Taking a loan against a 401k...

[gorcorps]

Many people instantly hear "taking money away from retirement" and instantly go into "BAD BAD BAD!!!!" mode. Real answer is that it's situation dependent. If you need money for an emergency it's better than taking an unsecured loan from a bank or burying yourself in credit card debt. If the markets are flat or actually dropping then you aren't losing anything(or very little). The interest paid goes back to you and there may or may not be a processing fee depending on your plan.

My thought was for a small loan to pay off all CC debt at a lower rate than the CC rate. I'm not sure if it's possible or the way to go.

 

[Hugo Drax]

Hugo, I'm not sure where you are going with this?


If I take a loan against my 401k and I repay the interest to myself and we raise the price of the house by more than we put into it in repairs, how will I lose money? As for lowering the price, it's not the price that's a problem we don't think. It is a house primarily looked at by older people as a retirement home. As such, it isn't the price that is an issue, but rather doing the repairs needed to get it into good condition again. They simply don't want the hassle.

Because it does not work that way. You could have a home that you can sell for 80K cash quick to some flipper, but you decide you want to make 160K and borrow @ 1.5% interest to put in 40K in repairs for a total outlay of 120K, and the comps for your location indicate homes sold recently for 130K

you now increased your risk to earn an extra 10K. What if the next leg down occurs just as you finished getting the last repair and now comps are at 110K and no longer 130K

You need to find out what a home close to what you have but in good repair has sold for in that market within the last few months. And then do the math.


No you cannot just arbitrarily raise the price for more than what you put in repairs for into a house. There is a cap and anything above fair market value means you might end up only recovering pennies on the dollars for the recovery cost (if your lucky) You want to avoid pricing yourself out of the market by overspending on repairs/enhancements. And you also want to avoid taking on too much risk by spending enough where the profit margin is small enough to just get you right on the edge.

 

[Cuda1447]

Home equity loan - which is essentially a mortgage. It gets paid out of the proceeds of the home sale. I have no idea why anybody would consider anything else.

Can't do it, as I explained earlier, my parents would have to establish residency on that property to qualify for a heloc

 

[spidey07]

Hugo, I'm not sure where you are going with this?


If I take a loan against my 401k and I repay the interest to myself and we raise the price of the house by more than we put into it in repairs, how will I lose money? As for lowering the price, it's not the price that's a problem we don't think. It is a house primarily looked at by older people as a retirement home. As such, it isn't the price that is an issue, but rather doing the repairs needed to get it into good condition again. They simply don't want the hassle.

Cuda - I love ya man, but this has very extremely bad idea written all over it.

1) You're trying to gauge the price of the house on what you put into it. STOP THAT SHIT RIGHT NOW.
2) Have you been paying attention to housing market, your comps, and your return on investment?
3) No, fucking, NO. Stop it. Stop that line of thinking right now.

You're asking "should I take on X risk, without a snowballs chance in hell to get any return".

Stop your line of thinking right now. STOP IT.

I'm putting 10k into my previous house so it will be ready to sell AND pricing it below comps. I don't expect to get that money back.

 

[Cuda1447]

Because it does not work that way. You could have a home that you can sell for 80K cash quick to some flipper, but you decide you want to make 160K and borrow @ 1.5% interest to put in 40K in repairs for a total outlay of 120K, and the comps for your location indicate homes sold recently for 130K

you now increased your risk to earn an extra 10K. What if the next leg down occurs just as you finished getting the last repair and now comps are at 110K and no longer 130K

You need to find out what a home close to what you have but in good repair has sold for in that market within the last few months. And then do the math.


No you cannot just arbitrarily raise the price for more than what you put in repairs for into a house. There is a cap and anything above fair market value means you might end up only recovering pennies on the dollars for the recovery cost (if your lucky) You want to avoid pricing yourself out of the market by overspending on repairs/enhancements. And you also want to avoid taking on too much risk by spending enough where the profit margin is small enough to just get you right on the edge.

I understand what you're saying, but I think you missed the big picture here.


The house isn't going to sell in it's current condition. It's not a shack that needs fixing up, it's a nice house on a great piece of property in a very small city where lake front property is hard to get. The reason it is not selling is because the likely buyers don't want to be hassled with the repairs, so they are essential to making it sell.

 

[spidey07]

I understand what you're saying, but I think you missed the big picture here.


The house isn't going to sell in it's current condition. It's not a shack that needs fixing up, it's a nice house on a great piece of property in a very small city where lake front property is hard to get. The reason it is not selling is because the likely buyers don't want to be hassled with the repairs, so they are essential to making it sell.

You seem to ignore my post.

The reason it's not selling is it's priced too high for what it is. Have you not been paying attention to real estate market?

For you to do what your proposing is a monumentally stupid idea. I'm not trying to be insulting, but this idea is monumentally stupid.

 

[Phynaz]

Can't do it, as I explained earlier, my parents would have to establish residency on that property to qualify for a heloc

First, I didn't say HELOC, I said home equity loan. They aren't the same thing.

Second, I've never heard of needing residency for a HELOC either.

 

[Mike Gayner]

LOL haven't Americans learned anything about borrowing on the hope of increasing property values?

 

[Cuda1447]

LOL haven't Americans learned anything about borrowing on the hope of increasing property values?

It's doing necessary repairs to get the house to sell. And are you really saying that some home renovations cannot increase the value of a home?

