Home Equity Line vs borrowing from 401K vs personal loan

[Tiberius]

12 minutes ago, SoTier said:

Borrowing from your 401k isn't really a "no interest" loan.   You may not pay interest to the bank and you may not be penalized by the government for borrowing the money from your 401k, but whatever amount you borrow will not be growing tax free in your 401k account, including not compounding.  If you have your retirement funds in bonds, money market accounts or CDs, you probably aren't going to lose too much if you pay back your loan eventually but if you invest in stocks you're likely going to pay a really high cost for that supposed "no interest" loan.

 

I'm retired now with a more conservative stock portfolio than I had when I was working, but my 403b (a 401k for public employees) returned 12.9% last year.  Since the economy turned around about 2011 or so, I've had at least 10+% returns every year and a couple of years of more than 20% returns even though I've been withdrawing various amounts from it since I retired in 2016.   I don't know how you are invested, but for myself, I would be unwilling to give up earning $5,000 on $50,000 a year in order to avoid paying a 3-5% a year in interest. (This isn't even counting the effect of compounding, ie that $5000 earned in year 1 also earns money going forward).  

 

 

 

Nice return on that 403b! Ours was a total rip off with the company running off with 8% off the top. I left that well over a decade ago, but some people I work with still do it.

[sherpa]

If your 401k/403b is invested in equities, the strategy is simple.

"Borrow" from it on the eve of a correction, and repay it on the eve of a rally.

Couldn't be more simple.

[Tiberius]

1 minute ago, sherpa said:

If your 401k/403b is invested in equities, the strategy is simple.

"Borrow" from it on the eve of a correction, and repay it on the eve of a rally.

Couldn't be more simple.

So use a crystal ball?

[LeviF]

1 hour ago, Tiberius said:

So use a crystal ball?

 

Or get elected to Congress.

[Augie]

2 hours ago, Tiberius said:

I know when people say, "But this time is different!" The bottom usually falls out. But it seems to me that the housing situation now is actually demand driven as population has really shot up. Not that I have skin in the game on this, just wondering what you thought.

 

First of all, I don’t claim to “know” anything, but I do have impressions. I think there is much less mortgage shenanigans than there were back in the last boom, but it’s still there to some degree, and always will be. I don’t think a gradual rise in population can account for the current spike. I think it’s more likely that second homes/vacation homes and investment rental properties and intended flips are more popular and the low interest rates have a lot to do with that.

 

I also think Covid has changed the way people live and work. My wife works with a lot of people in NYC. Some of them have not been in the office in a couple years and have moved out of the city or moved to places with some extra space to accommodate some office space. Our son and DIL just bought their first house. Because they are both working from home, their first house has FIVE bedrooms to accommodate offices for each of them. I’m not saying that explains the surge in demand or prices, but there was extra interest in the place with all the bedrooms which drove up the price a bit.

 

One last thought jumps out, but it’s just  a gut feeling. Places like Atlanta attract people for jobs. Almost everyone I know here moved to town for a job. That leads to a more stable market, albeit still with rising values, than places like Florida or Hilton Head, SC (where we lived for 30 years before Atlanta). Those warm weather, second home, vacation rental types of places have almost NOTHING available on the market. People see cheap money and are willing to have their dream winter home, or a place they can rent for part of the year and use when they like. Some are just looking to make a quick flip and earn some easy money. The more desirable areas seem to have higher peaks, lower valleys and FAR more volatility. 

 

Back in 2004-2005 in Sarasota, FL the biggest broker in town had agents personally putting in multiple contracts on pre-construction condos looking to flip them because by the time the development was done the would certainly be worth more in all the frenzy. I had a college buddy living in Boston call me about buying pre-construction condos in sleepy Englewood, FL, and he wasn’t sure where Englewood was or what it was like! I’m glad he didn’t do it, because the bubble popped shortly thereafter. Many projects stood partially completed for years. People realized they were “under water” on the investment property or the home that was a stretch for them (“get as much as we can, it will only go up!”). Nobody wants to be under water, and they look for a way out. “Why keep paying when it’s worth less than we owe?” 

 

We lived a few doors from an attorney and a real estate developer. They lived highly leveraged and on the edge in a magnificent home worth millions. When the music stopped their home went into foreclosure and instead of developing real estate they started a new business. They had a website that was something like walkaway.com. They helped people get out of their properties and helped negotiate with the banks to cause as little damage as possible. 

