A Good Alternative To Refinancing
If you need fast cash, there are other ways to get it other than refinancing your mortgage or taking out a home equity loan. An often overlooked alternative to refinancing is to borrow from your 401k. If you’ve been working diligently and socking money back, you probably have thousands of dollars at your fingertips. Remember that refinancing is expensive. Because refinancing means taking out a completely new loan, the costs to get that loan off the ground run into the thousands. It doesn’t necessarily make good financial sense to refinance your entire mortgage just to get access to thousands or even tens of thousands of dollars. The upfront costs to get the loan going are often cost prohibitive. Home equity loans have origination costs too, and you will need to qualify, so your financial ducks will need to be in a row. In contrast, you do not need to qualify to borrow from your own retirement. No credit check required.
Borrowing from your 401k is a viable alternative. Because you are borrowing your own money, you do not have to qualify through a credit approval process. Obtaining the funds is usually a quick process. You can often have access to the funds in less than one week. Perhaps the biggest advantage to borrowing from yourself is that any interest you pay goes right back in your pocket because you are both the borrower and the bank. I’ll say that again — the interest that you pay goes right back into your account. Because the interest comes back to you, the interest paid on 401k loans is not tax deductible.
The law allows you to borrow up to 50% of your 401k balance OR up to $50,000, whichever is smaller. Typically, the loan must be repaid within five years (10 years if used for the down payment on a home). There are no penalties or income tax hits.
The repayment will be made through a payroll deduction, so your paychecks will get lighter immediately. Also realize that your contributions to your 401k are pre-tax, but the payments made to repay the loan are made after taxes are deducted. If you are terminated or voluntarily leave you job, the loan becomes due and payable. If you do not pay back the loan when your employment is ended, you will incur penalties and taxes. You’ll get hit with a 10% withdrawal penalty, and you will pay ordinary taxes on the withdrawn funds. The penalties and taxes kick in if the loan is not repaid because the status of the transaction changes from “loan” to “withdrawal.” Do not borrow more than you know you can easily pay back.
Putting your retirement at risk is serious business, but paying thousands of dollars to refinance unnecessarily is also unpalatable. Borrowing from you own retirement is a good alternative to pulling the equity out of your home, but proceed with caution because, as with any loan, there are risks.
Wade Young is a Denver mortgage broker. His website is bursting with consumer information about credit scores and mortgages. http://www.reddoorhomeloans.com
Tags: 401k, borrow, Colorado mortgage broker, Denver mortgage broker
