Get Out of Debt Guy

Should I Use My 401(k) to Payoff My House?

Posted November 19, 2013

WRAL Reader Question

Dear Steve,

I'm 39 years old and am worried about the stock market being over valued and want a safer place to put half of my 401K.

I wonder if taking a loan from my 401K to pay off our home might be a good idea? It would take right at 50% of my 401 K to do it. I like the idea of paying interest of the loan to myself rather than a lender and I just have an opinion that it might be a safer place to have my retirement money than the stock market. I do realize that the interest would no longer be tax deductible.

Thank you!

Brook

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Dear Brook,

This sure feels like a question based on an emotional impulse. And that's never a good way to make financial decisions.

There are any number of personal financial advisers or Certified Financial Planners in the area who can give you sound advice about specific investments to have your 401(k) in to manage risk. These funds don't need to be all in the stock market or you could even hedge your bets with a market index fund.

Just using math, if you took half of your 401(k) out and paid off your house it seems what you would gain is the percentage in appreciation of your house and the elimination of the interest rate you are paying on the mortgage. But the way the stock market has been rising it seems unlikely even a stock index mutual fund would do worse than that.

Think about this, if you took half out and paid off the house and the market took off, you'd loose a tremendous amount in value in your retirement fund.

I understand your fear of a crash in the market. They happen. But if we look at history, any crash in the market has been more than made up for in the future.

Before you make this decision it would be prudent for you to sit down with an investment adviser and do the math to see which scenario will lead to the highest return when you get ready to retire.

Steve Rhode
WRAL Get Out of Debt Guy

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  • 68_dodge_polara Nov 21, 2013

    Thank you for the advice!

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.