I will be closing on my first house on December 4th, and I will be bringing a 20% down payment to my closing date.
As someone who just paid off my student loans a few months ago, I definitely didn’t just have $40k lying around.
What I did have was a fairly substantial amount of money in my 401k. The only problem is an early withdrawal from a 401k means I’d be hit with taxes and penalties. If only there was a way to access the money without paying taxes or penalties…
A 401k Loan Gives You Access to Your Money
Many companies allow employees to take a loan against the money in their 401k. Note that I said MANY; companies are not required to offer 401k loans and you have to check with your HR office.
If your company does allow a 401k loan, they may let you borrow up to 50% of your vested balance.
The bad news is you will probably have to pay a fee for the loan to be processed (mine was $50) and you will have to pay back the loan with interest (my rate is 4.25%).
The good news is the loan processing fee can be pretty small (I paid $50 on a $15,000 loan, or 0.33%) and the interest you pay goes directly into your 401k account. You are paying interest to yourself!
You can take a 401k loan for any reason but it will have to be paid back within five years. The only exception is if you are using the loan to buy a house, in which case it can be longer (mine is 20 years). I just had to fax them my signed home purchase agreement and they cut a check the very next day.
The Downsides of Taking a 401k Loan
Aside from the minimal fees and interest you pay when you take out a 401k loan, there are two serious issues to consider before deciding to take a 401k loan.
The first negative is the opportunity cost of the loan. If you take out a $15,000 401k loan then you have $15k less in your investments. If your investments go up 10% over the year then your net loss will be 10% minus the interest you are paying on the loan.
There is another side to that coin. If you take out a loan and the stock market drops 10% the you will actually come out 10% better than you would have been if you left it in there.
The other danger of a 401k loan is if you leave your company. If you quit your job then the loan will be due in full in the next 60 days. Whatever you don’t pay back in that time will be counted as an unqualified distribution, which means you’ll pay taxes and a 10% penalty for all the money you borrowed.
If you are thinking about leaving your company in the near future then a 401k loan is a horrible idea.
The Best Thing About My 401k Loan
Personal finance bloggers and even certified financial planners will always talk about diversifying your portfolio. They typically mean having a mixture of different stocks and bonds. US vs. International. Large, Mid, and Small Cap. Dividend vs. Growth. Etc.
However, you aren’t truly diversified if your net worth is 100% in stocks and bonds. Other ways to diversify your net worth include precious metals (like junk silver) and of course real estate.
Before buying this house I was about 93% invested in a combination of the stock market, the bond market, and cash. My other 7% was my junk silver.
Now I’m about 66% in real estate (my house), 29% stocks, bonds, and cash, and 7% precious metals. That’s a much better diversification in my opinion.
As time goes on I will pay back my 401k loan and build up my investments again so my house isn’t such a massive portion of my net worth, but I feel so much more financially secure knowing that I have a house.
Call me crazy, but it scares the crap out of me having almost 100% of my money in the stock market. I like the idea of putting my money into things I can physically touch and/or live inside.
Putting 20% Down Saves Money
Another reason I took the 401k loan was because I wanted to have a 20% down payment. Buying a home is much more expensive if you don’t have 20% down.
- Without 20% down, you’ll need either PMI (which can be well over $100 a month) or a second loan (which will be a much higher rate than the first mortgage).
- The more money you put down the better your interest rate will be, meaning you have a lower monthly payment.
A 401k Loan Might Be Right for You
To summarize, a 401k loan lets you get to the money in your 401k without paying early withdrawal taxes or penalties. There are some fees involved and you risk removing your money from the market when it might go up.
On the other hand, it allows you to diversify your assets into a real estate purchase that is not only a valuable piece of property, but also somewhere you can live.
Readers: Have you ever taken a 401k loan? If so what did you use it for?
Based on the title of this post alone I guarantee there will be some hardcore zero debt personal finance fanatics who think I’m the dumbest person on the planet, but I’m here to take a radical position: paying interest isn’t always so bad.
Does paying interest suck? Absolutely. But sometimes you need to borrow and the only way to do it is to pay a little bit of interest.
Let me explain.
I’m Paying Interest for Cash Flow
I’m closing on my house in less than a month and I need to pay for my 20% down payment plus any other closing costs. That’s going to cost me tens of thousands of dollars.
I had to sell essentially all of my stocks, drain my Roth IRA, and even take a loan against my 401k to get the money for the down payment, but after doing all of that I now have enough money for closing.
I should also mention I bought my fiancee’s engagement ring with my credit card (which I usually pay off every month). That credit card bill is due in a few days and I can either pay it off completely like usual or pay a smaller amount and carry a balance.
