Mortgage versus Cash from Retirement Funds

[npaden]

Generally speaking, you can only take a loan out if you are making contributions to the plan. Once you are retired and no longer making contributions into the plan there is nothing left for them to take the payment out of.

Most plans won't allow you to take out a loan after a certain age and most will require any outstanding loans to be repaid before you retire.

Loans are prohibited from an IRA.

A quick google search says that it isn't against IRS regulations, but I haven't ever seen a plan that allows it.

 

[BigHornRam]

You or anyone else know if he could take a loan from his own 401K (if that was the retirement account he was using)?

Possible, definitely something to look into.

 

[BigHornRam]

Generally speaking, you can only take a loan out if you are making contributions to the plan. Once you are retired and no longer making contributions into the plan there is nothing left for them to take the payment out of.

Most plans won't allow you to take out a loan after a certain age and most will require any outstanding loans to be repaid before you retire.

Loans are prohibited from an IRA.

A quick google search says that it isn't against IRS regulations, but I haven't ever seen a plan that allows it.

Imagine being able to loan your own money to yourself. Lending industry would certainly pitch a fit.

 

[MTHunter1321]

Loan fees would be at least 4k. Unless it was a line of credit. Then interest would be higher than a mortgage, but if it was paid off in 2 years that wouldn't be a big deal. 24% tax rate is only on the amount above the 12% threshold, so maybe on 30k max would be taxed at an additional 12% ($3,600). I would hate to be living on retirement income and still paying a mortgage, so for piece of mind, I would pay it off a be done with it.

I’ve worked in banking for 16 years and I have never seen total loan costs from a reputable lender anywhere close to 4% of the principal balance regardless of credit score. If anyone has paid that, they got absolutely screwed.
I don’t disagree with you on not wanting to have a mortgage payment in retirement but I think there’s better options to preserve your wealth in this situation and not unreasonable to have it paid off over the short term

 

[BigHornRam]

I’ve worked in banking for 16 years and I have never seen total loan costs from a reputable lender anywhere close to 4% of the principal balance regardless of credit score. If anyone has paid that, they got absolutely screwed.
I don’t disagree with you on not wanting to have a mortgage payment in retirement but I think there’s better options to preserve your wealth in this situation and not unreasonable to have it paid off over the short term

Average Closing Costs in 2024 | Complete List of Closing Costs

Complete guide to mortgage and refinance closing costs, including average closing costs and a full list of what's included in your fees.

themortgagereports.com

"For example, say you’re purchasing a home. Closing costs on a $100,000 mortgage might be $5,000 (5%), but on a $500,000 mortgage they’d likely be closer to $10,000 (2%).

In addition, closing costs are often a smaller percentage on a refinance loan because some fees— like transfer taxes and owners title insurance — aren’t included.

Closing fees include everything charged by your lender, home appraiser, title company, and other third parties involved in the mortgage transaction."

 

[MTHunter1321]

Average Closing Costs in 2024 | Complete List of Closing Costs

Complete guide to mortgage and refinance closing costs, including average closing costs and a full list of what's included in your fees.

themortgagereports.com

"For example, say you’re purchasing a home. Closing costs on a $100,000 mortgage might be $5,000 (5%), but on a $500,000 mortgage they’d likely be closer to $10,000 (2%).

In addition, closing costs are often a smaller percentage on a refinance loan because some fees— like transfer taxes and owners title insurance — aren’t included.

Closing fees include everything charged by your lender, home appraiser, title company, and other third parties involved in the mortgage transaction."

I think that those articles are very misleading. Some of those “costs” are ones that you have to pay regardless of whether or not you pay cash or a mortgage. You still pay for title insurance if you pay cash for a house and it’s typical in MT that the seller pays for the title insurance. Same with property taxes, and insurance. You’re going to pay a closing fee to the title company (escrow) regardless of cash or financing. An inspection is optional for buyers, but personally I would get one if they accepted my offer with that contingency. Buying down interest rate points is also optional and I would say minority of borrowers actually do it. In the case of the OP scenario, if he’s selling a house in AK and needs only $100k to complete the purchase in MT then I’m guessing their loan-to-value would be very strong, less than 50%. That would very likely not require an appraisal to be completed. If I had a customer in that situation the loan costs for everything would be no more than $1500 and that’s if it’s a full 1% origination fee.

 

[BigHornRam]

I think that those articles are very misleading. Some of those “costs” are ones that you have to pay regardless of whether or not you pay cash or a mortgage. You still pay for title insurance if you pay cash for a house and it’s typical in MT that the seller pays for the title insurance. Same with property taxes, and insurance. You’re going to pay a closing fee to the title company (escrow) regardless of cash or financing. An inspection is optional for buyers, but personally I would get one if they accepted my offer with that contingency. Buying down interest rate points is also optional and I would say minority of borrowers actually do it. In the case of the OP scenario, if he’s selling a house in AK and needs only $100k to complete the purchase in MT then I’m guessing their loan-to-value would be very strong, less than 50%. That would very likely not require an appraisal to be completed. If I had a customer in that situation the loan costs for everything would be no more than $1500 and that’s if it’s a full 1% origination fee.