 

[spidey07]

It's doing necessary repairs to get the house to sell. And are you really saying that some home renovations cannot increase the value of a home?

In this market, you're not going to get you money back.

 

[vi edit]

LOL haven't Americans learned anything about borrowing on the hope of increasing property values?

I don't think he's really looking at increasing value, rather returning what it needs to be at.

If a house needs new windows and a new roof and that's $25,000 then the house is going to get an offer worth $25,000 less. If he pays to get that done and gets a market value offer then he broke even on the deal (less any interest he has to pay back/lost on market swing).

Technically you could argue that a lower selling price with the work needed knocked off the price would actually be cheaper since he's paying less in realtor fees. But if the place isn't selling because of needed repairs then it's a moot point.

He's not looking to put $25,000(or however much) in and magically make it worth $50,000. He just wants to make it more desirable and in line with comparables.

 

[alkemyst]

If you just need straight cash a cash advance on a CC is usually the better solution.

I took out a 401k loan due to my mortgage company losing track due to transfers of my loan that I was current on my payments. I had about $40k+ on credit at <10&#37; interest from going back to college a second time and not qualifying for anything better.

Overnight my interest payment went from mid double digits to over $350 per month.

The 401k + having my wife qualify for a major line of credit was the best move. All the interest I paid for my 401k loan went back into the 401k. I was a smart choice for me.

Fortunately my personal growth choices paid off and I was able to stomp that $40k out in a year.

 

[JS80]

You can't do 401k loan unless you are still employed with the company. Let's say you have a 401k loan and you quit, you have to pay it back immediately.

 

[soulcougher73]

I think im going to side with Hugo on this one. Knock the repair price off the price of the house and wipe your hands clean of it as soon as possible. Less realtor fees and no interest paid.

 

[Cuda1447]

I don't think he's really looking at increasing value, rather returning what it needs to be at.

If a house needs new windows and a new roof and that's $25,000 then the house is going to get an offer worth $25,000 less. If he pays to get that done and gets a market value offer then he broke even on the deal (less any interest he has to pay back/lost on market swing).

Technically you could argue that a lower selling price with the work needed knocked off the price would actually be cheaper since he's paying less in realtor fees. But if the place isn't selling because of needed repairs then it's a moot point.

He's not looking to put $25,000(or however much) in and magically make it worth $50,000. He just wants to make it more desirable and in line with comparables.

Yep, that's pretty much exactly it. And perhaps I wasn't clear on my side of things and my risk.


I am going to double my money, not because the house is going to sell more, but because that was the agreement I reached with my parents to make it worth it for me to invest. We may pay 20k into the house and only sell it for 10k more than what we had it listed at and if that happens, that's fine. I'll still double my money and we get the house sold, which is the most important thing.


As for lowering the price, I understand what you guys are saying, I really do. We have looked at the comps etc... and we are definitely in the right price range currently, according to our realtor. This market is a bit different than your average market though. It's lake front property on lake huron in a small city in Michigan. Not many pieces of property sell there, because there just aren't a lot of people. It's not the home your average mom/dad and two kids will buy. It's the retirement home that 68 year old florida residents buy to go up to in the summer. Those are what all the neighbors are and those are what the people looking at it have been. The one really interested buyer is a cash buyer, price is not the issue with them. They simply don't want the hassle of doing the repairs. They want to come live in it and be done. They don't want to mess with putting on a new roof, fixing some drywall and putting in new floors (also a bit of plumbing work needed). We aren't putting money into it to make extra money, we are putting money into it to get the house into sellable condition.

 

[IceBergSLiM]

You can't do 401k loan unless you are still employed with the company. Let's say you have a 401k loan and you quit, you have to pay it back immediately.

or get hammered by the tax man.

 

[IceBergSLiM]

If its going to help you get rid of the house and the loan won't be outstanding that long I don't see the harm its not like its making you any money right now in this market.

 

[rsutoratosu]

I'm positive it's still a 401k. I haven't rolled it into a ROTH IRA or anything.

I had the same issue, I'm not an employee of my last company and when I went to check my account, it says once you take the money out, they're closing it and you have to roll it into an IRA.. What I dont know is, do I pay it back as IRA or 401k? So i never touched mine..

 

[dbk]

Im planning on doing that with through my Thrift Savings Plan... they let you take out what you've contributed (so 50&#37; of total).. interest rate @ the current government rate (1.75%, i think). I plan on paying off my car and CCs with it. I can pay it back in 5 years through my payroll deductions.

 

[HardcoreRobot]

First off, you certainly can invest while simultaneously repaying a loan. The investment part is tax deferred and the loan payment is not.

Second, the rates for my 401k are extremely cheap. I think it was 1.5% last time i read a blurb about it in a statement. Also, you are paying that interest to yourself, so its not like a regular loan where you pay a bank.

The biggest drawback is that if the investments increase in value while you have the loan, you would miss out on those increases for the loaned amount. I dont really think the market is going to increase significantly in the near future.

On the flip side, if the market drops you actually increase your holdings.


Btw, does Tapatalk always put <br>tags in replies?

not all plans allow contributions while a loan is outstanding. this is well documented. but, some plans do.

 

[Cuda1447]

Just as an update guys, I contacted TRowePrice and I cannot take a loan out against it since I am not longer with the same employer. The only option is if I rolled it over to my new employers 401k and they allowed loans, but that's not an option right now.

Thanks for all the help and input though.