Financing 2nd Home with 401K

[joeea]

Easily, by at least 2x.

For me, this makes the "mortgage for 3 years at the most favorable rate you can find with 0 points, then decide if you want to use the proceeds of your sale to pay it off" choice a no-brainer. But having a mortgage doesn't keep me awake at night.

In my personal experience falling in love with a particular property (or car, or anything non-human) can lead to rash/bad choices. Not saying that would happen to you, just that I've seen it with family and friends.

Good luck either way!

 

[HarveyS]

very unique properties tend to be very difficult to sell. What about when you go to sell?
Proceed with caution.

 

[zinger1457]

Many 401K plans allow in service withdrawals. The specific rules vary by plan, there may be an age limit (>59.5), only can withdraw the vested amount, can only do it one time, etc.

 

[Sunset]

Have not made an offer yet. DW has not seen it in person yet, we will go back there Sat AM. While I am known to get "locked in" on obtaining some things (like vintage cars), I would say that I am in "like" with this property right now, it is something very unique and different and, thus far, I can't see any reason why it would not work for us or why we shouldn't buy it. It is waterfront RE. But if it doesn't happen, so be it.

WOW...... I'm guessing she also does not know she is the one buying this.

If it's a stretch, why don't you go back to work, since your wife will still be working for 3 more years ?

 

[doneat54]

WOW...... I'm guessing she also does not know she is the one buying this.

If it's a stretch, why don't you go back to work, since your wife will still be working for 3 more years ?

LOL, trust me she does. SHE is the one pushing this (a bit). We'll see what happens Sat AM. And trust me, I am NOT "Going back to work".....!!!

To a previous posters note about "unique" properties, I agree. It can be very appealing to us, but there are some elements that make it not mainstream, and I am aware that while you can get what you want for a good price, it doesn't mean that you be able to re-sell well if you decide after a while that it is not for you. We are moving slowly here, and thinking things over. Not even an offer yet. But I do see a way financially to make this work and I think the risk of punching any big holes in our longer term financial picture/portfolio/retirement is pretty low, if any at all.

Thanks for all the insight/comments. I have learned a lot so far and every day that goes by that I just "think" about it without a commitment of any kind is a good thing.

 

[doneat54]

Well we're getting in deep and getting excited. DW and I saw the property yesterday and she loved it. We sent an offer last night, a bit lower than asking and she replied that they want asking price, so after discussing it further we decided to offer asking.

Anyway, about the financing. Realizing the tax shock of pulling a big sum out of DWs 401k, I decided to get a mortgage for about 60% of the asking price, pay cash for the rest, and still have $40-$50k cash available to spend on the property in the coming years. We will basically rob our cash piles now to close the deal knowing that we can pull from the 401K should we need to... not take money out if we don't and pay higher taxes on it while DW is working. But we will then pay the mortgage, taxes, insurance and utilities on the new property with an annual lump sum pull from her 401K. We will be able to do that and stay in the current tax bracket, although the next higher one is only 2% more.


We will be robbing our travel and home improvement budget (now sitting in a cash savings account) for the next 2 years to get the cash needed in the plan. As such, we will be comfortable pulling those funds from the 401k as they become needed.

I did do the math of what the taxes (incremental) would be if we did pull the whole pile out of the 401K vs. what the interest will be on the mortgage over the next 3 years and it was clear that the mortgage was the way to go. We also have a large lot of undeveloped land that we can sell if needed.


Deal still not done though... going to be an interesting week....

 

[ivinsfan]

And away you go, sounds like you have a plan.....

 

[Nick12]

Best of luck. I wouldn't go your route to finance after FIREd. I'm free and clear of debt for a long time and FIREd last year.

 

[Cassius King]

Congrats on the purchase. Very exciting and happy for you.

 

[doneat54]

Congrats on the purchase. Very exciting and happy for you.

Thanks, but it is not quite a purchase yet! A few hoops to jump through, inspections, e-mails flying back and forth, banks, etc....fun stuff!

 

[gauss]

But you do have a fully executed Purchase Agreement at this time?
Most of the contingencies are always to the buyers advantage/option.

If they contractually agreed to sell it to you then they are on the hook for it.

-gauss

 

[doneat54]

P&S is drafted; reviewing now, consulting a RE lawyer and (huge sigh of relief here), just got off the phone with Prudential and we are able to pull money out of DWs 401k and probably ONLY because she got RIF'ed from her job last fall and is starting a new job in June, so since she doesn't work for the company that sponsored the plan, she can now draw from it with no penalty. We also last minute decided to totally maximize the amount of cash to put down, minimize how much to mortgage, which minimizes how much we have to pull out of the 401k to pay that mortgage each month. We'll pull other monies out for things that we were saving the cash for as we need to.