The seller pays title insurance on a real estate transaction. The buyer also pays additional title insurance if they take out a mortgage. Doesn't matter what the loan to value ratio is.

A better scenario for the original poster would be...... don't do a mortgage. Take out up to the 12% threshold from the 401 k this year. Say 50k. Borrow the remaining 50k through a line of credit loan. Sure he will pay at least 2% more in interest then with a mortgage but no closing costs. On January 2nd 2024, draw the remaining 50k from the 401k and pay off the line of credit. So half year of interest @ 9% on 50k. A little over 2k spent in interest to beat the taxman out 3 to 5k.

Or just buy a smaller Montana house with the proceeds from the Alaska house and skip the loan and taxman all together.

 

[AlaskaHunter]

Need to know what your expected withdrawals are going to be assuming you don't take out the mortgage.

The 12% bracket goes up to $89k so if your expected withdrawals are already going to be $75k or $80k there isn't much room to take the money out to pay the mortgage off early.

If you are expecting to only be withdrawing $50k or $60k then there is a lot more room to stay in the 12% tax bracket.

The next bracket is 22% that goes all the way up to $190k then goes up to 24% only at $364k. Something is up with your math if you are saying that pulling out $100k is going to jump you all the way from the 12% bracket to the 24% bracket.

Keep in mind that 12% is a one time hit, where the mortgage interest is going to be the gift that keeps on giving as long as you have a balance outstanding.

It's a pretty easy calculation if you have the amount you expect to withdraw if you don't have a mortgage.

Excellent points!
2023 standard deduction Married Filing Jointly $27,700
Plus since over 65 years old $1,850 = $29,550 so gross income of $89,450 + $29,550 =
$119,000 max to stay in 12% tax bracket

With taxes a withdrawal from my 401-k would be $122,000 for $100,000 cash as we enter the 22% bracket.
A one time hit.

At 7%, a 10-year loan would have about $39k in interest paid,
with monthly payments of about $1550 or about $18,600 per year.
And then there are fees also.

Seems like a one-time hit from my 401-k would be better.
Especially since we are used to living debt-free.

 

[antelopedundee]

We are a retired couple in our 60s with no debt, no major expenses and plenty of savings in retirement funds.

We are selling our Alaska house and moving to Montana.
Houses in MT are about $100k more expensive than in AK.
Say we need $100k to purchase a MT house beyond the cash from the sale of our AK house.

One option would be to take out a $100k mortgage and keep our income in the 12% federal income tax bracket.
Paying as much towards principal as we can each year.

The other option would be to take $100k from retirement funds, so no debt,
but our 2023 federal income tax bracket would likely rise to 24%.

What type of professional would be best to advice us?
Certified Financial Planner™ (CFP) · Chartered Financial Analyst (CFA) · Personal Financial Specialist (PFS) ·
Enrolled Agent (EA) · Certified Public Accountant (CPA)?

Why not buy as much house in MT as you can with the net sale funds from your AK house? Does it really need to be the equivalent or can you make do with smaller?

 

[AlaskaHunter]

Why not buy as much house in MT as you can with the net sale funds from your AK house? Does it really need to be the equivalent or can you make do with smaller?

The market with even a smaller house is approximately 100k more than our AK house...folks from Seattle and California have
driven prices up in MT. AK did not get a spike in prices during the pandemic like MT.

 

[antelopedundee]

I don't think that you need any of those folks to advise you. You can do the math yourself and decide. It sounds to me like the tax payment won't make or break you so if twas me I think I'd bite the bullet and own the new home free and clear; it's great feeling to have.

 

[npaden]

I think you are still not taking into consideration the earnings that the $122,000 would have if you left it in your 401k. It should directly offset whatever interest expense you have. I would think even conservatively invested you should be able to make a 6% return in your 401k which is what 15 year mortgage rates are now. If things changed and your earnings in your 401k got below 6% you could pull the money out and pay the mortgage off then.

It comes down to whether the $14,640 extra tax hit would be worth the hassle of a mortgage or not. Even with $4,000 in fees you are still $10,000 ahead.

That is all assuming that you are able to keep your withdrawals in the 12% tax bracket and still pay off the mortgage. If you can't then it would be better to take the hit now.

And a lot of it comes down to personal preference. I've had enough funds to pay off my mortgage for years now but have invested it instead. I have had a significantly higher return on my investments than the mortgage interest. Some people are risk adverse and wouldn't like that at all.