If I pay it off completely it’s going to put me right around the amount that I need for closing on my house. I actually don’t even know exactly how much I’ll need at closing because all the paperwork and stuff isn’t done, so it might leave me a little short.
If I show up to closing and I don’t have enough money in my account then that’s going to be a very serious problem. I don’t even know what exactly would happen but I’m sure it would be bad.
On the other hand I can pay off some of it and leave a $2,000 balance on which I would pay interest for one, maybe two months.
The Cost to Carry a Balance
The APR on my credit card is 11.24%. If I carry a $2,000 balance on that card for one month I will pay just $18.73 in interest. If I carry that balance for two months it’s $37.46.
If I were to borrow $2,000 from a friend for a month I’d probably pay him back and then take him out to dinner as a “thank you”. The dinner would cost me more than $18.73.
Also keep in mind that I get rewards on my credit card. This particular card gets at least 2% back, which means I already got $40.00 in rewards when I spent that $2,000. Even if I pay interest on it for two months I still make money.
It doesn’t sound like such a bad idea anymore, huh?
There are No Absolutes in Personal Finance
Lots of people would tell you that debt is never acceptable. Those people would tell me to either pay off my entire credit card and risk not having enough money at closing, or they would tell me that I’m an idiot for buying a house without being 100% sure I could pay the closing costs without going into debt.
Those people would call me an idiot for spending $20 to borrow money to buy a freaking house!!!!
Those people are the idiots in my opinion.
Carrying a balance on your credit card every month is a great way to lost a lot of money and make your credit card issuer rich. Carrying a balance for just one or two months is a shrewd way of getting a very low interest short-term loan.
Readers: Have you ever borrowed money and paid interest because you needed the cash flow?
If you are an American then Tuesday, November 6th is a big day for you. In fact, it’s a big day for all of us in this country.
There is a presidential election and there is a lot at stake in this election cycle, and in most states you have four people to choose from.
That’s right, there are four people to choose from.
You Have Many Presidential Candidates
Did you know there is a candidate who believes that a college education is a RIGHT and that college should be free for anyone who wants to attend? That would be Green Party candidate Jill Stein (although I’m not sure where all this money would come from).
Did you know there is a candidate who believes that we should completely abolish the IRS and wants to allow you to keep every dollar in your paycheck (and pay one national sales tax as outlined at the Fair Tax website)? That would be Libertarian Party candidate Gary Johnson.
Did you know there are two candidates who support the PATRIOT act, supported the Wall Street Bailouts, and believe the president should have to power to assassinate US citizens abroad if they are only SUSPECTED terrorists? Those would be Barack Obama and Mitt Romney.
Inform Yourself Before You Vote
There have been five televised presidential debates this year. Three between Mitt Romney and Barack Obama, one between Paul Ryan and Joe Biden, and another between Gary Johnson (Libertarian), Jill Stein (Green), Rocky Anderson (Justice) and Virgil Goode (Constitution).
Mitt Romney and Barack Obama were invited to participate in the Free and Equal debate so Americans could compare all the candidates amongst each other, but neither felt it was important enough to show up.
All five of these debates are archived on Youtube and it just takes a quick search to find them.
There is another debate at 9pm ET tonight (November 5th) between Gary Johnson and Jill Stein, and if you haven’t done your research then I strongly recommend watching this final debate. You can watch it at the Free and Equal website.
Once You’re Informed then GO VOTE!
Our sixth president John Quincy Adams once said, “Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost.”
I’ve been doing research on candidates for a long time and I already voted early. I voted for Gary Johnson because I agree with him more than I agree with any of the other candidates.
No matter who you think would be the best president for our country, it is important that all informed persons go vote. The next president will impact the state of the economy, how much you’ll pay in taxes, and generally how much the federal government is going to involve themselves in your life.
Readers: Are you voting this year? How do you feel about this year’s slate of candidates?
I’m closing on my house in the beginning of December and there’s a lot of work to be done and a lot of money to be spent.
I already wrote about how I found a great deal on floors, but even a great deal is going to cost me thousands of dollars. That’s not to mention the fact that I still need to pay the $40k down payment.
Did I mention I’m taking donations?
That’s a joke. Kind of.
I’ve actually told a lot of people about the house Tag and I are buying. I’ve also told just as many people about our upcoming wedding. I mention this to these people because I’m freaking excited and honestly I’ll tell a complete stranger if he’ll listen.
But I also tell people about this stuff because eventually I just might get lucky.