 

Sorry, it seems I’ve rambled on a bit. Just re-living some nasty times. I hope and pray THIS is nothing like THAT, but some of it does feel familiar. 

 

 

.

Edited January 26, 2022 by Augie

[Tiberius]

47 minutes ago, Augie said:

 

First of all, I don’t claim to “know” anything, but I do have impressions. I think there is much less mortgage shenanigans than there were back in the last boom, but it’s still there to some degree, and always will be. I don’t think a gradual rise in population can account for the current spike. I think it’s more likely that second homes/vacation homes and investment rental properties and intended flips are more popular and the low interest rates have a lot to do with that.

 

 

 

 

.

And the rising stock market. People with more money. Thanks for your take

[Chef Jim]

Do what you can to not borrow from your 401k.  Here are a few reasons.

 

1.  You pay back with after tax dollars.  When you distribute at retirement you are taxed again.  Double taxation

2.  If you leave your job your loan will be treated as distribution.  And if you're under 59 1/2 that will mean taxation AND a 10% penalty.  

Edited January 26, 2022 by Chef Jim

[Just Jack]

1 hour ago, Augie said:

I also think Covid has changed the way people live and work. My wife works with a lot of people in NYC. Some of them have not been in the office in a couple years and have moved out of the city or moved to places with some extra space to accommodate some office space. Our son and DIL just bought their first house. Because they are both working from home, their first house has FIVE bedrooms to accommodate offices for each of them. I’m not saying that explains the surge in demand or prices, but there was extra interest in the place with all the bedrooms which drove up the price a bit.

 

There was an article a year or so ago about the number of people moving from the NYC area to the Central NY area (Syracuse) because they could get a much larger house and land than what they were paying for before.  And if they needed to go to the city, there are multiple flights a day, or drive 4-5 hours.  What was not covered, was if companies would adjust their salary based on where they are living.  

[Mark80]

23 hours ago, Royale with Cheese said:

So I'm looking to buy a project house...smaller but I want to add to it.  I want to add around 500 sq ft and there's plenty of room for that.

 

I've been told to borrow money from your 401K for a loan, you won't be penalized and you just payback what you took out.  But, there's no interest.

 

Home Equity Line, if the bubble pops...would that put me in a huge hole?

 

I've never taken out a personal loan so I have no idea the years or interest rate on them.

 

I'm going to be putting roughly $35,000 - $40,000 in renovations/additions in the house.

 

What would be my best financial plan?

I'm not sure the part about zero interest in always true.  I am pretty sure when I looked into this (over 10 years ago) there was interest, but it was extremely low.  I can remember thinking "well, at least I'd be paying the interest to myself".  I never actually took out the loan so I'm not 100% on my memory.  But maybe it depends on your 401(k) or maybe I am just getting old and misremembering things.  I'd still do this any day over taking a bank loan.

[Ridgewaycynic2013]

Thank goodness.  I thought you were betting on football games.

 

[SoTier]

7 hours ago, Just Jack said:

 

There was an article a year or so ago about the number of people moving from the NYC area to the Central NY area (Syracuse) because they could get a much larger house and land than what they were paying for before.  And if they needed to go to the city, there are multiple flights a day, or drive 4-5 hours.  What was not covered, was if companies would adjust their salary based on where they are living.  

 

This seems to be a problem in the Southern Tier along the I-86 corridor from about Corning east to Binghamton.  A lot of locals complain about how people from NYC are driving up prices.   I'm sure it's happening in the Hudson Valley, too.  When I lived in the Albany area 20+ years ago, there was already a significant contingent of people who commuted from Hudson (the AMTRAK train to NYC has a station there) to NYC.  With remote work, Hudson and even Albany (2 1/2 hours to Pennsylvania Station) have undoubtedly gained even more commuters. 

[billsfanmiamioh]

On 1/26/2022 at 11:42 AM, Augie said:

 

I also think Covid has changed the way people live and work. My wife works with a lot of people in NYC. Some of them have not been in the office in a couple years and have moved out of the city or moved to places with some extra space to accommodate some office space.

It’s also changed the “where” for many people as well. I think a lot of soul searching went on that first year of the pandemic and when people realized that remote work wasn’t going away, it opened up the opportunity to live in places that people would have never even considered before. Especially places closer to “natural” wonders since living in a costal big city isn’t near as important anymore. 
 

