Skimming a little off top of 401(k) to pay off mortgage...?
- Thread starter mrsilv04
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I did that after I had refinanced my home when the interest rates dropped below 3%. I had to pay taxes on the money that was withdrawn as it was considered income. But here in Sou. Cal. home prices were appreciating faster than the stock market and with much less risk of a sudden "correction" , so it turned out to have been a wise choice. The amount that I had to pay in income tax was offset within just a few months in home prices gain and by the end of about a year the gain was about equal to the amount that I withdrew to pay off the mortgage balance.
Run some numbers and see what makes sense for you.
Run some numbers and see what makes sense for you.
Your house would have gained in value whether or not you paid off the mortgage.
You don't realize those gains until you sell the house.
If you were going to sell the house, why pay off the mortgage? It will get paid off when the house is sold.
Paid off house is overrated. You still pay taxes, insurance, utilities, repairs, all that. Principal and Interest payment really isn't that big. I would do the opposite and lever the house up and invest. Lets say you get a new loan for 130k, thats only 530 a month and could let you invest 100k.
100k in quality dividend paying stocks and utilizing a covered call strategy could net you pretty good gains, 10-30%. Just buy 100 shares of a good stable company on a red day, then when its up again, sell a call option for 10-15% more than you bought the stock for. Spread the money across 10-15 companies, 100 share blocks at a time. You can get the dividends and the call premiums. Let's pretend you did this well and took out 20% from the call premiums and dividends only. Thats $1666/month. Now your paying every bill your house creates.
-not a financial advisor and what i'm talking about is risky blah blah blah
100k in quality dividend paying stocks and utilizing a covered call strategy could net you pretty good gains, 10-30%. Just buy 100 shares of a good stable company on a red day, then when its up again, sell a call option for 10-15% more than you bought the stock for. Spread the money across 10-15 companies, 100 share blocks at a time. You can get the dividends and the call premiums. Let's pretend you did this well and took out 20% from the call premiums and dividends only. Thats $1666/month. Now your paying every bill your house creates.
-not a financial advisor and what i'm talking about is risky blah blah blah
$29K that could be invested (or lost) in the 401(k) as well as the hit you take for when it gets taxed and IRS penalty for early withdrawal (around 10%)... so that $29K for the principal means you need to withdraw more than $29k.
Vs. $29K on the mortgage.
Details on the mortgage? How many years are you into your mortgage vs length? This will determine how much interest you avoid. If you're in the tail end of the mortgage, you're not paying that much in interest, as you're paying mostly to entirely principal (if I recall properly)
Back to your 401(k). Are you maxed out on your contributions? If no, then you can take what would have been the mortgage principal+interest payment and put it back into your 401(k) to max out your contributions.
So, it's a complicated answer, that basically nets a loss in the 401(k) because you need to withdraw more than the $29k mortgage principal due to taxes and penalties to get to the $29K mortgage principal you want to pay off.
Vs. $29K on the mortgage.
Details on the mortgage? How many years are you into your mortgage vs length? This will determine how much interest you avoid. If you're in the tail end of the mortgage, you're not paying that much in interest, as you're paying mostly to entirely principal (if I recall properly)
Back to your 401(k). Are you maxed out on your contributions? If no, then you can take what would have been the mortgage principal+interest payment and put it back into your 401(k) to max out your contributions.
So, it's a complicated answer, that basically nets a loss in the 401(k) because you need to withdraw more than the $29k mortgage principal due to taxes and penalties to get to the $29K mortgage principal you want to pay off.
Example of the covered call strategy:
1. Buy on Red Day,like today. Example Stock UWMC, they are a giant mortgage wholesaler and make good $$$ off the gov't backed loans. 5% dividend yield, 10 cents per quarter, todays price is like $7.70.
100 Shares = $770 or so. Now you can sell 1 call option. This stock only has a monthly option. May 21st $9 Strike trading for 25-30 cents. This means they are paying you 25 cents for the right to pay you $9 for a stock you bought today for $7.70. If it sells your shares you made $1.30 plus 25 cents. It will most likely just expire and you can sell a similar option next month.
Your $770 spent would give you back $25 from call premium, and if the shares sell, you'd get 100x9.00 = $900 and the $25. If the shares sell you would have to place this money in something else at that time.
10 cents every 3 months from dividend and 10-20-30 cents every month from calls is possible. So if you got a call premium equal to or greater than the quarterly dividend each month, your 5% return becomes 20% or more.
25-30 cents is the premium Today, a red day, you want to wait till a green day to sell the call. Maybe UWMC goes up to $8 tomorrow and maybe that call option trades for 30-35 cents instead.
