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January 15, 2009 at 8:35 AM in reply to: Does it make sense to borrow money out of 401K to refinance? #329547January 15, 2009 at 8:35 AM in reply to: Does it make sense to borrow money out of 401K to refinance? #329631
(former)FormerSanDiegan
ParticipantI could be wrong, but I think the $ you borrow will be taxed twice. You’re paying back with after tax $. When you withdraw later, it’ll be taxed again.
Although I agree that borrowing from a 401k when it is down is not a great idea unless the payoff is good (which it might be in this case). You can forget that double taxation issue as it is a red herring (see below**). The only important conisderation is whether the loan is a good investment from your 401k’s point of view in terms of return and whether taking the loan will reduce the overall rate you are paying on debt service.
** This “double taxation” issue is overepmhasized by many, including financial advisors and diverts attention from the important points to consider (above).
Here’s why :Suppose you don’t borrow from the 401k. Those dollars that you were going to pay the loan back with are taxed anyway.
Example to illustrate:
Case 1 – You borrow $10,000 from your 401k at 6% and pay back the loan with after tax dollars about $200 per month (This $200 is taxed). If your 401k made less than 6% on other investments your 401k came out ahead by making the loan. If you used the $10,000 proceeds to pay off a debt at a higher interest rate you come out ahead (or if you use it to improve your overall effective interest rate on your debt).
Case 2 – You don’t borrow from your 401k. The $200 you are not paying against the loan is taxed anyway.
SO, whether you take the loan from the 401k or not, the dollars you have to either allocate to paying that loan or other things is taxed regardless.
Although, the dollars literally placed in the 401k when taking a 401k loan are taxed twice. It does not result in overall increased tax paid by the individual.
ParticipantIt’s the price.
The only real reason for foreclosure is being upside down. The reason is that if one was not upside down (after selling costs) they could sell their home and not suffer the credit hit from foreclosure. (There are exceptions, but this is by a wide margin the only important reason for sane people).
Once price declines end and there is slight upward movement people have the option to sell rather than be foreclosed on. The pricing bottom (in terms of nominal pricing) occurred in ~ Dec 1995 – Jan 1996. Many people were still upside down at this point.
When prices started creeping up in spring 1996 the foreclosure pace naturally declined since some folks were moving closer to break even (less underwater).
That is why foreclosures peaked at the bottom in pricing.
ParticipantIt’s the price.
The only real reason for foreclosure is being upside down. The reason is that if one was not upside down (after selling costs) they could sell their home and not suffer the credit hit from foreclosure. (There are exceptions, but this is by a wide margin the only important reason for sane people).
Once price declines end and there is slight upward movement people have the option to sell rather than be foreclosed on. The pricing bottom (in terms of nominal pricing) occurred in ~ Dec 1995 – Jan 1996. Many people were still upside down at this point.
When prices started creeping up in spring 1996 the foreclosure pace naturally declined since some folks were moving closer to break even (less underwater).
That is why foreclosures peaked at the bottom in pricing.
ParticipantIt’s the price.
The only real reason for foreclosure is being upside down. The reason is that if one was not upside down (after selling costs) they could sell their home and not suffer the credit hit from foreclosure. (There are exceptions, but this is by a wide margin the only important reason for sane people).
Once price declines end and there is slight upward movement people have the option to sell rather than be foreclosed on. The pricing bottom (in terms of nominal pricing) occurred in ~ Dec 1995 – Jan 1996. Many people were still upside down at this point.
When prices started creeping up in spring 1996 the foreclosure pace naturally declined since some folks were moving closer to break even (less underwater).
That is why foreclosures peaked at the bottom in pricing.
ParticipantIt’s the price.
The only real reason for foreclosure is being upside down. The reason is that if one was not upside down (after selling costs) they could sell their home and not suffer the credit hit from foreclosure. (There are exceptions, but this is by a wide margin the only important reason for sane people).
Once price declines end and there is slight upward movement people have the option to sell rather than be foreclosed on. The pricing bottom (in terms of nominal pricing) occurred in ~ Dec 1995 – Jan 1996. Many people were still upside down at this point.