We purchased a second property in August in a resort town in Montana. The real estate market has absolutely exploded there with wealthy people from CA and TX. I wish we had pulled the trigger about 1.5-2 yrs earlier, as we had already settled on that location after a couple years of researching and crunching numbers on other locales. it would have saved us a good amount of coin, but it’s still going to end up being a “good” investment long term when compared to other popular mountain towns. Heck, before we even closed we had one of the back up offers try to buy us out of the contract for 30k. Would have been easy money but we almost certainly would have missed our window to find the type of place we wanted at a price range we could afford. I look at the real estate out there regularly and comparable places to ours are already selling for 100-200k more depending on specifics.
 

We hope to enjoy it for ourselves a few times a year, as well as make some consistent money back as a rental for many years to come. We were a little too leveraged in the market and wanted to capture some of the paper gains of the last few years by cashing in on some real estate in an appreciating market that will produce some passive income. 

 

 

[Gugny]

On 1/25/2022 at 3:08 PM, Royale with Cheese said:

So I'm looking to buy a project house...smaller but I want to add to it.  I want to add around 500 sq ft and there's plenty of room for that.

 

I've been told to borrow money from your 401K for a loan, you won't be penalized and you just payback what you took out.  But, there's no interest.

 

Home Equity Line, if the bubble pops...would that put me in a huge hole?

 

I've never taken out a personal loan so I have no idea the years or interest rate on them.

 

I'm going to be putting roughly $35,000 - $40,000 in renovations/additions in the house.

 

What would be my best financial plan?

 

Well???

[Royale with Cheese]

6 minutes ago, Gugny said:

 

Well???

 

I didn't get the house.  My agent said their agent told her that they would accept my offer.

Then she text back 30 minutes later they were going with another offer.  Someone paid $50,000 over listing even though it needed significant upgrades all over the house.  Effing crazy.

[Gugny]

1 minute ago, Royale with Cheese said:

 

I didn't get the house.  My agent said their agent told her that they would accept my offer.

Then she text back 30 minutes later they were going with another offer.  Someone paid $50,000 over listing even though it needed significant upgrades all over the house.  Effing crazy.

 

Last year, a house down the road from me sold for $20K over asking price (which was already at least $100K more than the house was worth as recent as 5 years ago) to a couple from Wisconsin who bought the house based on a virtual tour.  It is insane.

[Augie]

12 minutes ago, Gugny said:

 

Last year, a house down the road from me sold for $20K over asking price (which was already at least $100K more than the house was worth as recent as 5 years ago) to a couple from Wisconsin who bought the house based on a virtual tour.  It is insane.

 

Now is a MUCH better time to be selling than buying. Unfortunately, you then have the problem of where to live. 

 

We were fortunate to sell two places (our house and the one we rented to our son) and buy a single, bigger house. We should be downsizing, but in order to get a bigger kitchen with an open plan, we had to buy a LOT more house that went with it. Never listen to me. DC Tom was apparently right, I am an idiot.   🤷‍♂️

Edited February 2, 2022 by Augie

[Just Jack]

8 hours ago, Augie said:

 

Now is a MUCH better time to be selling than buying. Unfortunately, you then have the problem of where to live. 

 

 

That's what happened to my brother and his wife.  They sold their house with a contingency that they had six months to get a new house.  It came down to just a few weeks left, and they had to go over their budget, to get one they liked. 

[Augie]

16 minutes ago, Just Jack said:

 

That's what happened to my brother and his wife.  They sold their house with a contingency that they had six months to get a new house.  It came down to just a few weeks left, and they had to go over their budget, to get one they liked. 

 

My sister in Providence has someone who wants to buy their house moving from California. California makes most markets look cheap. Sister wants to move to Newport where her son just had their first grandchild. Had a contract allowing her time to find a place. NOTHING sanely priced is available. She thought she got a great deal on her place, but had to cancel the deal. Newport is even more expensive than Providence (which is lovely, BTW). 

 

There WILL be a correction coming, imo. There just has to be. This is INSANE! I hope to be ready with cash for a place in Sarasota when interest  rates go up and prices go down. In 2006-2007 you couldn’t GIVE real estate away. People would rather have an STD.