Paying Off Your Mortgage With Your 401K - Should I Pay Off My Home Early? 

The house thing is more emotional for some than financial. Financially speaking, now you have all that money inside your sticks and bricks, getting a 0% rate of return, and will not produce income for you the rest of your life. For many, a home is 1/3 to 1/2 their net worth. Which means 1/2 there money will never generate income for retirement. Often times it’s better to have a mortgage and your money producing cash/income to pay the mortgage and put money in your pocket. That money in your house is idle - dead equity now. But if it feels good, well there is a price to pay for that and that’s okay if you’re willing to pay the price. Just make sure you’re doing the math correctly. The car is not free, it’s opportunity cost. What could have the 30,000 grown to had you invested it instead of put it into a car? See when you pulled money from your 401k, you also eliminated that money from working and growing,….so there is a cost….the car is not “Free!” And the fact that you have to then take current income and pay back the loan, plus 9%, again means that is 30,000 that you could have put into investments instead of car re-payments is gone. So in reality you gave up on the opportunity for your money to work for you….twice, once when you borrowed/withdrew from your 401k, and a second time with the income you had to deploy to reimburse your loan/withdrawal. I’m not saying this is the worst thing you could have done, but understand what you really did. How about this? If your money was growing at say 12%, and you get a car loan at 7%, you make the spread of 5%. See it’s not about the interest you pay it’s about the interest you make. This way you get the car, and your money still works for you. Finally, your money is not making 9% interest because you are paying it back - it’s losing 9% that could have gone to other investments, it’s a 9% opportunity loss. Hope that helps…. Thanks for your comment!

@@wisemoneytools Interesting perspective thanks for replying. Please note that the stock market could crash and we could go into a great depression and your 401k could tank! At least my house is paid off and I will not have to worry if the stock market crashes because I will own my home and not have it repossessed. Also taking out a 401k loan for my car, I MAKE money. It is 9% interest I am paying MYSELF! 401k is not getting 9% return, so I am making guaranteed money on the interest I pay to myself.

@@JonathanGarven Which is why I don’t like 401ks and market assets that retirement and livelihood depend on. Just make sure you understand the car situation. The only reason you are “making” money is you are taking cash flow from your income and paying the interest. The question is, could you have done better with that money than having it in your tires and wheels and taking cash flow to pay back the loan. I’m not saying it’s not a better way to go - but there are even more productive ways to do what you are doing. You aren’t making any money on your money, what you are doing is saving an extra 9% from your income. Your money is in a car going down in value every year and didn't give you any tax savings. Thanks for the reply!

Of course it was. That was the purpose of the video to show that even after paying interest, you would be much better off keeping your equity separate from you sticks and stones. As long as you can save and invest for more than your mortgage interest (minus an interest tax deduction if you qualify) you'll create more wealth. It's not hard to do at current mortgage rates. We've been taught to look at the wrong part of the equation. We're told to be worried about the 150k in interest being paid, yet you could double or triple that if you had it invested in a safe, tax-free account. I call it stepping over dollars to pick up dimes. Don't worry about the dimes you're paying, make the dollars instead. Hope that helps!

You may want to check out one of my other videos as well: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-bM_DHs60WC8.html

That is the conventional thought, and sadly not a very financially beneficial way to manage your money. It makes little sense if your money can do better outside of your home. All it has to do is get a return greater than the mortgage rate you are paying and you win. That is pretty easy to do in these low interest rate environments. I mean mortgages at 3% or even less! At these rates, I'd never want to pay it off because the money is so cheap and I can do better than having money tied up in sticks and stones. What you're also missing in the calculation of what you are losing in opportunity cost by having your money all in your home. As an example if you take the full 30 years to pay off your mortgage on a 300k with 60k down payment, financing 240k @ 3% interest you will pay 142,000 in interest. That is about half again the loan amount and it sounds horrible, right? However, if you were able to take the $240,000 and instead of putting it into owning your home, you were able to earn a greater return than 3%, your money is working doubly hard. In 30 years, $240,000 @ 5% is worth = $1,037,000. If we subtract the interest you paid of $142,000, the net result is you're ahead $895,000. Didn't make much since to own your home did it? That is a lot of money to miss out on. You also get your home's appreciation whether you own it or owe a mortgage. So we can add the growth of the homes resell value too. If you earn 7% the net difference is about 1.7 million more in your pocket. think about that nearly 2 million dollars more by keeping your money outside your home. And at 10% you be ahead $4,000,000. Do you really care that the bank earned interest when their money is so cheap right now,? You can get much further ahead keeping your money out of your home. And if you put your money safe, guaranteed assets, earning double digits, and tax-free, you really win! Making a spread on the banks money is a massive benefit to you. And since its so cheap you can take advantage of it. You are focussing on the wrong part of the equation, you're stepping over dollars to pick up dimes. Hope that helps!

