Another would you do this refinance (pay down loan with another loan)

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Goal33
Posts: 1292
Joined: Sun Apr 12, 2015 12:30 pm

Another would you do this refinance (pay down loan with another loan)

Post by Goal33 » Thu Jul 30, 2020 1:23 pm

SF Bay Area Property, Value ~1m... I am seeing some pretty good rates, thinking about applying, but not sure if it makes sense since I have to bring more money to the table. Would like to get perspectives from the group.

Current:
30-year fixed @ 3.25 with balance of 815k

Proposed:
30-year fixed @ 2.75 with balance of 765k (to get below the super conforming limit)
5-year fixed @ 5.75 with balance of 50k (loan from my 401k)
- 401k loan will come from bond allocation (BND)
- Realistically, I will pay this off in about 12-18 months
- I can continue to make this payment if my employment is terminated
- Paying this off will become my highest financial priority, at the expense of adding the next 50k to my brokerage

Edit: if relevant, I'd like to live in this house the rest of my life, however, I am still in my 20s and life happens
A man with one watch always knows what time it is; a man with two watches is never sure.

brad.clarkston
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Location: Kansas City, MO

Re: Another would you do this refinance (pay down loan with another loan)

Post by brad.clarkston » Thu Jul 30, 2020 9:57 pm

Personally? No I wouldn't and I would never take a loan on my 401k or ira's unless I hit rock bottom loose it all type of situation.
But I'm not a risk taker after 2008.

Topic Author
Goal33
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Joined: Sun Apr 12, 2015 12:30 pm

Re: Another would you do this refinance (pay down loan with another loan)

Post by Goal33 » Fri Jul 31, 2020 10:05 am

I don’t view the 401k loan as negatively. I have nearly 300k I can pull from a brokerage but the 401k enables this loan without tax ramifications.
A man with one watch always knows what time it is; a man with two watches is never sure.

ryman554
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Re: Another would you do this refinance (pay down loan with another loan)

Post by ryman554 » Fri Jul 31, 2020 3:19 pm

Goal33 wrote:
Fri Jul 31, 2020 10:05 am
I don’t view the 401k loan as negatively. I have nearly 300k I can pull from a brokerage but the 401k enables this loan without tax ramifications.
But there are fee ramifications. And some make it difficult to prepay

And yes, the "paid to you interest" is taxed twice.

Ron Ronnerson
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Location: Bay Area

Re: Another would you do this refinance (pay down loan with another loan)

Post by Ron Ronnerson » Fri Jul 31, 2020 3:59 pm

I would definitely refinance. A half percent savings on a loan of that size is significant over time and you said you want to live in the house the rest of your life.

As for how to come up with the $50k, I'm not sure whether or not borrowing from your 401k is best. If you have capital losses in your brokerage account, you may want to begin there. If you have extra cash in your emergency fund, perhaps you can use some of that and then work on replenishing that account. In any case, proceed forward with refinancing.

ut2sua
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Re: Another would you do this refinance (pay down loan with another loan)

Post by ut2sua » Fri Jul 31, 2020 4:54 pm

Goal33 wrote:
Thu Jul 30, 2020 1:23 pm
5-year fixed @ 5.75 with balance of 50k (loan from my 401k)
- 401k loan will come from bond allocation (BND)
- Realistically, I will pay this off in about 12-18 months
- I can continue to make this payment if my employment is terminated
- Paying this off will become my highest financial priority, at the expense of adding the next 50k to my brokerage
I believe if your employment is terminated, you will be required to pay off the 50K in full immediately. That, or the 50K is considered to be an early withdrawal. Check with your 401k admin to be sure....

Topic Author
Goal33
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Re: Another would you do this refinance (pay down loan with another loan)

Post by Goal33 » Fri Jul 31, 2020 5:07 pm

ut2sua wrote:
Fri Jul 31, 2020 4:54 pm
Goal33 wrote:
Thu Jul 30, 2020 1:23 pm
5-year fixed @ 5.75 with balance of 50k (loan from my 401k)
- 401k loan will come from bond allocation (BND)
- Realistically, I will pay this off in about 12-18 months
- I can continue to make this payment if my employment is terminated
- Paying this off will become my highest financial priority, at the expense of adding the next 50k to my brokerage
I believe if your employment is terminated, you will be required to pay off the 50K in full immediately. That, or the 50K is considered to be an early withdrawal. Check with your 401k admin to be sure....
Thanks for the heads up. I did check, my plan allows you to continue paying even if employment is terminated. Either way, I would prioritize closing this loan out either via new money coming in, or a heloc, if one is available to me after closing.
A man with one watch always knows what time it is; a man with two watches is never sure.