When prices started creeping up in spring 1996 the foreclosure pace naturally declined since some folks were moving closer to break even (less underwater).
That is why foreclosures peaked at the bottom in pricing.
ParticipantIt’s the price.
The only real reason for foreclosure is being upside down. The reason is that if one was not upside down (after selling costs) they could sell their home and not suffer the credit hit from foreclosure. (There are exceptions, but this is by a wide margin the only important reason for sane people).
Once price declines end and there is slight upward movement people have the option to sell rather than be foreclosed on. The pricing bottom (in terms of nominal pricing) occurred in ~ Dec 1995 – Jan 1996. Many people were still upside down at this point.
When prices started creeping up in spring 1996 the foreclosure pace naturally declined since some folks were moving closer to break even (less underwater).
That is why foreclosures peaked at the bottom in pricing.
Participant[quote=asianautica]
San Diego, I think, is a long way from <50%*rent, if it ever get there. However, places like Fresno is already there.[/quote]I seriously doubt we will see that kind of figure for single family homes in any reasonable middle class neighborhood in San Diego. It has not happened at any time in the past 40 years. For apartment buildings and condos in marginal areas I would expect to see these kinds of situations develop. Also might happen in the barrio for SFRs.
Participant[quote=asianautica]
San Diego, I think, is a long way from <50%*rent, if it ever get there. However, places like Fresno is already there.[/quote]I seriously doubt we will see that kind of figure for single family homes in any reasonable middle class neighborhood in San Diego. It has not happened at any time in the past 40 years. For apartment buildings and condos in marginal areas I would expect to see these kinds of situations develop. Also might happen in the barrio for SFRs.
Participant[quote=asianautica]
San Diego, I think, is a long way from <50%*rent, if it ever get there. However, places like Fresno is already there.[/quote]I seriously doubt we will see that kind of figure for single family homes in any reasonable middle class neighborhood in San Diego. It has not happened at any time in the past 40 years. For apartment buildings and condos in marginal areas I would expect to see these kinds of situations develop. Also might happen in the barrio for SFRs.
Participant[quote=asianautica]
San Diego, I think, is a long way from <50%*rent, if it ever get there. However, places like Fresno is already there.[/quote]I seriously doubt we will see that kind of figure for single family homes in any reasonable middle class neighborhood in San Diego. It has not happened at any time in the past 40 years. For apartment buildings and condos in marginal areas I would expect to see these kinds of situations develop. Also might happen in the barrio for SFRs.
Participant[quote=asianautica]
San Diego, I think, is a long way from <50%*rent, if it ever get there. However, places like Fresno is already there.[/quote]I seriously doubt we will see that kind of figure for single family homes in any reasonable middle class neighborhood in San Diego. It has not happened at any time in the past 40 years. For apartment buildings and condos in marginal areas I would expect to see these kinds of situations develop. Also might happen in the barrio for SFRs.
Participant[quote=poorsaver]It’s peculiar how rents could fall when demand is strong due to record breaking foreclosures. I’m in the eastern part of LA county and let me tell you rents here are certainly not going down. 1300 sq. ft. 45 yr. old POS still getting $2000 a month minimum. Sad.[/quote]
I was driving around in West LA last week and noticed a preponderance of for rent or lease signs. This area is much more influenced by jobs than foreclosure refugees.
Participant[quote=poorsaver]It’s peculiar how rents could fall when demand is strong due to record breaking foreclosures. I’m in the eastern part of LA county and let me tell you rents here are certainly not going down. 1300 sq. ft. 45 yr. old POS still getting $2000 a month minimum. Sad.[/quote]
I was driving around in West LA last week and noticed a preponderance of for rent or lease signs. This area is much more influenced by jobs than foreclosure refugees.
Participant[quote=poorsaver]It’s peculiar how rents could fall when demand is strong due to record breaking foreclosures. I’m in the eastern part of LA county and let me tell you rents here are certainly not going down. 1300 sq. ft. 45 yr. old POS still getting $2000 a month minimum. Sad.[/quote]
I was driving around in West LA last week and noticed a preponderance of for rent or lease signs. This area is much more influenced by jobs than foreclosure refugees.
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