@@wisemoneytools but if you pay off your house early aren’t you still free to make other investments now that you don’t have a mortgage to worry about?

@@lisaspics1127 Sure, but you've now got dead equity doing nothing for you forever. Don't worry about how much you are paying the bank, as long as you are using that money and earning more than the mortgage interest, you are winning.

Agreed,and paying off your mortage fast is not the conventional thought. A lot of people refinance ,take forever to pay off their mortgage,move again thus wasting even more money towards interest as a result. Paying off your house and investing is the best way to go for us, then doing more investments after the house is paid off.

For some that works - but having cash available during the tough times can be more important than owning your home. I mean without a job, money, cash, you may have to sell your home to survive if that is where you stored your wealth. There may be better alternatives and more productive, wealth building ways. Thanks for the comment!

Sounds like you've got a good plan! Thanks for the comment -

Take out a loan from the 401k to avoid the 10 % penalty and taxes. This only works if the mortgage balance is up to 50k and you can take a loan for 50k from the 401k The loan that you pay back is at around 4-5 % interest. You end up paying yourself instead of the mortgage company . This makes sense when the market is about to crash. Like now in the next few months. At that point even is the market crashes you still have an earning of 4 % and you don’t lose much from the investment portfolio portion of the 401k since you don’t have much in it

I'm think about doing the same in a few months. I would prefer to put the extra $800 in investments instead of the mortgage company. Hard decision.

Yes

Hi Toni, Check out some of my more recent videos where I talk about why to keep your mortgage. If you want to talk about some ideas, don't hesitate to reach out.

I just sit my IRA in money markets waiting for the next collapse. Then buy. Feels good to keep risk low and not lose principal. Might want to convert now into a Roth IRA, then self direct in that. Everything is tax free forever. Don’t wait to have too much in your IRA to convert. The taxes are too high.

I appreciate the comment! Thank you!

Sounds like you're doing pretty well, good for you. Next step would be to show you how to leverage your policy and accelerate the return. Will also add more tax-free income. Feel free to reach out to me and I'll show you an idea or two. Thanks for the comment!

Great job. What do you do for a living?

Ashley Taylor Health care provider

Wise Money Tools Thanks, I will take you up on that offer.

Nice - congrats. The only thing you might consider is leveraging your life insurance to accelerate the returns and tax-free income. A bit difficult to explain on a post, but if you'd like to see something quite remarkable, reach out to me - danthompsonsdesk@gmail.com

Always a balancing act for sure. Leverage is typically the way to make real estate work. Adds risk to the equation and often times more than many want to take. If you're interested, I'll show you how to leverage without risk, and tax free. Thanks for the comment!

I think we can design a more productive plan. I understand you're wanting to get the debt paid off, however, in RE, being debt neutral can be a good thing. If you'd like to schedule a quick strategy session, we can discuss some alternatives that might improve on your situation. Shoot an email to dan@ wisemoneytools.com Thanks for the comment!

You will get a surprise tax bill of 30%. Did you save at least $33,00 in interest payments? If not, whats the point?

Wait till the mortgage is at 50k then take out a loan from the 401k for 50k and pay off the mortgage with out paying a penalty.

Age has a lot to do with your question. If you are 60, might make sense to take the withdrawal. If you are under 60, then yes the loan would be better, depending on what you are going to do with it. You don't want to risk losing the funds and then get stuck with a penalty and taxes. Hope that helps!

The cost of early withdrawal from a 401k is the taxes owed and a 10% penalty. Depending on your tax bracket it could cost 40%, 50% or more. One thing to consider it to not use a 401k, maybe do a ROTH or use high cash value life insurance along with some leverage and build your wealth outside of a retirement plan. Then you can pretty much do what you want with your money without the 59 1/2 and the 70 1/2 rules. Paying off a home with a low interest rate mortgage may trap money with low returns in sticks and stones. Hope that helps - Thanks for the comment/question.

አደሰ ሀገር You’re welcome, glad to be of help - thanks for the comment and keep watching!

አደሰ ሀገር You’re welcome, glad to be of help - thanks for the comment and keep watching!