12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Upside of Reducing your Mortgage with 401(k) Funds
By Kelly WingardNFNS Columnist
You've made the decision to take on a mortgage, identified your dream
home, calculated closing costs and compared mortgage rates and mortgage brokers--now
all that's left is coming up with your down payment! If you're a first-time
homebuyer, you lack home equity resources from previous purchases, which may
tempt you to consider your 401(k) as a down payment source for your new home
loan.
This column, the second in a
three-part series, considers the positive aspects of borrowing against your
401(k) to finance your mortgage. The first column discussed the differences
between borrowing and permanently withdrawing retirement funds and the third
column details the downside of raiding your retirement piggybank. It's
recommended that you read this whole series and investigate further before proceeding
with a 401(k) loan.
Borrowing from Yourself
In essence, when you borrow from
your 401(k) you are borrowing from yourself. If your plan allows loans, you
generally may borrow up to half of your vested account balance, but no more
than $50,000. By borrowing from your retirement plan, you eliminate credit
checks and the hassle of filling out lengthy loan applications. Many plans
require you to complete only a short loan form before releasing funds.
Most 401k loans must be repaid within
five years; however, payback periods are typically extended for mortgage loans
and shortened if you leave employment before paying the entire balance. Loan
repayments generally are made through payroll withdrawal. Your plan stipulates
the loan interest rate charged, but rates are generally low--customarily ranging
1 to 2 percentage points over prime. Your payments, including interest, are
returned to your retirement account and remain tax sheltered until permanently
withdrawn.
About the Author
Kelly Wingard is a
freelance writer and a 25-year veteran tax preparer. She contributes regularly
to the
About the Author
Kelly Wingard is a freelance writer and a 25-year veteran tax preparer. She contributes regularly to the University of Illinois Tax School training manual for tax professionals.