Better options for paying off a mortgage than taking money out of your 401(k)

How can we take money out of our 401(k) account, pay off our mortgage and not pay taxes on it? Can any of it be deferred? The amount we’d want to take out is $105,000.

Unless you’re in danger of losing your house, you generally shouldn’t take money out of a 401(k) and use it to pay off a home loan.

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Your money is growing inside your 401(k) at a faster rate than you’re paying out for your loan. Also, your mortgage interest may be deductible if you itemize on your federal income tax return.

If you’ve recently refinanced, you’re probably paying less than 5 percent for your mortgage. (I just refinanced to a 15-year loan at 3.75 percent.)

If you itemize, your net interest rate is somewhere around 3.5 to 4 percent. That’s basically like free money, and over time you’ll do a lot better by keeping the cash inside your 401(k).

In addition, if you’re younger than 59 1 / 2 , you will not only pay taxes but will also pay a 10 percent penalty on your withdrawal.

So the real question is why would you want to take out that much money to pay off your mortgage? And if you did, that much of a withdrawal from your 401(k) would probably put you in a higher tax bracket, causing you to pay even more federal income tax on the amount you take out.

The only way to get tax-free cash is to borrow from your 401(k). But, again, I don’t recommend it. If you lose your job, you’ll have to replace all the cash within 60 days, plus you will be losing out on any return your retirement cash would generate inside your 401(k). The risks are extremely high that you could be caught short and wind up losing your home if you couldn’t come up with enough cash.

My suggestion is to keep your 401(k) money where it is and focus on additional ways to find savings in your budget so you can throw more cash at your mortgage.

We have requested a streamline refinance. Although we have a Fannie Mae loan, we were told we could not do this. Our lender was one of the big banks, and then they sold our loan to a company we’re not familiar with.

We are trying to refinance to a 15-year loan but are upside down, owing about $40,000 more on the mortgage than the house is now worth. The lender says it doesn’t participate in this sort of lending, and they’ve refused to help us. Is there anything we can do?

When you’re upside down on your mortgage, your options for refinancing are extremely limited.

But let me clear up one misconception: You can’t get a streamline refinance with a Fannie Mae loan — especially not if you’re upside down.

If you had an FHA loan, you could do a streamline refinance, but it doesn’t change the loan term from a 30-year to a 15-year. It just adjusts the interest rate on the loan, which might be good enough.

You can always prepay your mortgage to pay it off in 15 years by simply making about three or four extra mortgage payments per year. Not only would you cut your loan term significantly, but you also would start making a huge dent in your mortgage balance and much more quickly get right-side up on your mortgage.

Unless you go through a Home Affordable Modification Program, or HAMP, refinance — and I don’t know whether you would qualify, and it appears that your lender has told you that your loan does not qualify — you’re out of luck unless you come up with enough cash to bring yourself to a point in which you no longer have negative equity in your home. Then you could try to refinance your loan.

I recently sold a property in Texas to my aunt. This was a one-sixth undivided interest in a family farm. My brother owns another one-sixth. We received these pieces of property when my mother passed away a year ago.

My tax lady needs an appraisal of my one-sixth property, but the appraisers want to charge about $1,000, which seems high. Is there a less expensive way to get an appraisal?

.Because you only need this for tax purposes, and not to get a loan on the property, you should be able to shop around and find an appraisal for less.

If that’s not possible, talk to your tax preparer about having a local real estate agent prepare a comparative market analysis of the property. A CMA will evaluate similar properties that have sold recently, and you should be able to get an agent to do this for a couple of hundred dollars, or less.

One thing you don’t note in your question is what you think the property is worth. If the property is worth $1 million, it might be well worth the money to get the property appraised. If the property is worth $50,000, then it might not be worth it to you to have a proper appraisal.

The other members of the family, however, might be in a similar situation to yours, and perhaps all of you can split the cost of having someone give you a value for the property.

If your tax preparer says you need a formal appraisal, then shop around to get a better price.

I am current on my eight-year-old FHA mortgage, which is with one of the big banks. I want to refinance to take advantage of lower interest rates. When I have called my lender, they told me it would cost $4,000 to $6,000 in closing costs to refinance. What I want is a streamline refinance that I keep hearing about — the ones that cost about $400 and simply lower the interest on the current loan. How can I find one?

If you have an FHA loan, you should call back your lender and tell him you want to do an FHA streamline refinance, not a full refinance. Ask what the process is for a streamline FHA refinance (it’s important you use those words), how much it will cost and how long it will take.

Hopefully, the customer service representative will understand what you’re asking for and be a little more helpful. If not, you might wish to hang up and call again until you find someone who can help.

The benefit of this program is that the terms of your loan don’t change. All that changes is the interest rate. Another benefit is that the lender does not need to pull an appraisal of your property, which is very helpful when property prices are falling.

Unfortunately, if you have a conventional loan, you will not be able to do a streamline refinance and will have to evaluate whether it is worthwhile to do a full refinance. Given that mortgage interest rates have fallen again to near all-time lows, the answer might be yes.

One last thought: Even if you can do a streamline refinance, you might want to consider other options, as interest rates are so low. You are eight years into your loan, and you might benefit from a 15-year loan. Your payments might be lower than what you have now, and you’ll pay off your loan sooner than with a streamline refinance. There are some lenders that can offer you a refinance package in which you might not pay much in fees — and in which they won’t add their fees to your loan balance, either.

Shop around and see what deal might be the best one for you given your credit history, your credit score, the value of your home and your loan balance.

My lender is one of the big lenders that has had all kinds of trouble with its loan modifications. I went through the total disaster HAMP process, and it took a year for the bank to finally give me a loan modification.

I finally got my loan modification in May 2010, and the bank reported me as delinquent the entire time I was in the trial modification, destroying my credit.

I own a small business and can’t get credit because of this. I pleaded my case to the bank, the credit bureaus, the Treasury Department and dozens of others. No one seems to be able to get the banks to do anything to help consumers.

What banks have done during the HAMP process should be illegal. It should also be illegal to take a year to complete what should have been a three-month trial period. What I should do next?

Your situation is extremely unfortunate. The recession hit your business, and being reported as delinquent has made it difficult to get the financing you need to get your business working again. There are thousands of business owners who are suffering similar twin financial blows.

Now that you are in a permanent loan modification, your credit should start to improve. Some homeowners are finding that once their permanent loan modifications take hold, their lenders start reporting the loans as current, which helps rebuild their credit. But it may take a long time, years perhaps, for your credit to get back to where it was.

As for loan modifications taking too long to be processed, I hear you. But none of the banks was really ready for the onslaught of homeowners in need, and the Obama administration was too generous in letting banks set unrealistic timetables.

Unfortunately, at this point there’s really nothing you can do other than to file a complaint with the office of the comptroller of the currency’s Web site, helpwithmybank.gov.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” If you have questions, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact her through thinkglink.com.

 
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