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christo72 · Apr 25, 2007, 09:04 AM

We are NOT 1st time hombuyers. We are in the process of rolling over my wife's mortgage. We are considering taking out half our 401k ($15,000). This would lower our soon to be new mortgage anywhere from $50 - $100 a month.Luckyly we are in our mid 30's. I understand the 10% penalty and $20%TAX. Im not sure if borrowing would give us a too large of a repayment. OR, can you roll it into a IRA then withdrwal the money? Any info would help. Thanks,:confused:

ebaines · Apr 25, 2007, 10:32 AM

If you can afford the additional $50 - $100 per month in your mortgage payment that is much more preferable than taking money from your 401(k). The $15K that you are thinking of taking out will yield you only $10,500 (since you will owe the IRS around $4500 in taxes and penalties). That $10,500 will lower your mortgage payment by about $60/month, assuming a 7% mortgage interest rate. However, if you kept the money in the 401(k) and it earns 10% return (typical for a good mix of staocks and bonds), it would generate on average $125/month in investment growth, and in addition you'd get to deduct the extra interest payment on your mortgage, worth another $210/year or so in tax savings to you.

You can only roll a 401(k) to an IRA if you have left the company. Even then, the rules are the same - you still have the same taxes and penalties due.

christo72 · Apr 25, 2007, 12:03 PM

That is a great answer. Thanks for the quick reply. I did some number over 30 years. One being the extra $60.00 a month I would save and one being the $125.00 a month I could earn. Would I save money by taking the $15,000 (after taxes and penalties $10,500) and putting on the house? Would this reduce my grand total paid for the house over 30 years. This is such a help. Thank you.

ebaines · Apr 25, 2007, 12:25 PM

Yes, lowering the size of the mortgage will certainly reduce the total paid to the mortgage company over the life of the loan. But the money save is significantly less than the gain you would have enjoyed by leaving the money in the 401(k). Here's the math:

Option 1: you take the 401(k) money and contribute it toward the house, thus lowering your monthly payment. At 7% interest rate the $10,500 in additional principal on the house will save you $69.86/month. The amount saved over the life of the 30-year loan is $25,150. In reality few people stay in a house for 30 years, without refinancing, so take this with a grain of salt.

Option 2: you leave $15K in the 401(k) for 30 years, compounding its growth at 10%. After 30 years you will have $261,741 in your 401(k), and will have deducted $14,650 in interest payments from your income taxes.

Hope this helps.

christo72 · Apr 26, 2007, 06:09 AM

Ouch, so putting an extra $10,000 on our mortgage would save us money in the log run.

Ouch again,

Thanks for your help.

christo72 · Apr 26, 2007, 06:17 AM

Sorry, I meant WOULD NOT save us money in the long run. Im overthinking and want a house that is just a little bit out of our comfort zone. Where I live $150,000 house is worth $500,000 elsewhere. Erie PA. Thanks for the advise this is a great site.

ScottGem · Apr 26, 2007, 06:21 AM

You might consider taking the $10K as a loan against your 401K. What yhou pay back on the loan goes into your account so you are paying interest to yourself. This way you avoid the penalties and in 5 years (the usual max term on 401K loans), you still have a lower mortgage payment.

christo72 · Apr 27, 2007, 04:07 PM

When taking out a loan on your 401k its not considered a hard ship is it?

ScottGem · Apr 27, 2007, 07:59 PM

No, not at all. Since you have to pay back the loan, it's a feature of the plan. There is no penalty for taking one out. As I said, whatever interest you pay goes back into your account. So you are simply paying yourself interest.