[quote]Dr. Pangloss wrote:
I think you should definitely raid your retirement to go into business with your father in law, who can’t get steady work.
What could go wrong?[/quote]
Come on, Doc. You’re better than that. OP has not indicated if he has other retirement savings, and there’s no reason to portray a hard working immigrant in a negative light. There are plenty of logical reasons why one may not have stable work as an immigrant, many of them perfectly justifiable.
None of us know all the details here, but if OP does his homework a measly $20k loan from his own 401k may indeed be a very well thought out investment that a typical target retirement fund will never touch.
My advice is to do the homework to first determine if the investment is worth $20k, regardless of the investors liquidity. If OP determines it is worth the investment, take the 401k loan - but pay yourself back at 10% interest AND make sure you are maintaining your current investments. Ensure that you can maintain these payments whether the business succeeds or not. You simply have to be dedicated. If the business fails, you still MUST pay your retirement account back 100% of the balance plus the 10% interest. This very well may require you to cut back on other expenses. If you don’t have the cash flow to prepare for this worst-case scenario, you’re not ready to invest. But if you can, then the 401k loan is ideal. Most of us will gladly take a 10% annual return on our retirement accounts. Again, it all goes back to prudency. If you have it, then take advantage of it and pay yourself instead of a bank.
If you have an IRA, it may also be worth looking into a self-directed IRA. Google it. If you don’t also have an IRA, I take back my advice on the 401k loan.
Any thoughts on doing a house mortgage loan? I bought my house on a short sale for 99,000 and it is valued around 155,000. I owe about 65 on it now. Are these loans dangerous, financially speaking? [/quote]
I know someone else poo pooed this idea, but, assuming you have adequate income, I think would be a better idea than taking a 401k loan.
Two options:
Refinance taking out 20K, so you would then assume an 85K mortgage on your 155K house. Depending on your current rate, this would probably be a good idea since the interest would be tax deductible.
Home equity loan or home equity line of credit taking out 20K: you would keep your current mortgage but then add another loan for a worse rate and not tax deductible. But, this could be more flexible because if you have a strong income you could pay it off in 5 years or take a longer time frame.
Again, this assumes you have no problem paying it off, because there is the risk of losing your house. However, if you weren’t able to repay your 401k loan, I assume that shit would be hitting the fan and you’d probably still lose your house.
Any thoughts on doing a house mortgage loan? I bought my house on a short sale for 99,000 and it is valued around 155,000. I owe about 65 on it now. Are these loans dangerous, financially speaking? [/quote]
I know someone else poo pooed this idea, but, assuming you have adequate income, I think would be a better idea than taking a 401k loan.
Two options:
Refinance taking out 20K, so you would then assume an 85K mortgage on your 155K house. Depending on your current rate, this would probably be a good idea since the interest would be tax deductible.
Home equity loan or home equity line of credit taking out 20K: you would keep your current mortgage but then add another loan for a worse rate and not tax deductible. But, this could be more flexible because if you have a strong income you could pay it off in 5 years or take a longer time frame.
Again, this assumes you have no problem paying it off, because there is the risk of losing your house. However, if you weren’t able to repay your 401k loan, I assume that shit would be hitting the fan and you’d probably still lose your house.[/quote]
Lets take a step back here.
Honest_lifter, why do you think your home is worth $155K after buying it on short sale? I have a real hard time believing that. I doubt the value of your house has increased roughly 156% after being a short sale. I’m assuming you bought after the bubble?
If you refinance keep in mind you will pay refinance fees; although, you might be able to take advantage of historically low rates (save on interest in the long run).
One last thought, you should think long and hard about borrowing money to support a business you are a silent partner in / have no say in day to day operations. I know I couldn’t tie myself financially to someone else’s business decisions, but that is me. If the business goes under and you’ve taken a line of credit, loan from your 401(k), business loan (hard to get without collateral), etc… you will be on the hook for that money.
I feel it is worth that much because I went to my realtor to try and rent it out. Through the process of getting the comparables in the area, we found that selling prices of the house showed a marked increase. I think it could sell for more than 155,000 actually because of all the work I did on the interior (moved from carpet to hardwood throughout and new floor and door trim) but I feel comfortable even at the 155,000 mark.
You are right, I would be a silent partner, however, the business he is doing is something he has done before and has the equipment for. He is just going to need money for the start-up product/rental space.
[quote]honest_lifter wrote:
I feel it is worth that much because I went to my realtor to try and rent it out. Through the process of getting the comparables in the area, we found that selling prices of the house showed a marked increase. I think it could sell for more than 155,000 actually because of all the work I did on the interior (moved from carpet to hardwood throughout and new floor and door trim) but I feel comfortable even at the 155,000 mark.
[/quote]
I suppose it’s possible. My anecdotal experience has been a little different. I bought a house 3 years ago that I’m trying to sell. I’ve put about $20K into it (new roof, bathroom remodel, etc…) and per comps and 2 offerless months it’s at the same price I bought it for. That could be specific to my area in MD though and it was not a short sale and there were no foreclosures near me. My situation is a bit unique too (Aggressively trying to sell). Just food for thought, but comps don’t mean a whole lot.
I’ll echo most of the comments here against borrowing on the 401k retirement account.
I think it would be much better to get a HELOC or refinance on your home than mess with a 401k. With that said, if the business goes under you’re still on the hook for that money so you have to evaluate the risk. When considering the difference between a HELOC and refinance, HELOC should have no closing fees and is more of a short term option that you would want to pay off quickly, where the refinance is going to cost up front but will have a much better interest rate if you are paying off over the long term. Fairly easy to run the numbers to see what is better based off how quickly you plan on paying.
Withdraw 70% of your 401K and put it all on 7. Then, if you are feeling lucky, withdraw the remaining 30% and put it in penny stocks. Watch your money Grow!
[quote]TBT4ver wrote:
2) Home equity loan or home equity line of credit taking out 20K: you would keep your current mortgage but then add another loan for a worse rate and not tax deductible. [/quote]
In most cases your HELOC is tax deductible. There are limits, and rules, but mots of the time (assuming I have OP’s relative income/wealth level pegged correctly) and likely in his case, the HELOC is tax deductible.
[quote]TBT4ver wrote:
2) Home equity loan or home equity line of credit taking out 20K: you would keep your current mortgage but then add another loan for a worse rate and not tax deductible. [/quote]
In most cases your HELOC is tax deductible. There are limits, and rules, but mots of the time (assuming I have OP’s relative income/wealth level pegged correctly) and likely in his case, the HELOC is tax deductible. [/quote]
I was under the impression that a HELOC not used for home improvement was not tax deductible, but upon further investigation, I was wrong (up to certain limits). Thanks for the correction.