1. Buy on Red Day,like today. Example Stock UWMC, they are a giant mortgage wholesaler and make good $$$ off the gov't backed loans. 5% dividend yield, 10 cents per quarter, todays price is like $7.70.
100 Shares = $770 or so. Now you can sell 1 call option. This stock only has a monthly option. May 21st $9 Strike trading for 25-30 cents. This means they are paying you 25 cents for the right to pay you $9 for a stock you bought today for $7.70. If it sells your shares you made $1.30 plus 25 cents. It will most likely just expire and you can sell a similar option next month.
Your $770 spent would give you back $25 from call premium, and if the shares sell, you'd get 100x9.00 = $900 and the $25. If the shares sell you would have to place this money in something else at that time.
10 cents every 3 months from dividend and 10-20-30 cents every month from calls is possible. So if you got a call premium equal to or greater than the quarterly dividend each month, your 5% return becomes 20% or more.
25-30 cents is the premium Today, a red day, you want to wait till a green day to sell the call. Maybe UWMC goes up to $8 tomorrow and maybe that call option trades for 30-35 cents instead.
Shortly before I retired , my employer did away with the defined benefit pension for all new hires . They bumped up the 401k to make up for it . All of us already in the pension system were unaffected except that we still had the old version of the 401k . I've read that a lot of companies are doing something similar .
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We seem to be forgetting he'd like to free up additional monthly income... 
It a no brainer.
Pay it off, look at it as an investment.
You owe 29,000. If you pay it off right now, it only cost you $29,000.
If you pay it off over time it is going to cost you $38,612 over the 15 years if your interest rate is 4%
Now you do have a the penalty for the withdrawal which you then have to subtract or do as another says and take out a loan on the 401k to pay it off. Either way you come out ahead, way ahead since you say you really dont even need the 401K
True you get a small deduction on your income taxes for that but we are talking general numbers. It always pays to pay it off and you will have an extra $10,000 of interest you didnt have to pay minus the penalty if you dont take a loan against the 401k. That is an investment was as it is, savings $10,000 in interest.
Since you are thinking about it, go with it and get rid of the mortgage, you could even split the difference in savings by not paying the mortgage and contribute half back into the 401K even month if you dont do a loan.
To me anything is better then having a 15 year loan where almost a third of it your paying a fee to the bank for lending it to you. (interest)
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On the back end of the mortgage which he is at, his payments would basically be going to the principle. Makes no sense to pay off the mortgage. There is also the penalty he would have to deal with for withdrawing early on his 401k. That would be atleast 10 percent, loss of potential growth on the $29k and $29k added to his income which would be taxed. It could push him into the next higher tax bracket.
To me having a 15 to 30 loan is insane. though I understand we all do it, its always best to pay it off first. I rather be my own bank, just like Chase and Citibank
Your talking about speculating in equities with money backed up by your home all for a tiny gain.
Lets say you have that $130,000 loan for 15 years, you make way more money with a set in stone return on your money then equities if you pay it off or dont take it out to begin with.
You are paying 30% (4% rate) more for that $130,000 over 15 years for a total of $175,000, $43,000 in interest.
You are paying $229,000 for that $130,000 if you do a 30 year, $93,000 in interest.
I suggest do the reverse. Pay it off and with the savings take some of it and apply it to investments moving forward, you get a double benefit.
My post has all the correct numbers in it, a few posts up. We can all differ on thoughts, for me, debt is dumb. "Potential growth" is speculation much like "unrealized gains" using your house vs guaranteed income.
If you read my post, I brought up the penalty if he didnt do a loan. He is still saving almost $10,000 in interest on $30,000 that he will not be paying.
We will not agree, but many will side for one or the other. Paying Citibank $10,000 for a $30,000 loan or any loan for that matter is not to ones advantage. You can easily put that $10,000 you save into another investment if you want to, over 15 years.
Its all good, we all have different strategies, I dont really on others (banks) to lend me money to make money and give them a cut of the money.
I dont use them to buy things I cant buy myself either. Yet I can perfectly understand others that do, choices are good. But not relying on others to live and buy things is my way of being self sufficient. (or at least always being mindful of that goal)
Potential growth is only a tiny bit of speculation. If that speculation falls apart, so does the whole economy, so does everyone's retirement plans.
The S&P500 or a balanced portfolio is going to do better than your current mortgage rate in the long term.
So, please figure market return of 5, 6, 7...10% into your figures.
Having a 15 or 30 year loan at current mortgage rates is the best debt you could hold.
What's the alternative, everyone goes and buys a home with cash?
You're going to come out ahead even with the most conservative estimates of market return is my point.
If you think you cant do better in the market then sure pay it off. This is a judgement call everyone needs make for themselves.
