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Mortgage Help
Old 08-15-2012, 02:08 PM   #1
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Mortgage Help

My wife and I are moving from a low cost of living area to a high cost of living area. We own our home free and clear, have a contract on it, and assuming we make it to closing without some sort of disaster, we will walk away with about $265K. The new house that we will be purchasing is far more expensive (frankly I am embarrassed and almost ashamed to say how much more; suffice it say a lot). We will be getting a 30-year mortgage with a rate of 3.75%.

I found out today that I can borrow up to $100K from my 401K at a rate of 1.25% fixed for 15 years. I am wondering if it would make sense to reduce the amount of money I borrow from the bank and replace it with a 401(k) loan; I feel VERY certain that I will not be terminated, laid-off, etc from my new job, so repaying the loan in event of job loss is not an issue. We can afford to make the payments regardless of how we finance---all with the bank, or with the bank/401(k) combined.

Thanks in advance.

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Old 08-15-2012, 03:53 PM   #2
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Go with the mortgage unless you can quickly come up with the $100k if you lost your job.

401(k) Loan Fact 8 - Risk of Termination

No matter the cause, if you cease working with your current employer, your entire loan is usually due within 60 days. If you are unable to pay back the loan balance during that quick time frame, the entire amount you are unable to pay is deemed a distribution, which is likely to be subject to significant federal income tax, state income tax, and early distribution penalties.

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Old 08-15-2012, 04:33 PM   #3
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No, don't sacrifice you retirement savings.
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Old 08-15-2012, 04:34 PM   #4
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I have a friend who thought her job was safe. She was borrowing against her 401k - and in escrow - when she was laid off. Fortunately for her (and terrible for the sellers) she was able to back out of the deal.

The other argument against borrowing against your 401k is that while the money is out/borrowed, it's not growing. Not sure what your time horizon for ER is - but we all know that growth, compounding year over year, is the best way to end up with a tidy nest egg in the end.
Plus you'll have to divert money that would be going to savings/investment into repaying the mortgage.

I live in a very high COL area so I totally understand that sticker shock on housing prices... We rented for a few years just to give ourselves time to adapt to the prices when we moved back to San Diego from back east.
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