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Old 01-17-2010, 09:17 PM
 
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1.) How does borrowing against 401k works?
2.) Is there any penalty & how does it affect my 401k portfolio?
3.) Do I have to pay interest & if yes, at what rate?
4.) I was told that "I'll be paying interest to myself", can anyone elaborate on that?
5.) When do I have to payback the loan?

6.) Does anyone offer 2nd mortgage (Home equity line of credit) these days?
7.) How does the interest rate & payment option works?
8.) What are the risk with both?

I apologize if it seems like a lot of questions but based on the above info, I can decide how much finance I'll be able to arrange & what will be my monthly payment?

Thanks for your comments.
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Old 01-17-2010, 10:06 PM
 
Location: Cary, NC
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You should ask your benefits dept at work to explain how loans against your 401k work. The money that you borrow stops 'working' for you, you usually have to pay interest. If you are terminated or leave the job, you have a very limited time (60 days) to pay back the full amount of the loan, otherwise it's counted as a disbursement and subject to both tax and penalties.
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Old 01-18-2010, 01:36 PM
 
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As far as I know, all banks still offer 2nd mortgage loans. I'd be shocked if they didn't. Keep in mind that the amount of the equity line will be based on a current appraisal and the remaining balance on your first mortgage.
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Old 01-20-2010, 09:26 AM
 
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Thanks for your responses. I'm a first time home buyer so I don't have any equity built in the home. I'm thinking of putting 10% down & take loan against 401k for another 10%, thereby eliminating PMI, if possible.

The other option would be to take a 2nd Mortgage but I was told that not many people are doing it thesedays.

I guess the thread has moved from "Raleigh, Cary, Chapel Hill (NC)" to here. Anyway, can anyone suggest any bank/ CU which offers competative rate on both 1st & 2nd mortgages?

Thanks!
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Old 01-20-2010, 09:54 AM
 
Location: Sacramento
2,568 posts, read 6,464,988 times
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Quote:
Originally Posted by HitsOfMisses View Post
Thanks for your responses. I'm a first time home buyer so I don't have any equity built in the home. I'm thinking of putting 10% down & take loan against 401k for another 10%, thereby eliminating PMI, if possible.

The other option would be to take a 2nd Mortgage but I was told that not many people are doing it thesedays.

I guess the thread has moved from "Raleigh, Cary, Chapel Hill (NC)" to here. Anyway, can anyone suggest any bank/ CU which offers competative rate on both 1st & 2nd mortgages?

Thanks!
I don't think anyone does 80/10/10 nowadays. Also keep in mind that if you borrow from your 401k that might reduce the amount of mortgage you can borrow. How safe do you think your job is? That is the most important question you should ask yourself. If there is even a remote chance you can loose your job do not borrow from your 401k.
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Old 01-20-2010, 10:28 AM
 
Location: Land of Free Johnson-Weld-2016
6,472 posts, read 15,603,775 times
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I would borrow against the 401K. I did that for my first house and it was fine. Granted, housing prices were much lower back then. I used that option since I didn't have anyone who would help with my downpayment, did not qualify for government programs and did not have enough cash savings. At any rate I paid it back, and I was fine.

How 401K Loans Work in General
-------------------------------
1. If your plan allows, you may borrow a PORTION of your balance.
2. The plan administrator charges you FEES, which may be small.
3. You pay yourself back with a term than you may choose (24 mos etc)
4. You Pay interest at the going-rate, but you pay this interest to YOURSELF and it goes into your 401k. So if you pay 6.5 percent interest, you pay that to yourself (minus any fees). So you may earn like 4-5% on the money.
5. The payments are usually deducted from your paycheck.
6. If you leave your company you may have to pay the loan balance back all at ONCE OR you are penalized by having to pay income tax and maybe some small fee on that money, but you can keep the money. I mean it's technically yours anyway.

Personally, I think it might be a good idea if you do the math:

How much does PMI cost (after tax deduction if applicable)?
How much extra interest will you pay to the mortgage ppl (after tax deduction)?
How much interest will you earn on your 401K money (granted you are paying this interest back to yourself LOL.)?

Also, I am fairly sure that a loan from your 401K will NOT count AGAINST you when applying for credit. Since you're borrowing from yourself, I'm pretty sure it does NOT show up on your credit report; a "default" just means you have to pay tax and fees on the money. My 401K loan did not show up on my credit report.
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Old 01-20-2010, 11:05 AM
 
Location: Sacramento
2,568 posts, read 6,464,988 times
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Quote:
Originally Posted by kinkytoes View Post
I would borrow against the 401K. I did that for my first house and it was fine.
When did you do it? Anything done before the current lending environment may not work now.

