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I have recently been shopping around to see if I could get my home refinanced. I purchased in Oct. 2007 for $200,000 - 30 year fixed at 5.99%.

I called my lender and they were willing to refinance at 4.875% for 20 years, or 5.125% for another 30 years. Even though I bought the last house in the neighborhood for at least $100k cheaper than every other house in the neighborhood, I don't think the appraisal will come in high enough to get the right LTV ratio. I think the lender wanted 97.5% or something like that.

Additionally I have a car that I have had to start commuting for a new job in, so I have put a ton of miles on it, and thus it is underwater for the value. I owe about $14k, and I could probably get $10k out of it.

I switched jobs last year and I currently have about $20,000 in a 401k that is just sitting there that I never have rolled into my currently 401k.

I guess my question is - since it doesn't seem like I can refinance in my current situation, should I:

  • put that 401k money into either paying the car off ASAP, so that I could then start paying my "car payment" into principal on my house loan,

  • put the 401k money into the house to try to get the loan-to-value (LTV) ratio (I expect an appraisal might come in at 180k, and the loan amount is down to $194k-ish right now),

  • do nothing, pay the car off on schedule and then start trying to put money into the house when the car is paid off in 3 years, or

  • open to suggestions.

Additional facts: The new job I am at my income is at $96,000/yr presently, with a good 401(k) plan, in which the company is putting in 10%, and I am putting in 4% for a total of 14% going into my new plan. I am 27.

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  • what are the terms on the car?
    – MrChrister
    Apr 12, 2011 at 1:45
  • it was 72 months originally, and march was the halfway point
    – Derek
    Apr 12, 2011 at 4:15
  • Long term car loans serve two parties, the dealer and the bank, not you the borrower. You might consider your next car being much less expensive.
    – ChuckCottrill
    Dec 9, 2014 at 2:30

3 Answers 3

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Don't steal from the 401k. If you take the money out, you'll pay 28% in taxes and 10% in penalties -- only getting $12,960 out.

Before you do anything, consult an online refi calculator to make sure you'll be in the house beyond the break-even point. With the numbers you've given and some reasonable guesses I made, it looks like you'll break even within a year.

If your new employer's plan allows for loans, roll it into the new plan. Based on what you say you're putting in, you should be able to take a loan out of about $15-20k, which would get you to your LTV goal.

Before you do this, calculate:

  • the payments you'll have to make on the 401k loan
  • extra cash you may need to cover closing costs
  • the new payment on your mortgage (I think it will be lower)
  • the payment on your car loan

and make sure you will comfortably be able to handle all of the payments.

Make sure you're aware of the loan terms on your 401k loan. Understand the penalties associated with failing to make timely payments.

Finally, beware of sinking all of your liquid cash into this -- how will you handle an emergency that comes up soon after closing on the new loan before you have a chance to rebuild your emergency fund?

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Take The 20k and transfer it to the new employer 401(k). You then can take a loan and accomplish the same thing. By the time you pay the tax and 10% penalty, that withdrawal will be worth just over half. The same half you can borrow out, pay yourself the interest and not lose out on 50 years of growth.

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I agree with the others that pulling the money out of your 401(k) is not the best idea due to the taxes and penalties. But I also think that a 401(k) loan is not a good option either. Somehow life happens, and the time when you can least afford to repay the loan (just after losing your job) will be the time when you have to repay the loan or pay the taxes and penalties. There's just too much risk there. You also lose the compounding gains you'd get from the investment, and it's likely not worth sacrificing your future retirement for this.

It's probably worth finding out how close you are to having your house appraise out for a successful re-fi. Without that information, you're just guessing. Depending on how close you are, you pile up as much cash as you can over the next few months to try to pay down the mortgage enough to qualify for the re-fi. As you're doing this, if home values start coming up in your area, you'll have that going for you as well. It might even be worth suspending your 401(k) contributions for a short while to give you more cash to put towards the re-fi goal.

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    I agree on the downsides of the 401k loan, but if his company match is dependent at all on his current contributions, it would be crazy to suspend them: he's getting an immediate 150% return. Stealing from the current 401k would significantly extend the payback period on the refi if you account for this lost "interest" (from months to several years).
    – bstpierre
    Apr 12, 2011 at 12:36
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    The company puts in 6% if I don't contribute anything, if I put in 4%, they will match that as well, making it a total of 10% from them, 4% from me
    – Derek
    Apr 12, 2011 at 13:54
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    @bstpierre I agree about the 150% return, but sometimes generating some focus in order to achieve a short-term goal makes it worth it to give it up for a bit. It would also serve as motivation to achieve the short-term goal as fast as possible
    – Randy Coulman
    Apr 12, 2011 at 16:39

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