 

[David658]

I think you are still not taking into consideration the earnings that the $122,000 would have if you left it in your 401k. It should directly offset whatever interest expense you have. I would think even conservatively invested you should be able to make a 6% return in your 401k which is what 15 year mortgage rates are now. If things changed and your earnings in your 401k got below 6% you could pull the money out and pay the mortgage off then.

It comes down to whether the $14,640 extra tax hit would be worth the hassle of a mortgage or not. Even with $4,000 in fees you are still $10,000 ahead.

That is all assuming that you are able to keep your withdrawals in the 12% tax bracket and still pay off the mortgage. If you can't then it would be better to take the hit now.

And a lot of it comes down to personal preference. I've had enough funds to pay off my mortgage for years now but have invested it instead. I have had a significantly higher return on my investments than the mortgage interest. Some people are risk adverse and wouldn't like that at all.

I think you hit it in the last sentence - how risk averse you are.

David
NM

 

[npaden]

You might also double check to make sure taking it out in the big lump doesn't affect your Medicare Part B premiums. I know that can start to keep pretty expensive if your income is high after you retire. The extra premiums start at $194,000 for a married couple so if you took out the extra $122,000 in a lump sum plus what you were already planning on withdrawing for normal expenses that could get you into paying extra. I think it is $78 extra per month per person and they look back 2 years so that could add up. $78 x 2 x 24 months = $3,748 Something worth checking into for sure.

 

[antelopedundee]

I think you hit it in the last sentence - how risk averse you are.

David
NM

Or investment savvy. What assurance is there that you will do significantly better than the 6% interest that you'll pay?

 

[Bambistew]

Or investment savvy. What assurance is there that you will do significantly better than the 6% interest that you'll pay?

Since the withdrawal is income either way (lump sum or installments), he has to pay income tax no matter what. The govt is getting their cut. No way a 6-7% investment covers it all. At the $18600/year quoted above (seems high?) that's $2200 min in taxes taxes at the 12% rate.

The medicare max is another kicker. Damn. This thread makes me realize I need more income tax free cash squirreled away.

Can you buy the house next January? Take out half this year and half the next at the lower tax rate? What about a short term balloon vs traditional mortgage? No way around avoiding taxes that I can see, but maybe a shorter term payoff over a coupe years is money ahead since the total interest would be less?

So many things to consider in retirement. This thread has been interesting.

 

[mikieb]

I would leave my 100K in the retirement plan and take out a loan for the mortgage. 15 year. And, I would get a little more if you can get the numbers to work in your monthly budget... like get 150-175K loan if possible, not to have the cash on hand, but to buy a little more house or a house on a bigger lot or prime location on water front or the like.

But, with that said. I am no professional and not you. So. you know. For what that is worth.

 

[mikieb]

Imagine being able to loan your own money to yourself. Lending industry would certainly pitch a fit.

I have done it where I work.

I took a loan for 20K to buy a truck out of my 401K and took the repayment plan of weekly withdrawls from my paycheck with a 6.5% intrest. The 6.5% intrest I payed was credited to my account. So, it was like taking a 20k bond out that paid me 6.5%.

The deal on the truck went junk and I had the 20k in cash and invested it in dividend paying stocks EMB and MO and just let them deduct payments from my paycheck every week to pay back the loan. Once a year, I would flip $6500 of the 20k over into an IRA and take the tax savings until the 20k was all gone. I didn't plan all this out, it's just sort of the way it all happened to fall in place.

 

[darklozz]

Saw your mortgage vs. retirement funds pondering. I have been there! When I snagged my home, I tapped into retirement funds. Saved on interest but kept an eye on future security. Remember, it's a balancing act – house happiness now vs. golden years later. Mortgage Broker in Altrincham helped me through the whole process. Check all angles, chat with a financial guru, and find your sweet spot.

 

[David658]

Saw your mortgage vs. retirement funds pondering. I have been there! When I snagged my home, I tapped into retirement funds. Saved on interest but kept an eye on future security. Remember, it's a balancing act – house happiness now vs. golden years later. Mortgage Broker in Altrincham helped me through the whole process. Check all angles, chat with a financial guru, and find your sweet spot.

I am looking forward to the same questions. The idea of a paid off mortgage is appealing, but I think we are going to take the route of a small mortgage before pulling from retirement. This is all based on the value of the house going up, a payment less than rent would be, etc. I have a modest retirement from my previous job, and the program would be to tie it and the mortgage together - the mortgage won't go up, nor will the retirement check, so the payment would basically be perpetually covered. I guess in a way that is still withdrawing from my retirement, just coming from a pot that gets replenished every year.

Many roads to the same end, I suppose

David
NM