Should I pay off my 401(k) loan early?

[wenrob]

I’m really shocked that only @wenrob ie the only other one to point out that OP is living off of someone else’s generosity right now. No way would I live in someone else’s house and take such an extravagant vacation.

OP, play back the 401K; tackle the debt, and then move.

Thanks to PPs for all the life insurance and annuities talk as well. I learned quite a bit along the way, and I consider my DH and I well insured and on the right track with our investments, annuities, and insurance.

Yeah that part really, really bothers me. Taking on another family is expensive. Seeing my utilities and grocery bills shoot up while they’re taking a ridiculously expensive vacation would chap my bootie to no end. They’d likely come home to their bags packed on the front porch.

 

[JacksDaddy]

MantaRider - I hope you are still scanning the responses, even though you said you checked out of this thread a few days ago because people were not addressing your question...

One thing no one has addressed are secondary negative impacts of the 3 choices you gave us for the $10K. I suspect $10K will not provide at least 20% down payment on your new FL home, so you'll be stuck paying PMI (Private Mortgage Insurance) in addition to Principle and Interest. PMI sucks! It's literally $ down the drain, it takes a long time to get your principle down to 80% to remove PMI (if your lender will allow it) and you have to cross your fingers the appraiser (which you have to pay for out of pocket) will value your home high enough to achieve 80% loan to value of the home. Since the 2008 mortgage crisis appraisers have been much more conservative on appraisals.

My recommendation is to pay off your 401K loan - the power of compounding interest over time is extremely difficult to recover, google it, you'll see. But more importantly do a lot of research on a good living situation for your family, determine what you can afford in rent by developing a budget with your wife, make sure you are both committed to keeping expenses low enough to build the 20% down payment fund for the home you both want. Hold each other accountable and the answer to whether you should take a GF vacation will be easy. The goal of a new home will motivate you and enrich your relationship by working on it together.

Best of luck to you!

 

[RamblingMad]

MantaRider - I hope you are still scanning the responses, even though you said you checked out of this thread a few days ago because people were not addressing your question...

One thing no one has addressed are secondary negative impacts of the 3 choices you gave us for the $10K. I suspect $10K will not provide at least 20% down payment on your new FL home, so you'll be stuck paying PMI (Private Mortgage Insurance) in addition to Principle and Interest. PMI sucks! It's literally $ down the drain, it takes a long time to get your principle down to 80% to remove PMI (if your lender will allow it) and you have to cross your fingers the appraiser (which you have to pay for out of pocket) will value your home high enough to achieve 80% loan to value of the home. Since the 2008 mortgage crisis appraisers have been much more conservative on appraisals.

My recommendation is to pay off your 401K loan - the power of compounding interest over time is extremely difficult to recover, google it, you'll see. But more importantly do a lot of research on a good living situation for your family, determine what you can afford in rent by developing a budget with your wife, make sure you are both committed to keeping expenses low enough to build the 20% down payment fund for the home you both want. Hold each other accountable and the answer to whether you should take a GF vacation will be easy. The goal of a new home will motivate you and enrich your relationship by working on it together.

Best of luck to you!

You can put 5% down. PMI is not a big deal. My investments return far more than the incremental rate impact of PMI, which I calculated out at around 38bps for my current home. I am paying down now to remove it only because I now expect future returns to come in around my mortgage rate. However, I made far more than double my rate with the cash that would have took it off my previous mortgage. I now have enough cash to pay off my mortgage.

 

[JacksDaddy]

You can put 5% down. PMI is not a big deal. My investments return far more than the incremental rate impact of PMI, which I calculated out at around 38bps for my current home. I am paying down now to remove it only because I now expect future returns to come in around my mortgage rate. However, I made far more than double my rate with the cash that would have took it off my previous mortgage. I now have enough cash to pay off my mortgage.

couple things - the interest rate for a 5% down mortgage will not be as good as 20%, so now you've introduced another negative. Second - you need to define how much $ is a "big deal", it may not be a big deal to you because you have other investments that overcome the PMI penalty. I'm confident you are the exception to the norm, and as you say your investment returns are not guaranteed, PMI penalties are. It's been a long time since I paid PMI but I recall it was enough to make me angry and intentional about getting rid of it ASAP. I just want MantaRider to think about secondary impacts of his $10K decision.

