401k/Home Loan or CARES Act

[txlady1234]

I know conventional advice is to avoid taking money out of your 401k if you can, but I'm okay with tapping it for the purposes of a home purchase.

The market is booming here and home prices have skyrocketed! Before we purchased our last place for a new build in the area we wanted to be in would probably be $300-400k, now it's closer to $500-700k. With the choices/builders we like I'd say on average probably around $600k. The plan was to always use the equity in our current home towards a down payment for the next. We're watching what places in our neighborhood that are similar are selling for, and we're hoping to have somewhere between $60-80k available for down payment.

I'd like to be closer to 20% down. We've got some saved, but not enough to put us to 20%. PLUS we are also paying stuff down to make sure we're carrying as little debt as possible (basically want only car payments left) once we pull the trigger. It's been my plan to pull whatever shortfall from my 401k when the time came.

I was made aware that if you meet certain criteria (which I do) you can take up to $100k out under the CARES Act without paying the early withdrawal penalty, and have the option to spread out whatever tax you owe over 3 years. We're not planning on making a move for 6-12 months as I said we're paying some stuff down, but we'd like to move sooner rather than later before prices increase any more (or locations we want or no longer available). This appeals to me for two reasons: 1. I can take out a little extra and pay down debt (allowing us to save more). My husband dug us in a hole that I refuse to help bail out (I have done it in the past and therefore put off my own financial goals; won't do it again!), and I think it's a lesson that he needs to learn so that it doesn't happen again so I wouldn't take enough to cover that. Hence still the 6-12 month time frame. 2. I'm not in love with my current position, so if something became available there would be nothing preventing me from leaving here without fear of owing money on a loan and risk paying penalties!

I did a 401k home loan for our current spot and left my previous employer and had to pay (one reason my personal savings took a hit!), so I'm really hesitant on doing that again. Before I was aware of the CARES Act, if we want to make the move sooner than we can save - tapping my 401k for a loan was gonna be the only option regardless of how I felt about it. But knowing there's an alternative now I'm torn!

And even though we potentially do not need the money for awhile, with the CARES ACT you have to withdraw before the end of this year. If for some reason we end up not using the funds I believe you're allowed pay it back as long as it's within 3 years (need to verify this, and if you can is it all of it or can you return a portion). 

What would you do?

I'm 37 so still awhile until retirement.

[Deleted]

If I really felt I had to upgrade, I would just put 10% down and not tap the 401K at all.  

[txlady1234]

That is an option - that's what I did for our current home.

[teen persuasion]

I'd really want more numbers to crunch before deciding, but I'd have to lean against it.

You borrowed from your 401k before, to get you into your current house, and got hit with taxes when job change turned it into a withdrawal + penalty. Your current equity isn't enough for 20% down on new place (and prices rising rapidly). This implies you are jumping WAY up in price, which will increase your mortgage payment, and probably taxes. Which would make your budget tighter, so even less to put aside for retirement (to make up for yet another withdrawal). It might make you house poor - a big, long, fixed debt.


How much you have saved for retirement, and are you on track, is the real question. If you need to raid retirement for other things like housing now, that tells me either you put too much in retirement earlier, or you want to spend too much now (or in the near future).

You could stop contributing to retirement, and put that aside for downpayment, instead of contributing and then withdrawing later. Your taxes would climb without the tax deferral, but withdrawing reverses the tax deferment anyways. If you truly have enough in retirement to consider raiding it.

[stillmovingforward]

Why upgrade? Is the upgrade worth losing money potential in your retirement? Because crap happens and the older you get, the less your money has a chance to work for you to increase for retirement (ask me how I know this!). If prices are increasing, it might be a bad time to buy. Look at it from all angles. Not just 'should I take money out'. Honestly, at 50+, i'm very glad my 30+ didn't do this.

[The Walk of the Penguin Mich]

$100K is a lot of money to pull from retirement when you have another 20-30 years to go.  

The fact that your husband has dug you into a hole and you bailed him out once means that he will do it again.  I'm thinking that this is a lousy idea.  Just because you can doesn't mean you should.

