Would it be wise to use your 401K to pay off your house?

Depends on the interest rate of your mortgage and if you’ll incur a penalty for early withdrawal, but generally speaking, no.
With regard to the early withdrawal penalty, the magic number is 59 and ½.
Let’s say your mortgage interest is 5% or lower. If your investments are earning more than that, why take money from your investments to pay off your debt on which you are paying less than what your investments are earning?
Put another way, that extra $1000 a month is essentially earning you 5% interest (or whatever your morrgage rate is) when you pay it back, but you could earn more than 5% if you invest it. But as I say, YMMV, depending on your situation.

You lost me. How is my mortgage payment earning ME interest? It’s earning the mortgage holder interest.

OK, my wording was poor. What I meant was, when you pay back $1000 (I don’t know what your interest rate is, but let’s say it’s 5%), your saving 5% of that $1000 (on an annual basis). But if you don’t use the $1000 to pay back your mortgage, and instead let it earn money for you in an investment that pays more than 5%, then you’re ahead not paying the additional amount. (You still have to make your regular mortgage payments, of course.) It depends on whether you can make smart enough investments to earn more than 5%. As I said, YMMV.

If your mortgage interest rate is high, though, like 8%, then maybe yes, it might make sense to pay it all back, because in the current environment it’s a lot harder to earn more than 8%. But even then, I would first consider refinancing the mortgage into a low 4% loan if I could. These are still available.

I would use personal savings before retirement funds. There maybe penalties and the money from the 401K taxes due.

I would not take money from retirement funds to pay down a mortgage and assume I was going to invest what I save. That money has a way of disappearing into the ether while the 401K will benefit you later on.

We don’t have personal savings any more. :( Not since I lost my job.

I still don’t know how the 401K benefits is during retirement.

@janbb is right. The temptation would be too great to just use that $1000 for fun stuff. That “extra $1000” a month was made possible by what? Why, your retirements funds, of course (which you no longer have, because you used it to pay off your mortgage). But if you do use your 401k to pay off your mortgage, you should at least use that extra $1000 a month and put it back into some sort of retirement account.

But watch out for those early withdrawal penalties. If the 401K is yours, the penalty would be 10%. If the 401K is your husband’s, typically there would be no penalty. Be sure to check the IRS link I sent you earlier.

I’m pretty good at saving and wise in spending. And that was my thought….putting that $1000 into some other investment. If I owe $60,000 and pay that off, in 60 months I get that $60,000 back plus interest.

So, exactly how does a 401K help in retirement? It was explained to me once but I forgot.

Yes, but if you leave that $60,000 in your retirement account, it will be earning interest during the whole 60 months, so you’ll also have $60,000 plus interest. Question is, which interest is greater?

Or, are you saying that the money in your retirement account is earning NO interest? Better check that.

Yes, it’s earning interest. I just don’t know what to do. I mean, pay off the house and get it all back in 5 years (I understand the temptation issue, but I am really good at saving…when I have money to save.) I still have 15 years to go on the house….and we won’t have the $1000 a month to continue to pay it then….

You usually let that money accrue interest/returns and then at some point start taking monthly payments from it. If your hubby has other retirement income it may not be a bad idea but this is a complicated question actually. Please talk to a financial adviser.

Dave Ramsey says “Hell No!”

@Pachy It’s different, her husband is old enough to start taking money out without getting whacked with the 40% penalty and may have other retirement income. I usually agree with D.R. but there are a few things he preaches that are just plain wrong. They could start taking monthly payments and simply use those for the house payment. Things can get complicated when you reach the age when you can start taking money out.

You have to do the math and know the laws, and know yourself.

At 59½ you can start withdrawing from a 401k without penalty, but you will be taxed on the money. At some age, I don’t remember what it is, I think it is 70 something, you are forced to withdraw money from a 401k, or maybe that is just your IRA??

If you take the money out to pay off your mortgage, but then put the savings from not paying a mortgage into an IRA, then the money is still protected from taxes. If you already put the max in an IRA, then that wouldn’t be a good plan, because you won’t be able to out your extra savings into the IRA. At some age I am assuming the laws don’t allow you to put money into IRA’s any longer, since people eventually are forced to withdraw money, but I don’t know the details of the laws.

I personally would consider paying off my mortgage with 401k money as long as there was no penalty and depending on the other specifics of my financial situation.

I wouldn’t use your retirement fund to pay off the house. That’s got to provide you with an income when you retire. Yes, you do want to pay off your mortgage though. Can you afford to meet with a financial planner to look at your big picture in terms of your finances? You need someone who is aware of all the tax benefits and penalties.