 

[RamblingMad]

couple things - the interest rate for a 5% down mortgage will not be as good as 20%, so now you've introduced another negative. Second - you need to define how much $ is a "big deal", it may not be a big deal to you because you have other investments that overcome the PMI penalty. I'm confident you are the exception to the norm, and as you say your investment returns are not guaranteed, PMI penalties are. It's been a long time since I paid PMI but I recall it was enough to make me angry and intentional about getting rid of it ASAP. I just want MantaRider to think about secondary impacts of his $10K decision.

I saw no benefit between 5% and 20% down. You’d think there would be one. There wasn’t. My PMI is $1200 a year. That sucks. But my investment return annualized on the amount I would have to pay to get it taken off easily exceeds $1200 a year. That’s just how the math works out. And even the additional principal reduced doesn’t offset it. You have to do the math before making the decision.

Now I expect returns around 4-5% annualized, so now I’m getting PMI taken off this quarter.

I don’t see a rush in him paying off his 401k loan. If this was a credit card at 20%, then I’d say pay that off ASAP. As long as he continues to contribute to his 401k to get any match, he still should be okay.

Really, the big problem here is his wife’s spending habits that exceed their income. Eventually, this will become a big problem.

 

[tvguy]

couple things - the interest rate for a 5% down mortgage will not be as good as 20%, so now you've introduced another negative. Second - you need to define how much $ is a "big deal", it may not be a big deal to you because you have other investments that overcome the PMI penalty. I'm confident you are the exception to the norm, and as you say your investment returns are not guaranteed, PMI penalties are. It's been a long time since I paid PMI but I recall it was enough to make me angry and intentional about getting rid of it ASAP. I just want MantaRider to think about secondary impacts of his $10K decision.

Not necessarily. My interest rate was the same with 5% or 20% down. Thanks to rapid increase in value, I only had to carry PMI for a year. But full disclosure, that loan program almost bankrupted my bank. And of course, not knowing the amount of the loan and investments in OP's 401k, it's hard to say, but that money not being in the 401k could cost him tens of thousands of dollars over the life of the 401k

 

[RamblingMad]

Not necessarily. My interest rate was the same with 5% or 20% down. Thanks to rapid increase in value, I only had to carry PMI for a year. But full disclosure, that loan program almost bankrupted my bank. And of course, not knowing the amount of the loan and investments in OP's 401k, it's hard to say, but that money not being in the 401k could cost him tens of thousands of dollars over the life of the 401k

The S&P 500 is projected to grow between 4-5% annualized over the next decade according to Vanguard. I’m sure he’s paying more than that in interest on his loan. I would guess he would end up in the same place. These loans have to be paid off in five years. The problem is that they’re living beyond their means, which means bankruptcy filing in the future could happen along with divorce. He has much bigger problems than this loan.

 

[AlohaNow]

There are many worrisome issues on this thread, but I just wish to highlight the one that concerns me most for our OP, as no one else has mentioned it.

I checked the plan provisions, I can continue to make the same payments if I leave for another employer

Even though you may be able to make the same payments if you leave, did you clarify if the entire remaining balance becomes fully taxable to you in the year that you leave your current employer? That is typically how it would work. @MantaRider , I beg you to check on this before you make any decision to leave your current employer.

 

[Hey Blinkin]

After reading through the many responses here it backs up my theory to never ask for advice on the internet. There are some gold nuggets in here but there is also a lot of dynamite. Reach it to a financial coach or leader where you will get the correct advice you need.

 

[Mom24Princesses]

Not to the OP or anyone person on the thread, but getting out of debt with a financial advisor.
Vacations are cash operations.