Skimming a little off top of 401(k) to pay off mortgage...?
- Thread starter mrsilv04
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This, i know several companies do. Valic will.
Some good financial advice here at BITOG. Most of the time, a mortgage is free money. Even if you could pay cash for a house, you come out ahead taking out a mortgage. That's because the rate you pay is lower than the CAGR of long-term investments.
Here’s a specific example: suppose you borrow $500k at 3% for 30 years. You decide to pay an extra $100 per month. You’ll pay off the loan about 2 years early saving about $21,000 in interest. If instead you invested $100 every month earning 6% annually, you’d have $100,000. That’s $36,000 in principal and $64,000 in earnings. By paying off your mortgage early, you gave up $64,000 in order to save $21,000.
That said, this works most of the time for most people. But some have unique circumstances, so do the math and see what works for you.
Here’s a specific example: suppose you borrow $500k at 3% for 30 years. You decide to pay an extra $100 per month. You’ll pay off the loan about 2 years early saving about $21,000 in interest. If instead you invested $100 every month earning 6% annually, you’d have $100,000. That’s $36,000 in principal and $64,000 in earnings. By paying off your mortgage early, you gave up $64,000 in order to save $21,000.
That said, this works most of the time for most people. But some have unique circumstances, so do the math and see what works for you.
If you have a reasonably low mortgage interest rate, why pay the 10% early withdrawal penalty plus federal and state tax on the $29,000 withdrawal? A home is a necessity. Having to make a monthly mortgage payment is not a bad thing, unless you have a bad interest rate. I say nix on the 401K withdrawal, unless you absolutely need to do it to sleep well at night.
If I'm understanding the OP, he isn't planning to pull money from the 401k. Just not contribute as much, with the intention of instead putting that money towards paying off the mortgage sooner. So no withdrawal fee, and whatever he has in the market will still continue to grow.
I guess if he's still contributing the min amount so as to get full employer match, then it's just a gamble on return. If he was say 5 years out from retirement, then anything he adds now may not be making much in growth (and certainly won't have time to grow). Low return, and so maybe paying on the mortgage will reap the reward he is after. If he thought the market was going to take a dip in the near future, meaning what he puts in now will again not much make much, then same story.
But if he's 10+ years out from retirement... maybe the satisfaction of paying off sooner outweighs future extra dollars? Maybe invest less for a few years, pay off mortgage so as to make his outgoing money less dictated by debt, and then afterwards invest however he sees fit. Once that mortgage is gone, he could change jobs, retire, whatever--his expenses go down, and that might feel really good.
Every investor is different and has different risk thresholds. I'm not sure I'm seeing a foolish move here, just maybe one that won't maximize (potential) growth.
I guess if he's still contributing the min amount so as to get full employer match, then it's just a gamble on return. If he was say 5 years out from retirement, then anything he adds now may not be making much in growth (and certainly won't have time to grow). Low return, and so maybe paying on the mortgage will reap the reward he is after. If he thought the market was going to take a dip in the near future, meaning what he puts in now will again not much make much, then same story.
But if he's 10+ years out from retirement... maybe the satisfaction of paying off sooner outweighs future extra dollars? Maybe invest less for a few years, pay off mortgage so as to make his outgoing money less dictated by debt, and then afterwards invest however he sees fit. Once that mortgage is gone, he could change jobs, retire, whatever--his expenses go down, and that might feel really good.
Every investor is different and has different risk thresholds. I'm not sure I'm seeing a foolish move here, just maybe one that won't maximize (potential) growth.
After reading supton’s response now I’m not sure what the OP is asking. Direct paycheck contributions toward the mortgage or take $29k out of the 401k to pay it down.
OP, if you only owe $29,000 on the mortgage it sounds like you are in the last 5-10 years or less of the mortgage to me. That would indicate the interest portion is minimal and the savings of paying it off early wouldn’t be worth any penalties or taxes you’d pay. Don’t refinance and don’t take an early 401k withdrawal.
OP, if you only owe $29,000 on the mortgage it sounds like you are in the last 5-10 years or less of the mortgage to me. That would indicate the interest portion is minimal and the savings of paying it off early wouldn’t be worth any penalties or taxes you’d pay. Don’t refinance and don’t take an early 401k withdrawal.
He needs to calculate interest expesnse. Only then can he make an informed decision.
The basic answer as others mentioned is a firm no. If you take a loan, you no longer get to invest the money in the stock market and your return is whatever the interest rate they charge on the loan. So if they let you borrow against it and they charge 5%, you pay yourself 5% and you're avoiding paying 3%. On the other hand Fidelity's S&P 500 Index fund is up about 11.84% for the year to date and 13.9% over 10 years and 10.85% over the life of the fund. As others said, paying it off just locks in your 3% return. Better to just let it float on the S&P 500, yes it may go down 30% but it will probably recover and more over the next 10-15 years. Of course if you were retiring in the next 5 years, maybe I'd suggest differently.
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Not always a dumb idea such as when using asset location strategies to minimize taxable income.
Make double or two payments per month on the mortgage the second payment paying down principle faster hence less interest.
I thought you couldn't have a pension and 401k but I'm no expert in that. If the current employer is not offering a 401k, I'd roll the 401ks into an IRA so you can do what you want with the money instead of being limited by the 401k choices.
Also, i thought they loosened the 401k rules for borrowing due to covid.
Also, i thought they loosened the 401k rules for borrowing due to covid.
With only $29k left, most of the interest is already paid, i would assume.
You can definitely have a pension and a 401k. My late father did, and I am glad he did.
I'm retired now , but my employer had a pension as well as a 401k plan . I've known many companies that did .
My current employer offers both and I've been fully vested in both for a long time. Honestly, that and the insurance coverage are the only reasons I'm still around; if they dissolve the pension plan I will have to give serious thought on whether it's still worth sticking around.
First off, is this really the proper forum to seek this advice?
You say you don't need the 401k. So stop contributing to the 401k and use that extra money to pay the mortgage.
Exactly, your mortgage rate is much lower than even conservative estimates of what the market will do over the next 15 years.
So, leave the money in the market.
The only reason to pay it off is the psycological feeling of not having debt and not having a monthly payment. And that certainly has some weight. But financially this doesn't make sense. Primary home mortgage is an excellent loan vehicle.
You say you don't need the 401k. So stop contributing to the 401k and use that extra money to pay the mortgage.
Exactly, your mortgage rate is much lower than even conservative estimates of what the market will do over the next 15 years.
So, leave the money in the market.
The only reason to pay it off is the psycological feeling of not having debt and not having a monthly payment. And that certainly has some weight. But financially this doesn't make sense. Primary home mortgage is an excellent loan vehicle.
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