I agree with those who’ve cautioned against doing this because people with no mortgage often do fritter away the money they once used to pay that bill.

Do most people who pay off their mortgage spend that money willy nilly? I really doubt that is the case statistically. I dont know the actual data though. Everyone I know who owns their house outright is fairly frugal with money, and I know a lot of people who have paid off their mortgages.

@Dutchess_III I looked up IRA contribution limits and you can contribute $6500 each a year after age 50, and I am assuming (which of course could be wrong) that you are not contributing to an IRA right now, so you can put what you save from not paying a mortgage into an IRA and build up the savings again there tax deferred.

You just have to be careful about the taxes you will incur when you take out the money from the 401k as I mentioned above. For instance if you take out $50k to pay off the mortgage, you might have to pay a few thousand in taxes, because the $50k is counted as income. Plus, I don’t know if there is some sort of limit to how much you can take out of a 401k every year.

The other big thing to remember is the interest on your mortgage is much lower now than it was the first 15 years of your loan. Look at a mortgage amortization table to see how much interest you pay every month now.

@JLeslie I know people who paid off their mortgage in their 40s and then proceeded to fritter money away for quite a long time (years). They ended up divorced so who knows if they’d have changed their ways, but they didn’t have anything they HAD to spend the money on. I’ve spoken to my financial adviser and he confirmed this isn’t unusual. People are more likely to save if they set up systems that require them to put the money away. I imagine for fairly frugal people that could just be a direct deposit into another bank account so the money isn’t there and available in their normal, day-to-day account.

However, for less frugal people the mechanisms might need to be more concrete. For instance, I know someone else whose wife is a bit of a spender, so he keeps their money tied up in managed trusts and the like. The money they don’t need for day-to-day expenses and spending is filtered off to investments so it can’t be spent. He doesn’t leave her with no cash but he doesn’t leave the money there to be frittered away either. I imagine it’s the old ‘we live to our means’ situation. If the money is there unused, it can be spent. If it’s allocated for a purpose, people are less likely to waste it.

@Dutchess_III “I’m pretty good at saving and wise in spending.”
At ages 56 and 62 and you have no savings? I’m sorry to say it, but I do not agree that you are “pretty good at saving”, job loss or not. I agree with @ARE_you_kidding_me. Please see a financial adviser. It’s tough for us to give you any more advice in this forum, because we do not have your full financial picture, and we are not meeting face to face. You will benefit from discussing these things with a financial adviser. We can only talk in generalities here.

@Earthbound_Misfit I believe you, it just hasn’t been my experience. If people are spenders I would think they still would have nothing whether they paid a mortgage or not, and then they also have less equity in their home if they have been paying a mortgage. My inlaws for instance I think would have been better buying a house outright, or paying off a mortgage when it’s possible, because then when they were low on funds they wouldn’t be worrying about losing their house.

@Dutchess_III Actually, @2davidc8 makes a good point. If you don’t have the savings to pay off $60k then how much are you saving now? Or, do you have the savings, but want to know if it is better to use the 401k money than to use savings? Although, I do believe you will save some of the money if you don’t have the mortgage payment, just from knowing you here so many years.

To answer the question of why have a 401k, it’s because the money is sheltered from taxes for many years. If your husband makes $50k a year, and he puts $5k in the 401k per year, the whole $5k goes into the account and then when you do your taxes you are only taxed on the $45k. While the $5k is in the 401k and makes money, that money is not taxed either. Usually interest and dividends you need to add to income on your taxes, but the interest or dividends in the 401k you don’t add to your income on your taxes until you take the money out. For people who make a lot of money it is very beneficial they might be in a 28% tax bracket now, but once they retire they might only be in a 15% tax bracket.

@2davidc8 You don’t know my circumstances or what I’ve come out of. I said, “If I have money to save I’m good at saving it.” If the money you’re making just barely covers the bills, it’s hard to save. For several years I was making only 15K or less, and supporting 4 kids. Really hard to save under those circumstances.

We’ll talk to a professional. Rick was only able to start the 401K in 2007. If we took monthly payments out at retirement the money wouldn’t last very long.

No. Not only will you pay the penalty for early withdrawal, you lose the deduction. You tax bill may really hurt.

Since Rick is 62 there would be no penalty. Like everyone said, we need to talk to a professional.

