Author Topic: Rob 401(k) to pay down mortgage?  (Read 4245 times)

dantownehall

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Rob 401(k) to pay down mortgage?
« on: August 27, 2014, 01:52:36 PM »
Hi,

I'm 27 and a homeowner.

I owe about $111,000@4.625% on a $151,000 home, no other debt, and I have $56,000 in my 401(k) and $91,000 in a taxable investment account.

My 401(k) plan allows us to take loans against the value in the account, and pay it back via payroll deductions over anywhere from 1 to 60 months.

The interest on the loan (4.25%) is paid directly back to the account, so when I make the loan payments I'm really just paying myself back.  I was thinking the other day that it might make sense to take some of the 401(k) capital (say, $10,000) and use it to reduce the amount I owe on the mortgage.

The way I see it, the interest I'm paying on that $10,000 (via the automatic payroll deductions) goes back into my pocket instead of the mortgage lender's.  The risk I see is that the money would earn more in the market than the 4.625% it would save me on the loan.

Any thoughts?

Franklin

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Re: Rob 401(k) to pay down mortgage?
« Reply #1 on: August 27, 2014, 02:19:54 PM »
I would advise against it for the following reasons:

1. You are already doing great for your age. 
2. You would squander the one thing I wish I had in my 401k - TIME. 
3. You would be forgoing a 7% return in your 401k.
4. If you are in the 25% tax bracket then your effective mortgage rate is only 3.47%. 
5. You would have to pay the loan back immediately if terminated. 
« Last Edit: August 27, 2014, 02:24:16 PM by Franklin »

hybrid

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Re: Rob 401(k) to pay down mortgage?
« Reply #2 on: August 27, 2014, 02:35:15 PM »
I've had similar thoughts as well at times, but yeah, Franklin has it right, leave the 401K money where it is. You may or may not get that 7% (it could be -20% or +30%, who knows?), but all the other reasons don't come with unpredictability and are all on the mark.

Cheddar Stacker

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Re: Rob 401(k) to pay down mortgage?
« Reply #3 on: August 27, 2014, 02:43:38 PM »
I've taken a 401k loan for investment purposes and I would do it again for an expected return of 7% or greater. I would not take a 401k loan to pay down a mortgage. You have a fixed, low interest inflation hedge with your mortgage. Pay it as slowly as possible, and pay yourself any excess from your budget in the form of 401k or taxable investments to earn a return higher than the 4.625%.

And yeah, you're doing awesome for your age, so keep it up.

Gone Fishing

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Re: Rob 401(k) to pay down mortgage?
« Reply #4 on: August 27, 2014, 03:12:05 PM »
You didn't really ask, but have you looked into refinancing your mortgage?  Looks like there may be some room for improvement on the rate.  You'll probably need to weigh the savings against how long you plan on living there.  When you, shop don't compare payments to figure interest savings, compare total interest. 

For example:

Current annual interest=$111,000x.0465=$5,162
Potential annual interst=$111,000x.042=$4,662

Potential annual savings=$500
Cost to refi=Varies a lot but if it is $1500, it would take you three years to recoup the expense.

Depending on how long you have been in the house, you may be able to take a shorter term, 20 or 15 years and get the rate down even more while keeping a similar payment.

I say all this because mortgage professionals are terrible about just calculating the change in payment and comparing the payback period against the payment without calculating the actual interest savings. 

Cheddar Stacker

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Re: Rob 401(k) to pay down mortgage?
« Reply #5 on: August 27, 2014, 03:31:52 PM »
You didn't really ask, but have you looked into refinancing your mortgage?  Looks like there may be some room for improvement on the rate.  You'll probably need to weigh the savings against how long you plan on living there.  When you, shop don't compare payments to figure interest savings, compare total interest. 

For example:

Current annual interest=$111,000x.0465=$5,162
Potential annual interst=$111,000x.042=$4,662

Potential annual savings=$500
Cost to refi=Varies a lot but if it is $1500, it would take you three years to recoup the expense.

Depending on how long you have been in the house, you may be able to take a shorter term, 20 or 15 years and get the rate down even more while keeping a similar payment.

I say all this because mortgage professionals are terrible about just calculating the change in payment and comparing the payback period against the payment without calculating the actual interest savings.

+1.

There is also "no-cost" refinancing available with many lenders in exchange for a slightly higher rate. I've seen 4.125% - 30 year, and 3.25% - 15 year rates lately. There is room for improvement there.

dantownehall

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Re: Rob 401(k) to pay down mortgage?
« Reply #6 on: August 27, 2014, 06:45:38 PM »
Thanks for the replies.

Following your advice, I just got a quick online quote for a refinance, and that might be a great deal for me...

Looks like I can get a 15-year loan at around 3%.  My payment would only be about $200 more than it is now, and it would be paid of in half the time!

Dicey

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Re: Rob 401(k) to pay down mortgage?
« Reply #7 on: August 27, 2014, 07:51:02 PM »
So it's too late to ask if I can be on Franklin and Cheddar's team ;-)?

Pretty good decision dantownehall, but there are advantages to a 30 year term. For ex, you could go to 30 and stuff your personal accounts to the gills. Once you've saved enough, you could pay it off, or you could retire early and do whatever the hell you want.

Cheddar Stacker

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Re: Rob 401(k) to pay down mortgage?
« Reply #8 on: August 27, 2014, 07:59:50 PM »
Agree with diane c as well.

Also diane I saw your post on the 4.5% mortgage thread. I have a mortgage amort spreadsheet to analyze mortgage terms and compare a 30 yr to a 15 yr or whatever. It roughly calculates the breakeven point of going 30 yr and investing the difference in cash flow in the market.  It's a bit ugly but I understand it. Hopefully others will get what it's trying to do.

Unfortunately I keep it at work so I don't have it now. I will post it here and/or on that other thread 2moro.

SummerLovin

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Re: Rob 401(k) to pay down mortgage?
« Reply #9 on: August 27, 2014, 08:12:07 PM »
DO NOT TOUCH the 401K! as Franklin said, you have the value of TIME if you just leave it alone. Even if you didn't add to it, you'd come out further ahead in 10yrs just by not having to start over.  (There are a FEW instances where borrowing against it makes sense, but this isn't one of them.)
You should look into refinancing, to a shorter term but without changing your payments. You can always pay extra towards the principle even with a 25 yr vs. 15 yr.  Lower mortgage payments give you more flexibility- having to pay an additional $200 is way different than having the option to do so.  Also, if you have an extra $200 to invest, put it in a Roth 401k if you don't already. Any money you put in you can take out without penalty and you'll certainly get more than 4% interest over time.
Do you currently pay PMI? I would think not, but if you are, refinancing will remove it since your LTV is lower than the required 80%. Also, if you're paying PMI, even if you didn't refinance, you could pay for an assessment of your home's value (if it increased, or you've payed down to get LTV below 80%) and they sometimes just add it to your mortgage or you could choose to pay out of pocket.
You're doing a great job, stay with it.

Cheddar Stacker

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Re: Rob 401(k) to pay down mortgage?
« Reply #10 on: August 28, 2014, 08:26:26 AM »
I posted my attachment in the other discussion I mentioned above. Here's a link if anyone cares:

http://forum.mrmoneymustache.com/ask-a-mustachian/is-your-mortgage-rate-over-4-5/msg382990/#msg382990