The other reason, like i've said, is the psycological aspect of not holding debt - not dealing with monthly payments.
Nobody is going to fault anyone for making a decision one way or ther other.
But to say its a "no brainer" is inaccurate.
Depends on the debt. Debt is investing with other people's money.
Don't get me wrong; owning a home outright has many advantages; investing in Silicon Valley property has been very good to me.
But let's say a property goes down in value. You can walk away from a loan but if you own, 100% of the loss is yours.
What if property values are going up? You could invest in another property and possibly reap the appreciation rewards.
Another word for debt is leverage.
Today's loans are stupid low. If you can get a decent return on another investment, why wouldn't you do so and diversify?
Each scenario is different. OP's decision, AFAIC, is to look at his interest expense and then weigh the options.
I would not touch the 401k. You say you won’t need it but the way things are going you may regret that decision in your later years.
Accelerate paying off the mortgage by other means. The lender has already made a big profit off your mortgage. Review your spending budget and look for savings that in turn can be used to pay off the mortgage.
Do you get huge refunds from the IRS each year?
Stop. Cable television? 
. Everyone has areas in their budget that can be pared.
Accelerate paying off the mortgage by other means. The lender has already made a big profit off your mortgage. Review your spending budget and look for savings that in turn can be used to pay off the mortgage.
Do you get huge refunds from the IRS each year?
Stop. Cable television? . Everyone has areas in their budget that can be pared.
All good points here. To focus on the situation we need to see that having a 15 year fixed loan just started is very different from having a 30 year fixed loan paid down to 15 years remaining. Percentage wise you are paying a much larger payment vs principal in the 15 into 30 than starting out with a fresh 15. You will likely get a similar effect when you pay the same payment per principal amount for both.
In theory debt is bad if you are using it for toys and it is better to pay off all debt. In practice you are also competing with others for the same thing you buy, so if it is not in high supply (i.e. real estate high cost of living area) then paying cash is not going to win you any offer and you have to settle for some less desirable area (unless you are rich, which most of us are not).
US law allow people to walk away in a foreclosure, we also have 30 year fix mortgage, this is a huge advantage that the rest of the world do not have. I think it make sense to take advantage of it if you can. I wouldn't do it any other way unless you have so much money you don't know where you want to invest in.
In theory debt is bad if you are using it for toys and it is better to pay off all debt. In practice you are also competing with others for the same thing you buy, so if it is not in high supply (i.e. real estate high cost of living area) then paying cash is not going to win you any offer and you have to settle for some less desirable area (unless you are rich, which most of us are not).
US law allow people to walk away in a foreclosure, we also have 30 year fix mortgage, this is a huge advantage that the rest of the world do not have. I think it make sense to take advantage of it if you can. I wouldn't do it any other way unless you have so much money you don't know where you want to invest in.
I’ll take the contrarian view - pay it off.
Here’s why: risk tolerance and asset allocation are the bedrock of any financial plan. Most of the advice here is how to maximize returns for the OP’s cash flow and investment portfolio while completely ignoring his risk tolerance. Covered calls? Options? These are sophisticated tools that are not suitable for most investors. Sure, we can analyze rates of return and nuanced, effective, portfolio management. None of that matters.
The OP stated, clearly, that he would feel better with a paid off house. He will sleep better with it paid off.
That’s a very clear, and very different than the presumptive, risk tolerance, that is missing from all the other posts.
We’re talking $29,000 here, right? Pay it off, sleep well, and don’t worry about a few percentages one way or the other on what is really, economy car money, not millions in a portfolio.
Here’s why: risk tolerance and asset allocation are the bedrock of any financial plan. Most of the advice here is how to maximize returns for the OP’s cash flow and investment portfolio while completely ignoring his risk tolerance. Covered calls? Options? These are sophisticated tools that are not suitable for most investors. Sure, we can analyze rates of return and nuanced, effective, portfolio management. None of that matters.
The OP stated, clearly, that he would feel better with a paid off house. He will sleep better with it paid off.
That’s a very clear, and very different than the presumptive, risk tolerance, that is missing from all the other posts.
We’re talking $29,000 here, right? Pay it off, sleep well, and don’t worry about a few percentages one way or the other on what is really, economy car money, not millions in a portfolio.
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Any last payment is a good feeling …
But, making our final mortgage payment was a great, great, great, feeling - keeps on giving.
Who wouldn't feel good and sleep better with a paid off house?
$29k to one person may be a fortune and to another a pittance.
Lots been said and the OP hasn't check back in....so, just about everythings been said that needs to be.
Depends on if there's any penalty. If you have to pay an early withdraw penalty it is not worth it IMO.
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