial advice Alky gives.

I'd say it means someone living in Detroit has no clue.

 

[Drako]

I'd say it means someone living in Detroit has no clue.

Ah, I did not know that you lived in Detroit.

 

[onza]

R u still monster?

 

[alkemyst]

Ah, I did not know that you lived in Detroit.

If I lived in Detroit, my M3 would generate more property tax burden than most homes there.

The fact is that most people do not have the traditional 20% downpayment anymore. What's funny is how many critics to this are renters and/or living with their parents still.

Outside of that downpayment, new programs allow one to get by with 3-5% down typically with value limitations on that property.

Borrowing against a 401K is a smart move for a first time home purchase if you don't have the needed funds and why the government allows it. Those speaking about 0% balance transfers seem to not realize they carry a 3% penalty and if one doesn't pay them off in time are usually subject to a high interest rate.

Of course here, I am sure EVERYONE's 401K's are yielding 10% or more, but a 401K loan allows you to pay yourself back at 4% so isn't the end of one's investment...

All that said the home mortgage was a creation allowing one to live outside their means now in order to live within them later (at retirement).

 

[shadow9d9]

80k is an awfully low amount to have for retirement for two people to have total at age 36... this is a bad idea...

 

[alkemyst]

80k is an awfully low amount to have for retirement for two people to have total at age 36... this is a bad idea...

most people at 36 still have zero for retirement.

 

[alkemyst]

R u still monster?

yes, mouse.

 

[shadow9d9]

most people at 36 still have zero for retirement.

And they will never retire either. What is your point? It is not a responsible or financially sound decision.

 

[alkemyst]

And they will never retire either. What is your point? It is not a responsible or financially sound decision.

Most won't have $80k by retirement, but they will need a place to live. Ending up with just insurance and property taxes on a place is a sound decision for many.

 

[shadow9d9]

Most won't have $80k by retirement, but they will need a place to live. Ending up with just insurance and property taxes on a place is a sound decision for many.

You think a 36 year old is likely to stay in the same place through retirement? It isn't just property and insurance... it is a ton of upkeep and unexpected expenses.

Besides, 'retirement age' doesn't mean much if he never retires...(which is what it is looking like!).

 

[rcpratt]

Most won't have $80k by retirement, but they will need a place to live. Ending up with just insurance and property taxes on a place is a sound decision for many.

Many won't have $80k by retirement - so just fuck it, don't even bother.

 

[alkemyst]

You think a 36 year old is likely to stay in the same place through retirement? It isn't just property and insurance... it is a ton of upkeep and unexpected expenses.

Besides, 'retirement age' doesn't mean much if he never retires...(which is what it is looking like!).

You retain your equity. It ends up being cheaper than renting if you do it right and not try to upgrade to the biggest McMansion every 5-7 years.

You are trying to be tongue-in-cheek elitist or simply are clueless.

 

[Exterous]

taking a loan from a 401k is perfectly legit and reasonable. Yes, it is a loan, yes, you will pay interest. but you are paying interest to YOURSELF. The system is built so that the interest paid on the loan should be somewhat similar to the value accrued if the 401k was not touched.

Legit? Yes. Reasonable? Questionable. The interest is only 'somewhat similar' in a certain situations and 'nowhere near similar' in many others. The interest rate is usually Prime + 1 or 2. If he had done this last year that would have been ~3.5 to 4.5%. VTSMX returned 27.66% in the last year. If you think 4.5% is 'somewhat similar' to 27.66% then I have a bridge to sell you.

I would also argue that the lost interest (which may actually be gained interest in the repayment period of the loan against the 401k) can be recuperated on the home equity over time.

Based on what? Certainly not recent trends. If we look at the stock market and compare it to the housing market we see that gains in the stock market have massively outpaced gains in the housing market or what he could gain in equity. You could suggest that it might be possible but thats it

It appears that he's trying to live beyond his means. I feel that he's stretching himself too thin in an attempt to purchase a new place before house prices make his desired house unobtainable. To me the 401k loan seems like a good way to bridge the gap.

My general suggestion for those trying to live beyond their means is not to take money from retirement savings but to reign in spending to within their means - esp if they have a history of tapping their retirement for loans that return less than they would have made if they had kept the money in there

 

[s0me0nesmind1]

OP: You're a complete dumbass and you have no clue what you are doing.

Money comes out of your 401k for one reason and one reason only: Life or death. Getting a new home is not one of those. Regardless of it being a LOAN, if you have to take a LOAN in order to make a down payment for ANOTHER LOAN (Mortgage) - you're the reason housing bubbles exist. Go get half a brain in Finance before you ask such retarded questions.

edit: Ever wonder why pawn shops are big business? Hint: It's not because people return for their item....

 

[NoCreativity]

My general suggestion for those trying to live beyond their means is not to take money from retirement savings but to reign in spending to within their means - esp if they have a history of tapping their retirement for loans that return less than they would have made if they had kept the money in there

The problem is that it's not just a black and white rule like many make it out to be. In an ideal situation you put down 20% cash that you have saved up in the bank without touching your retirement savings. I Agree with that theory. But I also think there are certain non-ideal situations where borrowing from a 401K makes some sense.

As for the OP, I don't know if he is living beyond means or not but already having a loan against his 401K isn't a good sign. Sounds like there are no other assests to tap either. IMO he should not be trying to borrow even more of his retirement account.

 

[Exterous]

The problem is that it's not just a black and white rule like many make it out to be. In an ideal situation you put down 20% cash that you have saved up in the bank without touching your retirement savings. I Agree with that theory. But I also think there are certain non-ideal situations where borrowing from a 401K makes some sense.

As for the OP, I don't know if he is living beyond means or not but already having a loan against his 401K isn't a good sign. Sounds like there are no other assests to tap either. IMO he should not be trying to borrow even more of his retirement account.

I completely agree that it is not always black and white and I can think of a couple of situations where it would make sense but I also agree that this doesn't sound like one of them