People Love to Help
When I moved out of my last apartment I had a bunch of furniture I wanted to get rid of. I put it on craigslist and sold some stuff but ended up with a lot left over. At the end of the day a guy came to buy my bed. Turns out he was a broke college student.
I could have tried to sell the rest of my stuff, but this kid definitely needed everything he could get and at least he was willing to haul it away. He didn’t ask me to give him extra stuff. He just told me his situation and I was happy to help.
He paid for a bed. He got a bed, a dresser, a TV console, a desk, and probably more stuff I’m forgetting about.
When I tell people about all the exciting (and expensive) stuff I have coming up in my life, I’m not just letting them know about my super awesome future life. I’m also opening the door for them to help if they are able.
This may not work all the time, but it sure paid off today.
I Got a Free Washer and Dryer
The other day I called my realtor and asked if he could get me into the house so I could get measurements for the new flooring. We met at the house and he helped me take measurements. As I was talking about how expensive it will be for us to get the new floors plus buy a new refrigerator, washer, and dryer, he stepped in.
He and his wife are getting a new washer and dryer set soon, and he offered me his old set free of charge!
And you can bet your sweet behind that I accepted!
I would never ask someone for help because I know I don’t NEED it. However, if someone is willing to help then I’m not going to let my pride get in the way of accepting their generosity!
What Goes Around Comes Around
I gave some poor college kid a bunch of furniture and now that I’m a poor new homeowner I’m getting a free washer and dryer. Plus, who knows what other free stuff I might luck into by telling my new house/wedding story even more.
In my life I’ve found that generosity pays itself forward. If you take advantage of opportunities to help others then you’d be surprised what kind of help you might get in return one day.
Readers: Do you have a story where you gave someone something they needed? And, have you ever been lucky enough to have someone else offer you just what you needed at the perfect time?
Every day it looks more and more like the financing is going to come through and I’m going to have a house in December. When my fiancee and I buy this house we have four items on the to-do list before we move in: get rid of popcorn ceilings, paint, buy appliances, and install new flooring.
Getting rid of popcorn ceilings takes a ladder, some water, and something to scrape with like a $10 taping knife. This will just take a lot of time but the tools are cheap.
Painting the walls takes a ladder, paint, brushes and rollers, and tape. I don’t need to cover the floors because I’m going to pull them up anyway. Also I’ll be getting a Turbo Roller for $40 which eliminates the need for a paint tray and should make painting faster and easier. Again, time intensive but relatively cheap.
The owner is taking the fridge and the washer and dryer so we’ll need to buy those. Luckily Black Friday is around the corner and Craigslist exists. We’re going to get a brand new fridge, but we are either going to get a huge Black Friday sale or find something around 50% off with minor cosmetic damage from the Sears Outlet (as a new homeowner, that place is AWESOME!). Tag and I are hoping to get all three appliances for under $1,500.
That leaves us with the most expensive item left: flooring.
It Takes Time to Find Deals on Flooring
If you want cheap carpet or laminate flooring you can get that stuff for under $1 per square foot. If you want something that looks nice you’re probably going to have to spend a little bit more. However, I’m on a very strict budget and I can’t spend more than $2 per square foot and I want hardwood or bamboo.
I started with Home Depot and Lowe’s, then moved onto flooring stores like Lumber Liquidators but didn’t find any quality materials at the price range I wanted. Part of me wanted to just give up and either decide to keep the existing floors (which would put me in Tag’s doghouse indefinitely) or increase my budget (which will put me in the poor house).
After over a week and even a few free samples we hadn’t found anything, but we kept looking and sure enough I found some bamboo floors that usually sell for $4.99 per square foot marked down to $1.99 per square foot. On top of that, there is a 20% off EVERYTHING deal going on between now and Friday. That means it will cost $1.60 a sq ft + shipping (which is also 20% off).
I ordered some samples and they should be here tomorrow. If the floor is as good as the specs suggest then I will have found incredible flooring for under $2 a sq ft even after paying for shipping. That’s freaking incredible!
I don’t hold out for cheaper prices on small things. Whether I spend $8 or $12 on a tape measure isn’t going to impact my finances significantly. Whether I spend $2.00 or $3.00 per sq ft on over 1,000 square feet of flooring is at least a $1,000 difference. $1,000 is worth the extra time to keep looking for exactly the right stuff.
As long as the sample looks good then I have myself some new floors. If it’s bad then I’m just gonna have to suck it up and keep looking. The deal is out there somewhere; I just have to have the patience to find it.
Readers: Have you ever done a big home improvement project? How did you save money on materials?