Would you tap your 401k to avoid foreclosure?

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Charles
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Would you tap your 401k to avoid foreclosure?

Post by Charles »

Even if the penalty for pulling the money out was eliminated?

http://www.latimes.com/business/realest ... 8730.story

It is being considered. Currently there is a penalty (and taxes if not a Roth 401k) to pull the money out. The proposed legislation would amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

I guess it depends. If I was 25 was $50K in my 401(k), I might not. Is the credit destruction worth the future benefit of that $50K compounding from an early age? Probably not but I'd have to crunch the numbers and make assumptions. But if I was 55 with $800K in it I would probably do it - still after crunching the numbers.
not4u13
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Re: Would you tap your 401k to avoid foreclosure?

Post by not4u13 »

It depends. How much equity do I have in my home? If I pull the money out and keep it, am I still upside down? If I have 50% equity but lost my job and just can't make the payments ... probably.
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oceanvue
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Re: Would you tap your 401k to avoid foreclosure?

Post by oceanvue »

why would you crater your 401K and pay penalties if you had 50% equity in your home?
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not4u13
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Re: Would you tap your 401k to avoid foreclosure?

Post by not4u13 »

oceanvue wrote:why would you crater your 401K and pay penalties if you had 50% equity in your home?
1) The question posed assumed that there were no penalties.
2) If I could save the equity in my home by making up back payments using my 401k then that is a better investment. From an absolute dollar perspective, I likely have more money in the equity of my home than I would have to spend to save it.

Now, I might take a different approach if I had no income and no plan for making future payments.
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Parrotpaul
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Re: Would you tap your 401k to avoid foreclosure?

Post by Parrotpaul »

not4u13 wrote:
1) The question posed assumed that there were no penalties.
2) If I could save the equity in my home by making up back payments using my 401k then that is a better investment. From an absolute dollar perspective, I likely have more money in the equity of my home than I would have to spend to save it.

Now, I might take a different approach if I had no income and no plan for making future payments.
If a homeowner planned to live there for more than a couple years and defined it as "his home" and not "his investment," he might see things differently. No?
"I think I may say that of all the men we meet with, nine parts of ten are what they are, good or evil, useful or not, by their education." John Locke
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oceanvue
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Re: Would you tap your 401k to avoid foreclosure?

Post by oceanvue »

not4u13 wrote:
1) The question posed assumed that there were no penalties.
2) If I could save the equity in my home by making up back payments using my 401k then that is a better investment. From an absolute dollar perspective, I likely have more money in the equity of my home than I would have to spend to save it.

Now, I might take a different approach if I had no income and no plan for making future payments.

It said there is a penalty and you're going to pay tax on it too figure a total of 30% all in as opposed to 5-7 % on an equity line of credit but do what you want, you're property still has a good 20%+ depreciation so maybe it's not worth saving
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not4u13
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Re: Would you tap your 401k to avoid foreclosure?

Post by not4u13 »

Parrotpaul wrote: If a homeowner planned to live there for more than a couple years and defined it as "his home" and not "his investment," he might see things differently. No?
You are suggesting that there is an emotional factor and I agree. But there is also a very emotional factor in tapping into your retirement savings as well. Do you want to keep your "home" and plan on postponing your retirement (or at the very least, cutting back on your retirement plans)? Both have a significant emotional factor.

It's better to seek professional guidance from a tax advisor. That doesn't mean you are treating it as an investment, it means you are trying to make a sound financial decision. When money is tight, it is crucial to use your head and not just your heart.
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SoMelo
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Re: Would you tap your 401k to avoid foreclosure?

Post by SoMelo »

not4u13 wrote:
You are suggesting that there is an emotional factor and I agree. But there is also a very emotional factor in tapping into your retirement savings as well. Do you want to keep your "home" and plan on postponing your retirement (or at the very least, cutting back on your retirement plans)? Both have a significant emotional factor.

It's better to seek professional guidance from a tax advisor. That doesn't mean you are treating it as an investment, it means you are trying to make a sound financial decision. When money is tight, it is crucial to use your head and not just your heart.
But if you end up owning your home by the time you retire you could sell it and downsize, rent, move in with your kids ( :D ) or even do a reverse mortgage. It all boils down to how much your home is worth, how much to get yourself out of foreclosure and the ability to continue to keep your payments current. Pretty safe bet if someones home is in foreclosure they are also behind on property taxes.
Charles
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Re: Would you tap your 401k to avoid foreclosure?

Post by Charles »

SoMelo wrote: It all boils down to how much your home is worth, how much to get yourself out of foreclosure and the ability to continue to keep your payments current.
That's why I originally wrote a person would have to crunch the numbers. Depending on age, equity, income, amount underwater, size of 401(k), retirement date and several other factors, it probably makes sense for some people and not for others.
afan95
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Re: Would you tap your 401k to avoid foreclosure?

Post by afan95 »

If you're avoiding foreclosure, I'm assuming you don't have money currently to pay that bill.
We're all assuming that you're going to be able to find said money in the future to pay rent or you already have housing available to you.
What if you don't?

I sure would like to know that I and my family have a roof over my head and a place to sleep as I'm looking for a job.

I have no desire to be homeless. But that's just the position I'm in at this time regardless of whatever the numbers show.
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