 

[Big_Hitter]

P&S is drafted; reviewing now, consulting a RE lawyer and (huge sigh of relief here), just got off the phone with Prudential and we are able to pull money out of DWs 401k and probably ONLY because she got RIF'ed from her job last fall and is starting a new job in June, so since she doesn't work for the company that sponsored the plan, she can now draw from it with no penalty. We also last minute decided to totally maximize the amount of cash to put down, minimize how much to mortgage, which minimizes how much we have to pull out of the 401k to pay that mortgage each month. We'll pull other monies out for things that we were saving the cash for as we need to.

so you will have to pay taxes on the 401k distribution but you somehow escaped the 10% penalty for under 59.5?

 

[doneat54]

so you will have to pay taxes on the 401k distribution but you somehow escaped the 10% penalty for under 59.5?

Yes, because DW is 59.8125. ;-)

Again, I think if she was still working for the old company, this wouldn't have worked. Prudential will withhold 20% for federal and 5.05 for state on withdrawls.


Unfortunately DW new salary keeps us (still) squarely in the 22% fed bracket, so we know taking that money out *will* cost us more tax paying than it would if we did it when she wasn't working.


We have also got login to the IRS website so that we can (I think, they are snail mailing an access code) at any point in the year we can see exactly where were tax wise.

 

[pb4uski]

I don't get it... why pull money out while DW is still working and your marginal tax rate is 27% (22% fed and 5% state)? Just get a slightly larger mortgage and do withdrwals once DW retires and you are in a lower tax bracket.

But we appreciate your contribution to the operation of the country.

 

[RunningBum]

And that extra cash you used for the down payment could've gone towards payments for a few years instead. Leverage your money for those few years.

 

[doneat54]

I don't get it... why pull money out while DW is still working and your marginal tax rate is 27% (22% fed and 5% state)? Just get a slightly larger mortgage and do withdrwals once DW retires and you are in a lower tax bracket.

But we appreciate your contribution to the operation of the country.

As I stated above, 401k withdrawls are required to make the new mortgage payments. We don't have the bandwidth in our budget to pay for it. And larger mortgage means more interest which is, like tax, money you'll never get back. Our real fed rate after deductions should be in the 16% range. DW will not retire for at least 3 more years.

 

[corn18]

I get the feeling you can't afford this second house and you're making it "fit" because you fell in love with it.

 

[ivinsfan]

I get the feeling you can't afford this second house and you're making it "fit" because you fell in love with it.

We don't know that... we do know the OP will sell the house he lives in now when his DW stops working and they will put that equity towards the house they are buying now.

 

[doneat54]

We see it is simply re-allocating assets (and yes, paying some tax and interest that we wouldn't otherwise have to). Much like I have done for many, many years buying, and occasionally selling vintage cars. I tell my friends "I can't drive my mutual funds around on sunny days with the top down". Not only have never lost a dime doing that, I've made money on every car I bought/sold. And I see waterfront property as a very sound investment.

But you are all entitled to your feelings..... ;-)

 

[corn18]

We don't know that... we do know the OP will sell the house he lives in now when his DW stops working and they will put that equity towards the house they are buying now.

And I'm positive nothing bad will happen for the next 3 years that would cause his cash flow, equity or investments to tank.

 

[Markola]

Good luck. I’m curious why it’s such a good deal? Why hasn’t it been snatched up already?

 

[RunningBum]

As I stated above, 401k withdrawls are required to make the new mortgage payments. We don't have the bandwidth in our budget to pay for it. And larger mortgage means more interest which is, like tax, money you'll never get back. Our real fed rate after deductions should be in the 16% range. DW will not retire for at least 3 more years.

You said earlier you were putting 60% down, and would have something like $40-50K cash left. Now you are dipping into that extra money to put even more down.

I don't know what the selling price is, but let's say it's $500K. That means you're putting $300K or more down, and financing $200K or less. What I and I think pb4 are suggesting is that you only put 20% or 40% down. This would give you an extra $100K or $200K of cash. You can make mortgage payments out of that for the next few years, until your wife retires and you sell your other house, without having to dip into your 401K early. Invest that cash in something like VG Prime MM which is getting around 2.5% right now, not all that much lower than mortgage rates, which are something like 3.5 or 4%, right? It's true you don't get mortgage interest back, but it's not that much interest, only costing you 1 or 1.5%.

Your choice. I just think that when you are temporarily cash poor, a mortgage is a good solution to leverage your money.

 

[pb4uski]

As I stated above, 401k withdrawls are required to make the new mortgage payments. We don't have the bandwidth in our budget to pay for it. And larger mortgage means more interest which is, like tax, money you'll never get back. Our real fed rate after deductions should be in the 16% range. DW will not retire for at least 3 more years.

But wouldn't you be better off to only put 25% down rather than 40% and use the 15% that you would have otherwise used down to cover the first 3 years of mortgage payments without having to dip into your DW's 401k for mortgage payments? Then replenish cash with 401k withdrawls once your DW stops working and you are in a lower tax bracket.

 

[doneat54]

Good luck. I’m curious why it’s such a good deal? Why hasn’t it been snatched up already?

I think I know why. If it all goes through, I let you know my thoughts.