My wife may be losing her job and the prospects for another are rather bleak in this economy. She currently has about $150,000 in a 401k. We currently owe $52,000 on a $350,000 home with 4.5 more years at $1,125 per month. Does it make any sense to take a lump sum payout as a hardship and pay off the mortgage. The mortgage payment of $1,125 per month is $825 on principle and $300 on interest. I would be saving about $300 per month in interest for the next couple of years by paying it off. Aside from the penalty I'd be paying on the lump sum, the rest of the money is really going right back into the other pocket in equity as the debt is eliminated on the other side of the balance sheet. Anyone have advice?

Assuming our wife is under 55 years of age when she is laid off, you would have to pay the 10% early withdrawal penalty on any distribution from her 401(k). Add to this the federal and state income taxes that are owed on the distribution, and you can expect to lose about 50% of each dollar she takes out. If you don't have other savings to pull from, you could consider refinancing the mortgage - a 15 year FIXED rate mortgage on $52K would cost you about $4000/year, or $350/month. That would ease the cash flow burden on you, and give you the tax break on mortgage interest payments.