Sunday, June 18, 2006

401(k), 403(b), stocks, you and me: Financing your mortgage

Todays Tribune real estate section featured a great article about using securities accounts, 401(k)s and 403(b)s as financing options for home purchases. For instance, one can use these accounts as an equity line with various payback requirements. This is no way condoned by the author of this here blog or the Tribune's contributer Marilyn Kennedy Melia who wrote the story. But it is a valid option, or temptation, for those with much of their equity and net worth tied up in these vehicles. The only cash you have may be in the 401(k), 403(b) or a securities account.

Look, everyone is looking for all kinds of ways to use OPM (other people's money) and paper gains to leverage real tangible purchases. And it's just damn hard for working stiffs to afford Lakeview. But before you borrow from that 401(k) account to put money down on a house... please see a good CPA who is versed in these retirement plans and financial planning in general.

Hopefully, you've read the short story linked above by now and can now imaging the following scenario. Or like me, have been here before. You want to buy your first place. You dilligently contribute 5% of your paycheck to your 403(b) retirement account used in the health care industry (your job). Your allocation of this account is mainly small capital equities and they have performed well. Your company generously matches the 5% contribution. At the same time, you pay $750 a month in rent (your share), half utilities, car payment, party and travel fund (come on, your maybe 27 by now), taking out your girl, guy... whatever your into, clothes for work, cell phone etc... you get the point. You have no cash.

But, you have $30,000K accumulated in your 403(b). It's been five years since you enrolled in the plan and this will be your first home purchase. The rules dictating your account allow you to borrow from the amount you have in the fund for your first home and pay yourself back the principle and interest. The cash will allow you to qualify for a mortgage. Should you buy the condo or house if this is the only way you can finance it?

I'm telling you, there is a lot of people out there faced with this decision. My wife and I decided not to borrow against the account we had. This was due to the fact interest rates were low on the 100% financing products we were qualified for, we felt the employer match plan of the 403(b) we had was performing to well to mess with it, and we had a rightful expectation of increased income in the near future. So, we could skimp by on our first place without borrowing from the retirement account. Fortunately, we were able to pound down the ARM we had with the increased income and were left with 85% of our loan at a great 5 year fixed interest rate. Whew!

Just take a good look at your financial habits with a qualified CPA before you go messing with this stuff. If your values are really geared towards getting you in the right neighborhood and you demonstrate fiscal responsibility, creative financing can work.

As an aside, I can't say enough about the Tribune Sunday real estate section and it's selection of economic articles and condo owner advice (2nd and 3rd page, more so than the front page glam). It's a great resource for consumer ed. I say this with full knowledge that Tribune Co. also owns the Chicago Cubs... losers or 6 in a row at home and a gazillion games behind first place. I should boycott ( a lender buddy of mine has turned to, gasp, the Sun Times for this very reason). Grant me this obsession, the Cubs, but I really can't remember a more pitiful performance. And I remember as a wee youngster watching a Cubs team 37 games behind the Mets.

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