[gs11rmb]

I also say no.  Why are you contemplating taking money from your retirement a second time and not from your husband's account?  If he has no savings and dug you into a hole I would be very scared to take on a $600K mortgage regardless of the percentage put down.

[NastyWoman]

Aug 19, 2020 14:28:44 GMT -5 The Walk of the Penguin Mich said:

$100K is a lot of money to pull from retirement when you have another 20-30 years to go.  

The fact that your husband has dug you into a hole and you bailed him out once means that he will do it again.  I'm thinking that this is a lousy idea.  Just because you can doesn't mean you should.

   Since he did it again after you bailed him out, even if you don't do so now, he will always think that everything will turn out fine in the longer run. Also, isn't Texas a community property state? If the tx in your name refers to that state, not bailing him out won't do much as his debt is considered your debt.

[Deleted]

I also want to emphasize that raiding your retirement early is generally a lot worse than raiding it when you're getting close to retiring.  When I was 34 and quit working to stay home with my son I was really tempted to cash in the 22K 401K from my job.  I figured after taxes and penalty I would have about 15K.  Enough to pay off my truck, and really...it was just 22K and it would take some of the stress off of going to one income.  Well, I didn't do that and rolled it into an IRA instead.  Today (18 years later) that 22K is worth 133K without adding a single dime of additional contributions.  The truck is long since sold and probably a pile of rust by now. 

But yeah, as teen mentioned, it's hard to say without numbers.  If you're sitting on 2 million in retirement accounts already, then pulling 100K probably doesn't matter much.

[txlady1234]

Thanks for feedback - helps me think things out.

Just some more info/clarification...

• Yes, I took out a 401k loan for current home. When I left I paid the remaining balance from my savings, so I did not have to pay a penalty (not sure if that was clear). It turned out fine now, but given how I feel about my current job the potential risk gives me pause. If I can't say how long I plan to be here, then I can't say it'll be long enough for us to save enough to pay it back if we needed to.
• I purchased our current place before I was married. It's a townhouse, and it has served us well over the years. If it was still just my husband and I, moving wouldn't be on the table at all. But our family has expanded already and continuing to grow, so space wise it is no longer sufficient. This townhouse/neighborhood is truly for adults. There are cheaper options further out, but with my current job being in town realistically we can't go too much further out due to the commute. And moving inward results in poor school districts, and not necessarily cheaper housing. Pre-covid my commute is already 1 hour both ways.  
• And I wouldn't take out $100k, that's just the max you're allowed to with the CARES Act.
• And I agree with some assessments regarding my husband's finances. He's definitely gotten better and is making progress on his own financial goals. But it's far from perfect, and he's no YM shining star! As such we pretty much have separate finances, and I've removed him from any of my accounts that he was on previously. He gives me a fixed amount toward household obligations, and we've discussed once he's taken care of the debt that payment will go towards savings. 

The rising market here definitely influences my decision making - which maybe it shouldn't. But there was a time when I would have said absolutely not to a mortgage anywhere over $500k, but the market has changed so much that it's caused us to rethink what is realistic for our area.

[justme]

So you bought the place you want to use for a down payment before you were married and want to take out savings from your 401k. But you have separate finances with your husband? Is his name going on the house/do you live in a state where buying a house while married doesn't care if it's not?

Not to be a cynic, but with a husband who apparently has issues with money I don't think I'd want to liquidate two assets that I acquired pre-marriage (I'm assuming most of your 401k came from before marriage if your house did) and make it marital property.

My aunt sold her house before she was married to her current husband and they used the money for a downpayment, but she got a post nup where the first $X from the house sale was hers because it was her downpayment. She was nice and didn't tack on interest to it 😉. They're currently still married and this happened over a decade ago prob closer to two.

[phil5185]

How much equity in the condo?

[txlady1234]

As someone alluded to above - Texas is a community property state. I believe even if I were to purchase a house again only under my name, he would still have to sign paperwork stating that he is aware of the purchase - and thus go on the deed (I think). But the plan would be to both be on the loan/deed of the next house. 

