Borrowing from a 401K - Good or Bad?

When is borrowing from a 401K good?


Most 401-K plans allow employees to borrow a certain percentage of the balance.  The loan is paid back with payroll deduction over a term defined by the program.  The great thing, is the interest paid on the loan goes back into the 401-K.  This interest may be more than most people made last year in their investments.  The HUGE drawback to borrowing from a 401-K is that the loan is due and payable upon termination.  In other words, if the employee finds another job or is laid off the loan must be paid back.  If the loan is not paid back, the distribution is treated as an early withdrawal.  The early withdrawal comes with taxes and additional penalties.

The potential for paying early withdrawal penalties adds a big risk to borrowing from a 401-K.  Having said that, many people are choosing this route as a way to take advantage for the $8,000 ot $6.500 home buyer tax credit.  First time home buyers are borrowing $8,000 from their 401-K's, buying a house, then paying the loan back with the tax refund.  The risk of borrowing from a 401-K is reduced because the tax refund can be processed fairly quickly after closing.


To be clear, I'm not advising anyone to borrower against their 401-K.  Every situation is unique before you do this, you should consult your 401-K company and a licensed investment adviser.  If you don't have an investment adviser, I can connect you with one.

One Cost of the new RESPA Guidelines

New RESPA guidelines increase the time it takes to close a mortgage transaction.

As most people are quickly finding out, the real estate business in North Texas is starting to pick up.  Combine this with scaled back underwriting staffs and a bunch of new rules that nobody is sure how to follow and you get slower turn around times.  I heard the other day that the average close time is running 6-8 weeks.  Fortunately for those that are buying and selling, purchase transactions have priority with most lenders.  Our close times for purchases are currently 3-4 weeks for loans we close in house.  Loans closed with other lenders vary depending on the lender and program.

Why you shouldn't refinance your mortgage.

It seems right now that everyone and their dog is refinancing their mortgage.  Almost everyone with a rate over 6% has a mailbox full of offers to refinance.

While for many borrowers refinancing is a great idea, it is important to do the math first.  Most financial people claim that if you don't save two percentage points you shouldn't refinance.  This is true for some borrowers but not for others.  Borrowers with large mortgages can save money with less than one percentage point rate reduction while borrowers with small loans may not be saving money by reducing their rate by four points.

The key to the equation is calculating the cost of refinancing and comparing that to the savings of the interest rate reduction.  The homeowner must decide based on their own circumstances when a refinance is worth it.  For instance, one homeowner may look at increasing their loan balance by $3,500 in order to save $100 a month as a great deal and another may not.  A borrower who plans on staying in their home for ten years would likely save $8,500 by refinancing based on this scenario but if they sell their house in a year the refinance will cost them about $2.300.

Ultimately, every situation is unique.  The best thing to do, is talk to a couple of mortgage professionals and find out how a new loan would stack up against the current one.   Tell your mortgage person how long you plan on living in the house, when you would like to have it paid off and  about any major events in your financial future so that they can tailor a mortgage to fit your needs.

Bryan J May
817-929-3584

$25,000 downpayment assistance program for forclosures

  Government down payment assistance programs are usually so difficult to qualify for that they aren't worth going after.  The City of Fort Worth, however, has one that appears to be worth the effort.

The city will pay up to $25,000 towards downpayment, closing costs and minor repairs for buyers of certain foreclosed properties.

The seven zip codes were determined by the areas most affected by foreclosures.  Of the $25,000, up to $5,000 can be applied to closing costs, up to $5,000 can be applied to minor repairs and the remainder goes toward down payment.  Some of the guidelines are below.

• Income must be below 120% of HUD's median income adjusted for number in household.
• Property must be in the City of Fort Worth and in certain Zip Codes
  
• $225,000 Maximum Purchase price
• Property must be purchased at least 1% below appraised value
• Property must be a foreclosure
• The borrower must live in the property for ten years or pay some or all of the assistance back

These are only the general guidelines, the complete program guidelines can be found on the city of Fort Worth website at www.fortworthgov.org/hed/housing/?id=61060. 

If you have any questions about this or any other program, don't hesitate to give me a call. 

Bryan J May
817-929-3584

P.S.  This program is in addition to the $8,000 first time home buyer tax credit or $6,500 credit for move up buyers.

Are Banks finally reducing the prices of their REO inventory?

Banks have built in reasons not to offer short sales or other work out programs with troubled home owners.  For instance, on a $500,000 loan where the property can be sold on a short sale for $400,000 the bank has to take an actual and paper loss of the difference.  On the same loan if the borrower makes no payments for a year the loss is a little over $32,000 at 6.5% interest.  Foreclosures, work much the same way, the cost to the bank for leaving it on the market is minor compared to taking a loss on the sales price.

The good news is that January began a new year and a new quarter.  As of late December, several Realtors have shared with me that the banks are reducing their prices.  We think that the banks are doing this for a couple of reasons.  First, they need cash to operate; there is no better way of generating cash than taking in a bunch of large payments.  Second, they believe that they can recover from the losses better this year than they could have last year. 

We also believe that this may be short lived.  The banks are only going to unload a certain percentage of their portfolios because taking a loss on all of the properties might be impossible to recover from.

I've always cautioned people looking at foreclosures to very careful not to overpay.  I still recommend being cautious but I think there are going to be many more deals over the next few weeks or months in this area.  If you have any questions about this feel free to call or comment on this post.

Bryan J May
817-929-3584

2010 - The Year of Helping Others

I'm making a sort of revision or addition to my goals for 2010.  If you know me well, I may have already told you this but in addition to everything else, I'm a student at TCU.  I'm working on my business degree as a stepping stone to law school.

No one can work full time while going to college full time without some serious motivation.  Mine is a drive to help others.  I believe that the legal profession needs more people that are focused on helping others.


One thing that I recently realized is that I need to do a better job of helping others now.  I asked myself, how I can help others as a mortgage professional?  I came up with a few places to get started, these are not exhaustive but hopefully they will be a good measuring stick in the months ahead to see how I'm doing.

• Help people reduce their mortgage expense so they can get out of debt faster

• Help people get their mortgage debt paid off faster

• Help people get out of mortgages that are damaging them financially and into the right product

• Help people reach their retirement goals

• Help people pay for college and other expenses effectively

• Help people who are in danger of loosing thier home get into a better mortgage or into a house that better meets their financial needs

• Help people educate themselves about mortgage

Please help hold me accountable to this by asking me how I've helped someone lately.