Should you use a 401k to prevent foreclosure?
I’ve seen this published in several places, it seems like a growing trend due to the increase in distressed homeowners.
“Many homeowners facing financial difficulties used to look to home equity as a resource to cover shortfalls. But with that option off the table for many, increasing numbers of people are considering tapping into a second large asset — retirement savings.”
From SeattlePI.com
There’s a saying about the inadvisability of throwing good money after bad, it’s pretty appropriate in this situation. 401k’s are a retirement vehicle, and there are significant penalties for early withdrawals, even in a hardship situation. You can often borrow against the 401k, but should you?
If a foreclosure process is imminent, the borrower really needs to take a strong look at their finances, the property and their loan(s), and the real estate market in their area. If there isn’t enough money coming into the household to be able to make the payments, foreclosure is inevitable. If a job loss caused the default, is the expectation of new employment realistic, or is it just hope? The use of retirement money to buy a few more months probably isn’t the wisest choice in this type of situation. On the other hand, if there was a financial setback that has since been resolved, then the thing to do is talk to the lender about a forbearance plan. It’s a much cheaper solution than using retirements funds.
If there’s been a financial setback, and the local real estate market has dropped in value, there is no point in using retirement funds to stave off foreclosure. It will take years for many markets to recover some of the losses, buying a few months more time with 401k funds probably won’t get enough time to allow for market recovery.
Hard choices, but retirement funds should be left for retirement, using them to delay foreclosure for some time period really does fit the “good money after bad” concept you should be avoiding.
April 26th, 2008 at 12:54 am
I have a real problem with the government taking money out of my check to give to someone that made a bad choice and bought more house than they can afford. I also have a problem with my tax dollars being used to bail out billion dollar corporations.
There is a thing called personal choice and people should be responsible for it.
April 29th, 2008 at 1:43 pm
I hate the idea of people using retirement fund to bail themselves out of a housing mess. Lenders see about 70% of the loans they modify fall back into default.. what happens to the homeowners who use their retirement money and end up out anyway… even if they can keep the house long term… how can they retire? who is going to bail them out then?
June 26th, 2008 at 11:58 am
I hate all of it too,, and yes there is personal choice.
The bad thing is the ones that use retirement funds for bail out, will probably end up losing their home later on down the road. Anyone facing a foreclosure situation should really visit these guys, mortgagebuyerbasics.com instead of using up the retirement funds. THere is other choices out there, if you know where to look