There is probably $65k equity based off the last appraised value, but per a market analysis from our realtor he believes the value has increased. So hopefully more assuming nothing drastic happens with the market in our area before we decide to sell.

[WannabeWealthy]

Aug 20, 2020 10:10:15 GMT -5 txlady1234 said:

As someone alluded to above - Texas is a community property state. I believe even if I were to purchase a house again only under my name, he would still have to sign paperwork stating that he is aware of the purchase - and thus go on the deed (I think). But the plan would be to both be on the loan/deed of the next house. 

There is probably $65k equity based off the last appraised value, but per a market analysis from our realtor he believes the value has increased. So hopefully more assuming nothing drastic happens with the market in our area before we decide to sell.

I live in TX and yes, it is a community property state.  I hate it but it is what it is.  I got divorced 2yrs ago and had to sell my house to split 50/50.  In any case, yes, his debt is yours because in the case of a split, they will use his debt as a bargaining chip to mediate the assets.  Be careful with the 401k.  It's a nice vehicle to borrow from because you are paying yourself back in interest.  I have a loan outstanding and I love that I'm paying 5% interest.

I say go for it but keep in mind your marriage situation. There is no separating your accounts from his.  The courts will consider it all one pot.

[giramomma]

If I was earning enough that I could afford a very large mortgage, daycare costs, and still put money away for retirement, I'd still figure out a way to make the town home work (I'm assuming it's more than 800sq feet), save, save, save, and plan to retire at 55, and spend 55-65 extensively traveling, of course after covid. 

But, I can think of 100 other things I'd prefer to do other than go to work, and 3/4 of my kids are in enough activities, now that really, some days our home is a glorified hotel/storage unit. And, DH and I do not have jobs where it's expected you entertain out of your home as part of the job.

[txlady1234]

I appreciate you all helping me to think this out. As of now we're sticking to our original plan of keep saving/pay down debt, while keeping our eye on the market in our desired area.

We have had conversations with a few different real estate folks in the area over the last week, and the advice is pretty unanimous that if we're able to do so to at least get under contract no later than 6-7 months from now to lock in the price. They are extending a tollway/highway into that area that is projected to be done around that time. Once it's done they're expecting prices to start increasing ($50-100k). So as one realtor put it, waiting until later we'd miss the potential to benefit in the increase of rising property values to gain equity. And purchasing anything after the tollway/highway expansion is completed would just result in us seeing even higher prices than what we're seeing now. 

Who knows if that will actually happen - but hearing that consistent message from several people in the industry kinda added weight to my theory just as a casual observer that prices will continue to increase (maybe quicker than I had anticipated).

The highway already extends past our current location, so I wouldn't expect to see such a large increase in our property value.

So something to think about, and keep an eye on.

[tractor]

Aug 25, 2020 13:56:25 GMT -5 txlady1234 said:

I appreciate you all helping me to think this out. As of now we're sticking to our original plan of keep saving/pay down debt, while keeping our eye on the market in our desired area.

We have had conversations with a few different real estate folks in the area over the last week, and the advice is pretty unanimous that if we're able to do so to at least get under contract no later than 6-7 months from now to lock in the price. They are extending a tollway/highway into that area that is projected to be done around that time. Once it's done they're expecting prices to start increasing ($50-100k). So as one realtor put it, waiting until later we'd miss the potential to benefit in the increase of rising property values to gain equity. And purchasing anything after the tollway/highway expansion is completed would just result in us seeing even higher prices than what we're seeing now. 

Who knows if that will actually happen - but hearing that consistent message from several people in the industry kinda added weight to my theory just as a casual observer that prices will continue to increase (maybe quicker than I had anticipated).

The highway already extends past our current location, so I wouldn't expect to see such a large increase in our property value.

So something to think about, and keep an eye on.

Interesting, around here extending the highway into your area usually brings the prices down. Just a discussion of that would make me want to move.