It just seems like having the biggest bill of all completely paid, free and clear, when we go into retirement would be good. I mean, at this point I don’t know how we’d even make the house payment.

We’ll see. I’ll let you guys know what we find out.

@Dutchess Yeah if you’re strapped do it. If you get any assistance or income-based help be very careful.

We don’t get any assistance or income based help. We’re not exactly strapped, but it’s been difficult since I lost my job.

If we had a 401K we wouldn’t qualify for assistance! Back in the 90’s, when I found myself in poverty, they tried to tell me I had to sell my van, which was paid off, and get an older model. Also, when I still owned my own home they flat turned me down.

@DUtchess Sometimes people forget it affects Medicaid & ACA. You’ll be fine I’m sure.

We’ll check.

Is Rick currently contributing to his 401K, and if so:
What percentage?
What is the company match?

Yes.
Not sure
Not sure

I wouldn’t use the 401k to pay off the mortgage, personally. However if he is paying into the 401K more than necessary for company match, I’d put that money against the mortgage instead. Even if you could scrape up an extra $100 a month, you could shorten your mortgage considerably. Right now you are paying $12,000 in house payment and only gaining $4,000 against the loan.

Hmmm. Yeah, come to think of that, I might be temped to pay the bastages off. It’s hard to see how not giving the bank $8,000 a year would be a bad thing.

Can’t you ‘borrow” money from a 401k, and repay it?

He’s putting in the max. Just not sure what it is. 6% I think.

Yes, we can borrow and repay, but wouldn’t the payments be about like the mortgage payments”? Plus they charge interest. I really don’t see how they can do that, but they do.

Yes, that’s my point, the same amount would be going out, but directly into Rick’s account, rather than the mortgage holder. I think that’s safer than saving it direct.

Are you sure Rick wouldn’t be getting the interest charged? They want him to be even, as though the money hadn’t left, and he would have made money – the account isn’t static. I think he has to pay himself interest on the money borrowed.

I would not pay extra money towards the principle of the mortgage, which I think is what @ibstubro is suggesting. It doesn’t lower the payment, it just shortens the length of the loan, and it does reduce how much you pay overall when you get to the end of the loan. It sounds like you are worried about the monthly payment now though, or in the near future.

When we paid off our mortgage we began to save like crazy. We quickly had that money back in our pockets.

I have bought 4 pieces of real estate in my life, and I have never carried debt on anything for longer than 5 years. And I’ve never had a job that paid more than $16 an hour or inherited anything.

Paying ahead does not lower your payment, but all prepayment goes 100% against the principle. For every $12 you currently give the bank, they credit your account for $4. When I buy property I take the lowest (longest) rate possible, then make the highest payment possible. My first house I never paid less than double the required payment on a 30 year loan. I owned it in under 5 years.

@ibstubro If your loan was 30 years, you would have saved even more if you had done a 15 year loan to begin with. Or, you could just save and buy the house outright to begin with and avoid the fees you paid for the loan let alone the interest. Although, sometimes in markets where real estate is going up fast it’s better to buy now.

My impression is @Dutchess_III is worried about being able to make the payments.

I guess these last few posts demonstrate why you have to speak to a financial expert. If you’re trying to cut costs so you can have more usable money – you need to take one approach. If you’re looking at clearing debt for your retirement, another approach would be best.

Find a reputable financial adviser @Dutchess_III. Not sure how it works there but don’t just go to your bank. You need someone independent but ethical. I’d ask around and see if any of your friends can recommend someone. You don’t want someone affiliated to a specific company who’s going to sell you their products. You want someone who will look at your circumstances and give you advice based on what’s best for you and your goals. If there’s a financial planners association, try calling them to find out who’s in your local area.

No, I would not, @JLeslie. That’s my point. Overpayment goes 100% against the loan amount. The first few years nearly 100% of your payment goes to interest. In 5 years, rather than owning the home, I would have simply been making the required payment and accruing no equity.

@Earthbound_Misfit give sound advice. Ask around. I once visited the financial officer at my bank and later found out that he’d recommended only funds that gave him the biggest kickback.

We have an Edward Jones advisor in town. I kinda sorta worked for him for a while. I’ll see if he can help us.

Demon Dutchess_III

@ibstubro A 15 year loan you get a lower interest rate. Usually .5 to .8 less. But, now we are off topic.

And, @JLeslie, how would you pay that off in under 5 years?

My last loan, based on my credit rating, was 1.5%

@ibstubro You had a house mortgage for 1.5%?

Yes, @JLeslie. My current house, 10 years ago.