ut2sua
Posts: 15
Joined: Tue Apr 21, 2020 9:19 pm

Re: Another would you do this refinance (pay down loan with another loan)

Post by ut2sua » Fri Jul 31, 2020 5:14 pm

Given your answer, personally, I would do it. You will be saving ~4K/year on the mortgage due to the lower rate. You will be making a guarantee 5.25% on your 401K investment. This is the first order calculation. Second order calculation will involve how much you can deduct your mortgage interest etc.

LittleMaggieMae
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Re: Another would you do this refinance (pay down loan with another loan)

Post by LittleMaggieMae » Fri Jul 31, 2020 5:27 pm

If you are going to commit to "paying off" a 50K side loan in 12 to 18 months... why not just hit your current 3.25% mortgage with that extra money each month for the next 12 to 18 months? It's early in your mortgage (so paying the bulk of interest) so paying the balance down does save you money. I now it's not good to try to predict future interest rates... but really... it doesn't look like they will sky rocket anytime soon no matter who is in the White House. Not much is gonna happen until the election. And if there's a new president - nothings gonna move until after they take office (and maybe beyond).

Topic Author
Goal33
Posts: 1292
Joined: Sun Apr 12, 2015 12:30 pm

Re: Another would you do this refinance (pay down loan with another loan)

Post by Goal33 » Fri Jul 31, 2020 5:30 pm

LittleMaggieMae wrote:
Fri Jul 31, 2020 5:27 pm
If you are going to commit to "paying off" a 50K side loan in 12 to 18 months... why not just hit your current 3.25% mortgage with that extra money each month for the next 12 to 18 months? It's early in your mortgage (so paying the bulk of interest) so paying the balance down does save you money. I now it's not good to try to predict future interest rates... but really... it doesn't look like they will sky rocket anytime soon no matter who is in the White House. Not much is gonna happen until the election. And if there's a new president - nothings gonna move until after they take office (and maybe beyond).
The 765k super conforming limit should go up in January too. It’s just one of those bird in the hand things, I’m afraid rates may go up and I’d miss it.
A man with one watch always knows what time it is; a man with two watches is never sure.

TropikThunder
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Re: Another would you do this refinance (pay down loan with another loan)

Post by TropikThunder » Fri Jul 31, 2020 5:49 pm

Goal33 wrote:
Fri Jul 31, 2020 5:07 pm
ut2sua wrote:
Fri Jul 31, 2020 4:54 pm
Goal33 wrote:
Thu Jul 30, 2020 1:23 pm
5-year fixed @ 5.75 with balance of 50k (loan from my 401k)
- 401k loan will come from bond allocation (BND)
- Realistically, I will pay this off in about 12-18 months
- I can continue to make this payment if my employment is terminated
- Paying this off will become my highest financial priority, at the expense of adding the next 50k to my brokerage
I believe if your employment is terminated, you will be required to pay off the 50K in full immediately. That, or the 50K is considered to be an early withdrawal. Check with your 401k admin to be sure....
Thanks for the heads up. I did check, my plan allows you to continue paying even if employment is terminated. Either way, I would prioritize closing this loan out either via new money coming in, or a heloc, if one is available to me after closing.
The immediate-payback rule was changed in the ATCJA for 2018 and moved the payback deadline to the follow tax deadline. However, many employers (yours and mine included) allow payments to continue post-separation under the same terms so a forced withdrawal is no longer an issue.

As for the "double-taxation" critique, at least people have evolved from incorrectly saying the whole loan is double-taxed to now accurately saying just the interest is. But if you pay it off in 18 months as planned, you'll accrue ~$2,000 in interest (paid back into your 401k, not to a bank, custodian, or your employer) which will cost you ~$450 in taxes. Compare that to the interest savings on the new loan and I think you'll come out ahead. And in my case, the loan funds are not actually withdrawn from the (in my case) 403b, they are sequestered in an interest-bearing account that is incrementally released each time I make a payment. And the final cherry on the cake for me is that the sequester account is held in TIAA Traditional, which is currently paying 3% and which is also where I hold all of my fixed income so all I did was move $X from Fixed Income to "Sequestered Fixed Income."

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