Quote:
Originally Posted by kinkytoes View Post
6. If you leave your company you may have to pay the loan balance back all at ONCE OR you are penalized by having to pay income tax and maybe some small fee on that money, but you can keep the money. I mean it's technically yours anyway.
No small fee. There is a 10% penalty plus federal and state taxes at your highest tax racket. Could be 30%. The problem is that due to the economy the risk of being laid off is much higher than in the past. So you can find yourself unemployed having to pay all those taxes. And there will not be money available to do that since it was used to buy the home. Very easy way to get in trouble and loose the house.

Quote:
Originally Posted by kinkytoes View Post
Also, I am fairly sure that a loan from your 401K will NOT count AGAINST you when applying for credit. Since you're borrowing from yourself, I'm pretty sure it does NOT show up on your credit report; a "default" just means you have to pay tax and fees on the money. My 401K loan did not show up on my credit report.
It may not show in your credit report but the lender will count in on your debt to income ratio. And you can not hide it from them because they want a paper trail of where the money for down payment comes from.
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Old 01-20-2010, 12:20 PM
 
Location: Land of Free Johnson-Weld-2016
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To response to your points:
1. The OP should ask the current lender what ramifications there would be for the 401K loan if desired. Personally, I don’t think it’s necessaryt. But since you brought it up, I would recommend using a credit union instead of a bank or an independent broker, if possible. State credit union employees have been pretty good about answering my questions, and as long as you're a worthy borrower, their rates and fees are the lowest (in my experience of shopping around for my most recent loan as well as anecdotal information from colleagues). Just ask, “If my available cash increases to Xthousands and my monthly debt inreases by xhundreds, how will that affect my abiity to get Y interest rate and Z amount?” No big deal.

2. I think the chances of remaining EMPLOYED for most people are still greater than the chances of being laid off. The OP should be positive. Actually if he/she is laid off any taxes may not be onerous since the taxable income would be lower. Again compare this to getting laid off during repayment of a "normal" loan when the bank can take all of the collateral, charge ONEROUS fees and ruin your credit rating. Borrowing money is always a big risk.

3. I am sure the banks and the OP are not idiots. If the monthly payment for the 401K loan is $350 and the amount the OP would have to pay for getting the same amount from the bank PLUS PMI is the same amount or GREATER, any change in the debt to income should not be a problem. The OP may end up with MORE available money in his/her pocket.

Also, EXCEPT for one instance for a later home where I got a GIFT from one of my parents, the banks only wanted to see my bank STATEMENTS showing the amount available for my down payments and fees. On the other hand, for the GIFT (which was small anyway) they put me through the ringer to document where it came from and that I would not have to pay it back. It was ridiculous. if I had borrowed the same amount, the monthly payments would have been so small that it would not have even been an issue... But I digress.

For my NON-gift cash, the banks did not CARE where the money came from. For my most recent loans, same story. They just wanted to see that I have money, not grill me about where I got it. Some people still use Home Equity loans from other income property as down payments for new loans. For a non-investor, I think a 401K loan is a good alternative. After all, it's your money, you should be allowed to use it to your benefit, and IMO since you pay it back, any "hit" to your retirement will be negligible or REDUCED since you may beat the stock market performance.
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Old 01-20-2010, 09:58 PM
 
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[quote=HitsOfMisses;12492146]1.) How does borrowing against 401k works?
Yes most plans allow you to take a loan. But do realize that you can only borrow up to 50% of your vested account balance.
2.) Is there any penalty & how does it affect my 401k portfolio? There is no "immediate penalty, however if you were to lose employment your entire outstanding balance becomes due. That DOES not mean you have to pay it back immediately, it means that if you do not pay it back, your company considers it an early withdrawal from you 401k, and you will receive a 1099R, which you have to file for your taxes. Again, check with your company, there are some companies that will issue coupons, or allow EFT and still allow you to pay on a loan even though you are considered a termed employee. That is not the norm, but there are some plans that allow it. You must realize 401k plans are individually designed. So there are some rules that are universal under ERISA law that governs them, and then there is some customization that takes place depending on the company and the 401k provider.
3.) Do I have to pay interest & if yes, at what rate?
Your company sets the interest rate, and by law it has to be competitive with market rates.
4.) I was told that "I'll be paying interest to myself", can anyone elaborate on that? Yes, it goes back into your account.
5.) When do I have to payback the loan?
Most loans have flexible terms ranging from 1 to 5 years.


One thing that hasnt been mentioned, is that you can also take a "hardship" from your 401k account. This does not have to be paid back, but yes, you will have 20% federal taxes automatically witheld, and possible state. You will also have to pay a 10% percent penalty when you file your income taxes.

There are some benefits to taking a hardship, if you dont want a monthly loan payment.
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Old 01-20-2010, 10:13 PM
 
99 posts, read 355,950 times
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Treasurefinder et el,

Thanks for sharing your views. Based on all your feedback, I think best would be to explore options for 80/10/10 loan & preferably from CU.

And as a Plan B, take loan against 401k.
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